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Woeful Earnings from Kroger Has Us Tightening Position in UNFI

Woeful Earnings from Kroger Has Us Tightening Position in UNFI

While many have been focused on the retail environment —and we count ourselves among them here at Tematica — we’ve also been watching the painful restaurant environment over the past few months. It’s been one characterized by falling same-store-sales and declining traffic – not a harbinger of good things when paired with rising minimum wages.

For those that are data nut jobs like we are, per TDn2K, same-store sales for restaurants fell 1.1 percent in May, a decline of 0.1 percentage points from April. In May, same-store traffic growth was -3.0 percent. Now for the perspective, the industry has not reported a month of positive sales since February 2016 – that’s 15 months! One month shy of the bad streak the May Retail Sales Report has been on. Clearly not a good operating environment, nor one that is bound to be friendly when it comes to growing revenue and earnings.

Reading those tea leaves, we’ve avoided that the restaurant aspect of our Fattening of the Population investing theme, and with Ignite Restaurant Group filing bankruptcy, Cheesecake Factory (CAKE) warning about its current quarter outlook we confident we’ve made the right decision.

But people still need to eat, and we’ve seen consumers increasingly flock back to grocery stores in 2017. Year to date, grocery retail sales are up 1.7 percent through May. Breaking down the data, we find that in recent months those sales have accelerated, with March to May 2017 grocery sales up 2.8 percent year over year and standalone May grocery store sales up 2.2 percent year over year.

Yet, when grocery company Kroger (KR) reported in-line earnings for its latest quarter, it lowered its 2017 EPS outlook, cutting in the process to $2.00-$2.05 from the prior $2.21-$2.25, with the current quarter to be down year over year. Aside from price deflation in the protein complex and fresh foods, the company cited its results continue to be pressured by rising health care and pension costs for employees, as well as the need to defend market share amid “upheaval” in the food retailing industry. We see that as company-speak for Kroger and its grocery store competitors having to contend with our

We see that as company-speak for Kroger and its grocery store competitors having to contend with our Connected Society investment theme that is bringing in not only Amazon (AMZN), MyFresh, and FreshDirect into the fray, but also leading Wal-Mart (WMT), Target (TGT), and Safeway among others to expand their online shopping capabilities, which in some cases includes delivery. Another reason not to get off the couch when shopping.

Candidly, we’re bigger fans of companies that focus on profits over market share given that short-term market share led strategies, often times with aggressive pricing, tend to sacrifice margins, but focusing on profits tends to lead to better market-share over the long-term. We’ve seen the “strategy” that Kroger is adopting many times in the past and while it may have short-term benefits, increasing prices later on, runs the risk of alienating customers.

Getting back to Kroger’s guidance cut, that news sent Kroger’s shares down almost 20 percent on Thursday and led to United Natural Foods (UNFI) shares to fall more than 3.5 percent, while Amplify Snacks (BETR) slumped by 2 percent. In our view, most of Kroger’s bad news was likely priced into UNFI’s mixed guidance last week when it reported its own quarterly earnings. Without question, 2017 has been a rough ride for UNIF shares despite the Food with Integrity tailwind, but despite Kroger’s guidance cut, management shared on the company earnings call that it continues “to focus on the areas of highest growth like natural and organic products.” Even Costco Wholesale (COST) recently shared it has room to grow in packaged organic food items, excluding fresh), which plays to the strengths at both United Natural Foods and Amplify Snacks.

 

Tightening Our Position in UNFI, But Staying the Course with BETR

With our Food with Integrity thematic tailwind still blowing and UNFI shares down just 7.5 percent relative to our blended cost basis on the Tematica Select List, we’ll remain patient with the position. That said, from a technical perspective the shares are near support levels and if they break through $38.50 the next likely stop is between $33 and $34. Therefore, to manage potential downside risk, we’re instilling a stop loss on UNFI shares at $38.50. As we do this, we’ll acknowledge the tougher operating environment and reduce our UNFI price target to $50 from $65, which still offers upside of just over 25 percent from current levels.

  • We are keeping our Buy rating on United Natural Foods, but trimming our price target back to $50 from $65.
  • We are instilling a stop loss at $38.50 to manage additional downside risk near-term.

With regard to Amplify Snacks, with today’s close the shares are down just 6 percent from our late April Buy recommendation. Generally speaking, these single digit stocks tend to be volatile and require some extra patience, and that’s the tact will take with BETR shares. Our price target remains $11.

  • We continue to have a Buy on Amplify Snacks (BETR) shares and our price target remains $11.

 

 

 

Retail Sales Data for the Month of May Confirms Several Thematic Investment Themes

Retail Sales Data for the Month of May Confirms Several Thematic Investment Themes

This morning we received the May Retail Sales Report, which missed headline expectations (-0.3% month over month vs. the +0.1% consensus) as well as adjusted figures that exclude autos sales for the month (-0.3% month over month vs. +0.2% consensus). Despite the usual holiday promotional activity, retail sales in May were the weakest in 16 months due in part to lower gasoline prices, which had their biggest drop in over a year. In our view, the report confirms the challenging environment for brick & mortar retailers, despite those lower gas prices, while also affirms our decision not to participate in the space with the Tematica Select List as there were some bright spots below that headline miss.

Almost across the board, all retail categories were either essentially flat or down in May compared to April. The exception? Nonstore retail sales, clothing, and furniture — and nonstore obviously mostly comprised of online retailers since the Sears catalog isn’t in the mailbox too often these days. Comparing May 2017 retail sales to year-ago levels offers a different picture – nearly all categories were up with a couple of exceptions, the most notable being department stores. Again, more confirmation to the “why” behind recent news from mainstays of U.S. mall retailers like Macy’s (M), Michael Kors (KORS), Gymboree Corp. (GYMB) and Sears (SHLD).

Some interesting callouts from the report include that year over year, nonstore retail sales rose 10.2% percent, which brings the trailing 3-month year over year comparison for the category to 11.4%. This data simply confirms the continued shift toward digital commerce that is part of our Connected Society investing theme and is a big positive for our positions in Amazon (AMZN), Alphabet (GOOGL) and United Parcel Service (UPS).

We only see this shift to digital accelerating even more as we head into Back to School shopping season in the coming weeks and before too long the year-end holiday shopping season. While it is way early for a guesstimate on year-end holiday spending, eMarketer has published its view on Back to School spending this year and calls for it to grow 4 percent year over year to $857.2 billion. If that forecast holds, it will mean Back to School spending will account for roughly 17 percent of eMarketer’s 2017 retail sales forecast for all of 2017.

Not ones to be satiated with just the headlines, digging into the report we find more confirmation for our Connected Society investing theme – eMarketer sees e-commerce related Back to School shopping growing far faster, increasing 14.8% to $74.03 billion in 2017. As we like to say, perspective and context are essential, and in this case, should that e-commerce forecast hold it would mean Back to School e-commerce sales would account for 8.6% of total retail sales (online and offline) for the period, up from 7.8% last year.

 

The Connected Society Won’t Be the Only Theme In Play for Back to School Shopping

Given the last several monthly retail sales reports, as well as the increasing debt load carried by consumers, we strongly suspect our Cash-strapped Consumer theme will also be at play this Back to School shopping season, just like it was last year. In its 2016 findings, the National Retail Federation found that “48% of surveyed parents said they were influenced by coupons, up five percentage points from the prior year, while others said they planned to take advantage of in-store promotions and advertising inserts, and 53% said they would head to discount stores to finish prepping for the new school year.”

With consumer credit card debt topping $1 trillion, consumers are likely to once again use coupons, shop sales and hunt for deals, and that bodes very well for the shift to digital shopping. With Amazon increasingly becoming the go-to destination for accessories, books and video, computers and electronics, office equipment, sporting goods and increasingly apparel, we see it continuing to gain wallet share over the coming months.

 

Food with Integrity Theme Seen in Retail Sales Report As Well

Getting back to the May Retail Sales report, another positive was the 2.2% year on year increase in grocery stores compared to data published by the National Restaurant Association that paints a rather difficult environment for restaurant companies. The latest BlackBox snapshot report, which is based on weekly sales data from over 27,000 restaurant units, and 155 brands) found May was another disappointing month for chain restaurants across the board. Per the report, May same-store sales were down -1.1% and traffic dropped by 3.0% in May. With that in mind, we’d mention that last night Cheesecake Factory (CAKE) lowered its Q2 same restaurant comp guidance to down approximately -1%. This is a reduction from prior guidance of between 1% and 2%.

Stepping back and putting these datasets together, we continue to feel very good about our position in Food with Integrity company Amplify Snacks (BETR), as well as spice maker McCormicks & Co (MKS) as more people are eating at home, shopping either at grocery stores or online via Amazon Fresh and other grocery services. Paired with the shifting consumer preference for “better for you” snacks and food paves the way for Amplify as it broadens its product offering and expands its reach past the United States. As we shared in yesterday’s weekly update, United Natural Foods (UNFI) should also be enjoying this wave, but the company recently lowered its revenue guidance, so we’re putting UNFI under the microscope as we speak and we could very well be shifting our capital soon.

 

WEEKLY ISSUE: Adding to the Select List as we continue to ride the smartphone wave

WEEKLY ISSUE: Adding to the Select List as we continue to ride the smartphone wave

In this Week’s Issue:

  • As Trump Bump Gives Way to Trump Slump, What Will the Fed Do?
  • Putting UNFI and AT&T Under the Microscope
  • Nuance Communications – Big Deals for this Disruptive Technology Player
  • AXT Inc. – More Than Riding the Smartphone Wave

 

Welcome to this week’s issue of Tematica Investing. Following last week’s addition of Guilty Pleasure company MGM Resorts International (MGM) to the Tematica Select List, we’re adding another new name in compound semiconductor substrate company AXT Inc. (AXTI) – more on it and exactly what compound semiconductors are will be had shortly. But first, let’s have a quick look at what’s coming across our desk this week . . .

 

As Trump Bump Gives Way to Trump Slump, What Will the Fed Do?

We’re just several hours away from the Federal Reserve announcing what is likely to be a modest bump higher in interest rates, a move that is widely expected by investors. We here at Tematica continue to see it as the Fed looking to re-arm itself ahead of the next eventual recession. Note we said eventual, for even though we continue to see step downs in 2Q 2017 GDP expectations, the domestic economy continues to chug along at a sluggish pace. That’s a speed we expect to be with us as we head into the summer doldrums. After today’s market close there will be 12 trading days left in the quarter, which means companies are on the cusp of entering their quiet periods, and before too long we’ll get any and all negative earnings preannouncements.

As we get more June economic data and those preannouncements, we could see the stock market revisit last week’ move lower for reasons that we recapped in this week’s Monday Morning Kickoff. With the Eurozone elections being a non-event, a sense of calm returned to the market this week, but once we’re past the Fed’s expected action, the next item to preoccupy investors will be expectations for the second half of 2017. We continue to suspect expectations for both GDP and earnings will have to be adjusted given the Trump Slump, but that’s for the market, not the positions we’ve identified as benefitting from thematic tailwinds that reside on the Tematica Select List:

  • We will continue to keep shares of Amazon (AMZN), Alphabet (GOOGL), Dycom (DY), Facebook (FB), Applied Materials (AMAT), Universal Display (OLED) and others on the Select List.
  • We will be revisiting stop loss levels over the following weeks in order to have them in position for 2Q 2017 earnings, which will commence soon after the July 4th holiday weekend.

 

 

Putting UNFI and AT&T Under the Microscope

We are putting shares of United Natural Foods (UNFI) on notice, as they’ve slumped after reporting above-consensus quarterly earnings of $0.77 per share on an 11.1 percent year-over-year jump in revenue to $2.37 billion, which was shy of expectations. Looking ahead, UNFI reaffirmed its bottom-line guidance for the full year, expecting earnings between $2.53-$2.58 per share. However, revenue guidance was lowered and the company now expects below-consensus sales between $9.29 billion and $9.34 billion after previous guidance called for sales between $9.38 billion and $9.46 billion.

  • As we review our position in UNFI, we’ll be recalculating our price target, which currently sits at $65. Expect more on this in the coming days and weeks.

We’re also keeping close tabs on AT&T (T) shares. We’ve been patient with this position, but year to date it’s fallen 9 percent before factoring in dividends paid. Our thesis over the changing business model following the merger with Time Warner (TWX) remains, and we expect more concrete details to emerge in the coming months given the timetable to close the deal by year-end.

  • Our inclination is to scale into T shares below $38, which would modestly improve our cost basis.
  • Stay tuned for more on this as well.

 

 

Nuance Communications – Big Deals for this Disruptive Technology Player

It’s been a bit since we updated subscribers on speech recognition and virtual assistant provider Nuance Communications (NUAN), but that’s primarily because until recently the business has been chugging along. For its March quarter, the company hit consensus expectations and guided the current quarter in line with Wall Street forecasts, which laid the groundwork for the shares to climb more than 8 percent over the last three months. More recently, however, things are once again shaking at Nuance as the company inked deals with Amazon (AMZN), Apple and Alphabet (GOOGL) to bring its Nina platform to power customer service chatbots on iMessage, Alexa and Google Home devices.

Already, Nuance’s Nina platform powers customer service bots for about 6,500 companies and organizations, including many telecoms, banks, and airlines. The reality is, you may have already used this Nuance solution and not recognized it. Per Nuance, Nina-powered bots can resolve 80 percent of customer requests, such as transferring money, or changing airline seats.
We’d point out this is in addition to Nina powering other messaging services, including Facebook Messenger, WeChat, and text messaging applications.

As it relates in particular to Apple, the chatbot capability is scheduled to appear within iOS 11, and the plan is to integrate Nuance’s solutions with Apple Business Chat to enable a new breed of artificial intelligence (AI)-based intelligent assistants within Messages. What this means is users will see a messages icon pop up on brand websites, in search results, and elsewhere that will allow people to contact those brands with one tap.

From our perspective, this could prove to be an interesting behind the scenes development that if it were to spread to Siri and Apple’s new HomePod, could make for more robust offering that currently expected. It also reaffirms our view that at some point Nuance is likely to be a takeout candidate.

  • With 13 percent upside to our $21 price target, we continue to have a Buy on NUAN shares.
  • As we get a better understanding, and some hands-on experience with these new capabilities across Apple, Amazon and other recent wins, we’ll look to revisit our price target.

 

AXT Inc.  – More Than Riding the Smartphone Wave

Over the last decade, RF semiconductor companies like Skyworks Solutions (SWKS) and Qorvo (QRVO) have seen strong moves in their businesses as well as stock prices. RF semiconductors are what allows that cellphone in your pocket to communicate wirelessly with networks (RF stands for radio frequency) and it enables that communications at a far more battery efficiency than its silicon semiconductor counterpart.

As the Connected Society investment theme plays out in the marketplace, it’s easy to see the two factors driving demand for these semiconductors.  First, the move from 2G to 3G and 4G technologies has resulted in greater RF semiconductor content per device, beginning in mobile phones and now in smartphones. The second factor is the
adoption of wireless technologies across multiple devices ranging from gaming controllers to tablets, GPS devices, and wearables to name a few.
We are now on the cusp of seeing these two forces step up once again as mobile carriers get ready to beta 5G technologies, which will add another layer of RF content to connected devices, and newer connected markets, like the Connected Home, Connected Car and the Internet of Things approach their tipping points. Speaking of Connected Car, later this week, we’ll have more on the Connected Car market when Ted Cardenas from Pioneer joins us on this week’s Cocktail Investing Podcast. Be sure to catch it on TematicaResearch.com or head on over to iTunes and subscribe.

Back to the matter at hand, each of these connected devices requires a bevy of RF semiconductors ranging from switches and filters to power amplifiers. In the silicon semiconductor world, chips are fabricated on wafers. With RF semiconductors, they are grown on substrates based on elements found on the periodic table. We’ll keep it simple here when it comes to compound semiconductors, and will post more background information on the website. For now, what you do need to know is RF semiconductors’ performance characteristics across their varied applications lend themselves to our Disruptive Technology investment theme.

Again, the basic building block of these disruptive semiconductors is the substrate and brings us to AXT Inc. (AXT) a worldwide manufacturer of compound and single element substrates that include Gallium Arsenide (GaAs), Indium Phosphide (InP), and Germanium (Ge) flavors. The company has manufacturing facilities and investments in 10 subsidiaries and joint ventures in China that produce raw materials as part of its vertically integrated supply chain. Applications for the company’s InP substrates include fiber optic networks, passive optical networks and data center connectivity among others. Moving to Ge substrates, key markets for the material include satellite solar cells and optical sensors and detectors including infra-red detectors.

The substrate category that has the greatest volume opportunity remains GaAs, which as mentioned above is used in smartphones and other burgeoning connected device markets such as augmented and virtual reality devices, gaming applications as well as facial recognition security applications like the one in beta by Jet Blue (JBLU) as well as SmartTV, auto, medical, gaming and industrial applications. Pretty much any device is poised to include RF semiconductors, but let’s remember the single largest market by volume remains the smartphone market. With greater RF semiconductor content per device as more of the globe migrates to 4G and LTE technologies, we see rising demand for AXT’s GaAs substrates. With RF semiconductor content taking another step up with 5G, the outlook for AXTI’s GaAs substrates looking favorable over the next several years.

Given the wide array of end markets served, no particular customer accounted for more than 10 percent of revenue in 2016, but we suspect key customers include Skyworks Solutions and Qorvo, given their position in the RF semiconductor space. Consensus estimates call for Skyworks to grow its revenue 10 percent this year and again next year, while forecasts for Qorvo call for its revenue to grow 4-9 percent over the next several quarters. As we’ve noted with Applied Materials (AMAT), we are seeing China invest heavily in developing its in-country semiconductor capabilities, and based on order books for both Applied and Veeco Instruments (VECO), this includes compound semiconductors. As such, we could see the mix of customers and geographies at AXT shift over the coming quarters. In our view, that plays to AXT’s strength given its existing operations in China.

Much the way we are watching Applied Materials and Veeco for cues on organic light emitting diode demand, we will also be watching them for compound semiconductor capacity additions. Applied in particular has reported strong order growth, which led the company to recently boost its outlook. As part of its first-quarter results, Veeco reported a third consecutive quarter with bookings above $100 million vs. $94 million in revenue for the quarter, bringing its backlog at the end of the quarter to more than $200 million.

Let’s Have a Look at AXT Fiscal and Stock Performance

Current expectations call for AXT to deliver revenue of $91 million this year, up from $81.3 million last year, but there could be upside based on the deployment of 5G networks as well as reception for Apple’s (AAPL)next iPhone. As several compound semiconductor technology applications mature over the coming quarters, revenue at AXT is expected to rise to $103-$107 million, with EPS forecasted to climb to $0.31 per share, up from $0.19 this year. We’d note that over the last year, AXT has managed to beat analyst expectations in all four quarters, even as EPS expectations have ticked higher. One other item to point out, the company has no debt and $77 million in cash (roughly $2 per share) and is generating positive cash flow.

Historically, smartphone demand has ramped in the second half of the calendar year. Apple (AAPL) is set to take the wraps off its latest iPhone model this fall. Given the likely competitive response from Samsung, HTC, LG and others, we expect the seasonal pattern to hold, which means we should see a pick-up in demand for AXT’s substrates in late July. Other connected devices, ranging from connected speakers, gaming consoles and so on, should also see a seasonal bump in the back half of the year as part of the year-end holiday shopping season. With the seasonal pattern expected to hold, this likely means AXT shares will move higher as revenue and earnings are poised to climb meaningfully in the second half of the year compared to the first half. While the positive is that tends to result in favorable multiple expansion, it also means that we need to be mindful about the typical revenue fall off from the fourth quarter to the first quarter, given the seasonal drop off in smartphones and other volumes as we move into late January and February.

With all of that said, we see AXT shares reaching $9 over the coming months. We derive that price target through a confluence of historical P/E and enterprise value (EV) to revenue metrics. Our plan will be to either use market weakness during the summer months to scale into the shares, or to build our position on signs the seasonal smartphone ramp is trending stronger than expected.

The Bottom Line in AXT Inc (AXTI):

  • We are adding AXTI Shares to the Tematica Select List, which at market close yesterday traded at $6.45 per share.
  • We are setting a price target on the shares of $9, and anticipate it reaching that level over the coming months. We derive that price target through a confluence of historical P/E and enterprise value (EV) to revenue metrics.
  • Our plan will be to either use market weakness during the summer months to scale into the shares, or to build our position on signs the seasonal smartphone ramp is trending stronger than expected.

 

WEEKLY ISSUE: Making a Measured Bet on this Guilty Pleasure Gaming Company

WEEKLY ISSUE: Making a Measured Bet on this Guilty Pleasure Gaming Company

In this Week’s Issue:

  • Let Luck Be Our Lady — Adding MGM Resorts to the Tematica Select List
  • Fallout from Apple’s WWDC 2017 Event Has Us Upping Stop-Loss on OLED
  • The Apple Halo Effect Shines on More than Just the iPhone Ecosystem
  • Apple’s HomePod Announcement Also Has Implications on AMZN, GOOGL and NUAN, Leading Us to Instill a Stop-Loss on Nuance

 

Since last week’s issue of Tematica Investing, we have to say that things more or less remain unchanged. All three major market indices are up, led by the Nasdaq and the same group of companies that have powered its outperformance relative to the S&P 500 and the Dow Jones Industrial Average since mid-January. Most of these same stocks — Amazon (AMZN), Alphabet (GOOGL) and Facebook (FB) — have powered the Tematica Select List higher, but we’ve also benefitted from continued climb in Universal Display (OLED), Applied Materials (AMAT), and USA Technologies (USAT), each of which is being driven by its own aspect of our various investing themes.

In the race to reach $1,000, we’ve seen both AMZN and GOOGL shares cross and move back from that would be magical line in the sand. From our perspective, much like a tailor tells us when we cringe at our waist size when getting measured for a new suit – it’s just a number. At least when it comes to our age and waist size!

What matters most when assessing a stock price is whether the thematic tailwinds are still blowing, and in the case of both Amazon and Alphabet, it’s a resounding yes. Even as the shares encroach upon our respective price targets — $1,100 for Amazon and $1,050 for Alphabet — we continue to see signs that the core respective investing themes – Connected Society and Asset-Lite Business Models – show no signs of abating. As we’ve said before, even as we look to once again revisit our price targets, much the way we have with Universal Display shares as its outlook has strengthened over the last several months, these are stocks to own, not trade. That remains our position.

Even as those names have moved higher this past week, we’ve seen investor appetite favor some of our more defensive names, including McCormick & Co. (MKC) and International Flavors & Fragrances (IFF), both of which are up more than 1 percent over the last five days. Not surprisingly, we are seeing these kinds of companies, the ones that have a rising dividend policy and inelastic aspects to their businesses, come back into favor as uncertainty once again creeps back into the market.

Whether it’s the recent happenings in London, fired FBI Director James Comey’s pending testimony before Congress, investigations into Russian meddling, Trump once again trying to pivot his policy efforts to get out of stall speed, the European Central Bank meeting or elections in Britain, there is no shortage of things to preoccupy investors. As we keep one eye and ear on these events, we’ll continue to watch the data unfold and make our moves accordingly with the Tematica Select List. As we shared in this week’s Monday Morning Kickoff and described in last week’s Cocktail Investing Podcast, we are seeing GDP expectations for the current quarter begin to wither and beginning to see downward revisions for 3Q 2017 as well. It’s going to make for an interesting summer, but we’ll be there to guide you through it.

As we get ready for the soon to be on us summer, we’ll be reviewing both price targets and stop losses up and down the Tematica Select List. Now, let’s get to some updates and a new recommendation that centers on our Guilty Pleasure investing theme.

 

 

Let Luck Be Our Lady — Adding MGM Resorts to the Tematica Select List

Our Guilty Pleasure investing theme examines a variety of companies and businesses that range from alcohol, beer and spirits to chocolate, tobacco and gaming. We examine each of these, and when the time is right, meaning a thematic tailwind is blowing and there is sufficient net upside to be had, we’ll add shares to the Tematica Select List. That’s what we’re doing today with MGM Resorts International [stock_quote symbol=”MGM” show=”symbol”] shares.

While widely recognized mostly for its domestic gambling and hospitality business that includes casino, rooms, food and beverage, entertainment and retail-related revenue, we are adding MGM shares to the Tematica Select List primarily because of the positive inflection unfolding in Macau China, per monthly data reported by the Macau Gaming Inspection and Coordination Bureau.

Before digging into MGM’s overseas business, it’s helpful to spend some time understanding the full scale of the company’s domestic business, the bulk of which includes operations within Las Vegas, with properties that include the Bellagio, MGM Grand, Mandalay Bay, The Mirage and Luxor. The company has expanded in recent years outside of Vegas, opening resorts in Michigan, Mississippi, New Jersey and one just last year in Maryland at National Harbor just outside of Washington, DC.

MGM’s domestic casino operations account for roughly 76 percent of the company’s overall square footage and 86 percent of its guest rooms. If you are looking for greater detail, those domestic operations also account for roughly 87 percent of overall slots and 69 percent of overall gaming tables. Viewed somewhat differently, the company’s overall Casino operations generate roughly 55 percent of revenue in the most recent quarter, with the two next largest businesses – Rooms and Food & Beverage – accounting for 21 percent and 16 percent of revenue, respectively. While the company will often discuss its Entertainment and Retail businesses, it’s those three – Casino, Rooms, and Food & Beverage – that are the key levers for revenue and profits.

Monthly data released by the Nevada Gaming Board showed April gaming revenue rose 1.2 percent year over year statewide, even though Las Vegas Strip revenue dipped some 3 percent year over year. For the fiscal year to date, which spans from July 2016 to April 2017, both Las Vegas Strip and overall Nevada gaming is up 3 percent. Forecasts for the just-passed Memorial Day weekend suggest a rebound in Las Vegas for May, as about 328,000 people were slated to descend on Las Vegas from last Thursday to Tuesday, which according to AAA and the Las Vegas Convention and Visitors Authority make Las Vegas the seventh-most-popular destination to kick off the summer travel season. According to the Las Vegas Convention and Visitors Authority, those out-of-town visitors were to spend about $252.6 million on food, hotels and gambling during the Memorial Day weekend, nearly 1 percent more than the same time last year.

Given its presence in Las Vegas, we see MGM’s portfolio of casinos, restaurants and hotels benefiting. With U.S. airlines expecting to carry 234 million passengers from June 1 through Aug. 31 — up from the summer record of 225 million a year ago, according to the trade group Airlines for America — we see MGM’s Las Vegas operations having a solid summer. Lending a helping hand will be MGM’s investments in T-Mobile Arena and the Park Theater. Subscribers know that we here at Tematica love our data, and we’ll be monitoring that from the Nevada Gaming Board each month to make sure the fundamentals are on track. Outside of Vegas, MGM’s domestic business should benefit from full year contributions from MGM National Harbor and Borgata, both of which opened to much fanfare and are using headline entertainment to lure hotel guests and gamblers.

Turning back to the Macau gaming data, the Macau Gaming Inspection and Coordination Bureau recently reported April gross gaming revenue is up more than 23 percent year over year. This marked the 10th straight month of positive growth, and early indications by research firm Bernstein and others peg June growth to be up 20 to 26 percent year over year. Other forecasts have Macau gaming up double digits over the next several months.

For MGM, its Macau operations were a drag on overall profits in 2014, 2015 and 2016, but with gaming revenue and most likely corresponding food- and hotel-related revenue up as well this year, the business is likely to be far less of a drag in the current and coming quarters. From a metrics perspective, while MGM’s Macau business accounts for 1.3 percent of its overall hotel rooms and 3.7 percent of its slots, it has a far more sizable presence in gaming tables (22 percent) and casino square footage (16 percent) as it caters to “high rollers” and VIPs. Channel checks reported by several Wall Street firms indicate “high roller” and VIP customers provided much of the April revenue boost, which bodes well for MGM’s Macau business.

If we look back at the downturn in MGM’s Macau gaming business that spanned from June 2014-July 2016, it not only hit the company’s overall revenue and earnings, but its share price as well. Consolidated revenue fell to $9.19 billion in 2015 from 10.08 billion in 2014 before rebounding to $9.45 billion in 2016 as Macau gaming recovered in the back half of the year. That fall off, which bled through to the company’s bottom line, resulted in MGM shares falling to a low of just over $18 in July 2015 from a high of $28.29 in March 2014.

Off the very bottom of the Macau gaming issues, MGM shares are up roughly 35 percent over the last twelve months, but with solid prospects in both the domestic and Macau operations, MGM’s business is on a roll. Current consensus expectations have MGM’s EPS reaching $1.27 this year, up from $1.14 last year, but with the most difficult year-over-year comparisons in the June and September quarters. With expectations for EPS to grow in the coming quarters and reach the $1.55 to $1.60 level in 2018, based on historical multiples, we see upside to $37. That offers roughly 14 percent upside from the current share price, but doesn’t factor in the company’s new quarterly dividend of $0.11 per share.

MGM instituted the new dividend just a few months ago, and we take that to be a sign of management’s confidence in the business given the understanding with shareholders what is likely to happen should a company cut let alone trim its quarterly dividend. At the current share price, that annualized dividend yield equates to 1.4 percent. Looking at the company’s balance sheet, it exited the March quarter with $1.4 billion in cash and total debt near $13.1 billion. While that debt load may seem high, the company’s cash flow offers sufficient coverage with earnings before interest tax and depreciation running at 4.1-4.6x based on 2017 and 2018 expectations.

  • We are adding shares of MGM Resorts International (MGM) to the Tematica Select List with a Buy rating and a $37 price target. As we begin this position, we would look to scale into it on any weakness near $30, which would also serve to improve the average cost basis.
  • Because this is a new position, we are holding off setting a protective stop loss at this time.

 

 

Fallout from Apple’s WWDC 2017 Event Has Us Upping our OLED Stop-Loss

Yesterday we published our reaction to Apple’s (AAPL) latest World Wide Developer Conference (WWDC), but we held off discussing how the Tematica Select List is benefitting from what many have come to call the Apple halo effect given the expected 2017 refresh of its iPhone line of products. Again, Apple CEO Tim Cook and the rest of his management team said nothing about the expected new iPhone at Monday’s event — which is likely part of the reason that Apple stock has traded up only modestly following the event.

The reality, however, is that this iPhone product refresh has already led to a ramp-up of industry capacity for organic light emitting diode (LED) displays and the machines that fabricate them. We continue to see the Apple-related demand as part of the overall sea change toward organic LED displays that is benefitting both our Universal Display (OLED) and Applied Materials (AMAT) shares.

To put it into perspective, AAPL shares have been a stalwart thus far in 2017 — the shares are up 33 percent since last October. It’s been a great run, no doubt. Our strategy, however, has been to “buy the bullets, not the gun” and the result has been even better, with OLED shares are up 134 percent and AMAT shares up 27 percent. As the Apple rumor mill kicks back into gear in a few months, we see it propelling OLED and AMAT shares higher.

  • With OLED shares hovering at our $125 price target, subscribers should hold off adding to positions at current levels as we revisit that target. We will be boosting our stop loss to $100 from $85, which will lock in a profit of more than 88 percent.
  • We continue to have a Buy rating on AMAT shares with a $55 price target.

 

 

The Apple Halo Effect Shines on More than Just the iPhone Ecosystem

Buried among the various Apple comments yesterday, however, there were several that were rather positive for our Cashless Consumption investing theme and the USA Technology (USAT) shares on the Tematica Select List. In particular, it appears that 2017 is a rather big year for Apple Pay, as it will be available at 50 percent of retailers within the U.S. by the end of the year. According to Apple, Apple Pay is already the top contactless payment service on mobile devices, and this retailer deployment has the potential to push Apple Pay into the mainstream. As that happens, we see user adoption escalating and a push — pull emerging with vending machines and the self-serve retail market for USAT’s solutions.

Over the last week, USAT shares have climbed more than 13 percent, bringing the positions return to more than 21 percent since being added to the Tematica Select List on April 19. By comparison, the S&P 500 is up all of 3.5 percent. This is but the latest example of the power to be had by recognizing pronounced thematic tailwinds and identifying well-positioned companies.

  • With roughly 10 percent upside to our $6 price target for USAT shares, we’re notching down our rating to Hold from Buy.
  • Given the volatile nature of small-cap stocks like these, we’re going to hold off setting a protective stop loss on USAT shares for now.

 

 

Apple’s HomePod Announcement Also Has Implications on AMZN, GOOGL and NUAN, Leading us to Instilling a Stop-Loss on Nuance

The introduction of Apple’s connected speaker, dubbed HomePod (you have to love the creativity), is raising some eyebrows with more than a few questions as to what it means for existing connected speaker products and voice digital assistants. The two obvious standouts are Amazon’s Alexa and Alphabet’s Google Home.

To begin with, Apple is marketing the HomePod as a music device first, connected speaker second. Granted the speaker quality in Amazon’s Echo products is not the best, but it’s also not the worst given its informational queries. We also suspect Apple’s HomePod positioning reflects current shortcomings with Siri relative to Amazon’s Alexa, which leverages Amazon Web Services and has an ever expanding skill set. If you’ve ever asked Apple’s Siri the same question as you might ask Amazon Alexa, you will quickly realize that Siri isn’t the sharpest knife in the drawer.

HomePod won’t be released until late 2017, which knowing Apple means it won’t be readily available until sometime in early until 2018. Between now and then, odds are we will see at least one iteration of upgrades to the existing competitors. And for those who are sweating this for Amazon, we’d remind you that near-term Alexa is a small part of the Amazon puzzle. We expect that to change over time as Amazon reaps the benefits of licensing deals for Alexa, but for now, Amazon’s main drivers remains digital commerce and Amazon Web Services.

We will say that Apple’s need to catch up in the voice digital assistant market could lead Apple to acquire additional artificial intelligence or related voice technology companies. Whether it’s Apple or another competitor (say, where is Samsung in the voice digital assistant maker?) we continue to suspect Tematica Select List company Nuance Communications (NUAN), given its voice recognition and natural language solutions, is bound to turn up on corporate M&A radar screens.

  • We continue to have a $21 price target on NUAN shares, which offers 10 percent upside from current levels.
  • With the position up more than 23 percent since we added it to the Tematica Select List last December, we are instilling a stop loss at $18, which will lock in a minimum gain of 16 percent.

 

 

 

 

 

May Data From ADP and Challenger Offer Confirmation for Several Tematica Select List Positions

May Data From ADP and Challenger Offer Confirmation for Several Tematica Select List Positions

This morning we received the Challenger Job Cuts Report as well as ADP’s view on May job creation for the private sector. While ADP’s take that 253,000 jobs were created during the month, a nice boost from April and more in line with 1Q 2017 levels, we were reminded that all is not peachy keen with Challenger’s May findings. That report showed just under 52,000 jobs were cut during the month, a large step up from 36,600 in April, with the bulk of the increase due unsurprisingly to retail and auto companies.

As Challenger noted in the report, nearly 40% of the May layoffs were due to Ford (F), but the balance was wide across the retail landscape with big cuts at Macy’s (M), The Limited, Sears (SHLD), JC Penney (JCP) and Lowe’s (LOW) as well as others like Hhgregg and Wet Seal that have announced bankruptcy. In total, retailers continued to announce the most job cuts this year with just under 56,000 for the first five months of 2017. With yesterday’s news that Michael Kors (KORS) will shut 100 full-price retail locations over the next two years, we continue to see more pain ahead at the mall and fewer retail jobs to be had.

Sticking with the Challenger report, one of the items that jumped out to us was the call out that,

“Grocery stores are no longer immune from online shopping. Meal delivery services and Amazon are competing with traditional grocers, and Amazon announced it is opening its first ever brick-and mortar store in Seattle. Amazon Go, which mixes online technology and the in-store experience, is something to keep an eye on since it may potentially change the grocery store shopping experience considerably, “

 

In our view, this means the creative destruction that has plagued print media and retail brought on by Amazon (AMZN) is set to disrupt yet another industry, and it’s one of the reasons we’ve opted out of both grocery and retail stocks. The likely question on subscriber minds is what does this mean for our Amplify Snack Brands (BETR) position? In our view, we see little threat to Amplify’s business; if anything we see it’s mix of shipments skewing more toward online over time. Not a bad thing from a cost perspective. We’d also note that United Natural Foods (UNFI) is a partner with Amazon as well.

  • Our price target on Amazon (AMZN) remains $1,100 and offers more than 10% upside from current levels.
  • Amplify Snack Brands (BETR) has an $11 price target and is a Buy at current levels.
  • Our target on United Natual Foods (UNFI) is $65, and the recent pullback over the last six weeks enhances the long-term upside to be had.

We’d also note comments from Chipotle Mexican Grill (CMG) that its recent cybersecurity attack hit most Chipotle restaurants allowing hackers to steal credit card information from customers. In a recent blog post, Chipotle copped to the fact the malware that it was hit with infected cash registers, capturing information stored on the magnetic strip on credit cards. Chipotle said that “track data” sometimes includes the cardholder’s name, card number, expiration date and internal verification code. We see this as another reminder of the down side of what we call both our increasingly connected society and the shift toward cashless consumption. It also serves as a reminder of the long-tail demand associated with cyber security, and a nice confirmation point for the position PureFunds ISE Cyber Security ETF (HACK) shares on the Tematica Select List.

  • Our price target on PureFunds ISE Cyber Security ETF (HACK) shares remains $35.

 

WEEKLY ISSUE: A new contender for our Tooling & ReTooling Investment theme

WEEKLY ISSUE: A new contender for our Tooling & ReTooling Investment theme

In this Week’s Issue:

  • A Quick Economic Recap
  • Data on Tap for the Week Ahead
  • A New Contender for Tooling & Retooling Thanks to Aerospace Mandates!
  • Amazon (AMZN) and Alphabet (GOOGL) both flirt with the $1,000 price line
  • Dycom (DY) shares hit hard, but thematic tailwinds are still strong

 

We here at Tematica hope you had an enjoyable and relaxing holiday weekend that also served as a reminder for all those who fought so we can enjoy the freedoms we have. Three-day weekends serve to help recharge one’s batteries and we’ll need it this week. We have a plethora of economic data coming at us, which will set the stage for the European Central Bank’s next meeting (June 8) as well as the next Federal Open Market Committee meeting (June 13-14). With the Fed’s most recent FOMC minutes indicating the group is looking to determine if the recent economic slump was indeed transitory, we expect there will be much focus on this week’s data.

Odds are that will be a hot topic of this week’s Cocktail Investing Podcast, and if you missed last week’s episode then you missed out on our restaurant pain conversation. Of course, if you head over to TematicaResearch.com you can find that episode there, or you can simply subscribe to the podcast on iTunes – you can guess which one I’d recommend, so you don’t miss out.

 

A Quick Economic Recap

Because there was no Monday Morning Kickoff published this week, let’s recap last week and what it meant for the Tematica Select List. As the market ground higher last week — setting new records for both the S&P 500 and the Nasdaq Composite Index — there were added signs that even though the domestic economy is faring better now than in the first quarter, it’s still not setting the world on fire.

We saw evidence of a struggling economy in Friday’s April core durable goods order data and in disappointing April new home sales earlier last week. While this morning’s April Personal Income & Spending were in-line with expectations, we have to remember April spending benefitted from the late Easter holiday. Digging into the report, the biggest spending increase was for durable goods, while spending on services fell month over month. The personal savings rate remained flat at 5.3 percent for the third consecutive month. Unsurprisingly, the latest Case-Schiller 20-city index, which seeks to measures the value of residential real estate in 20 major U.S. metropolitan areas, rose once again in March reflecting the continued shortage of available homes for sale that is benefitting sellers and helping drive prices higher.

Even the latest Fed minutes that came out last week showed some debate as to the nature of the recent economic slowdown. Then on Friday, St. Louis Fed President James Bullard shared his view that the path of inflation in the U.S., which has started to roll over according to the latest data, is “worrisome.” Bullard, who is not a voting member of the Federal Open Market Committee (FOMC), went on to reiterate his dovish view that the central bank is seeking to hike rates too quickly and by too much. As we have said before, the Fed has historically done a great job of hiking rates right into a recession… hopefully, Fed Chairwoman Janet Yellen realizes this.

From our perspective, we continue to see the prospects for growth challenged by rising debt levels, little to no wage growth and the headwind of an aging population that, over time, will sap the available workforce pool. Per Economics 101, it’s pretty hard to grow an economy if there aren’t people there to work or as another put it this morning, “the reality of an economy slowed by an aging population and a lack of worker productivity growth.”

Despite some early wins on President Trump’s overseas tour, his approval rating remains below 40 percent, according to the latest from Gallup. As if this wasn’t enough, the Congressional Budget Office reported the GOP Health Plan would result in 23 million fewer Americans with health insurance — fodder for the 2017 election season and likely to help embolden Democrats to resist working with the president to instill reforms until at least mid- November. What’s more, it should weigh on GDP and earnings expectations in the back half of 2017.

As we enter the 2017 campaign season, we’ll continue to read the tea leaves in Washington to assess the potential timing of Trump’s policy moves (late 2017-early 2018?) as well as the potential impact on the markets.

 Data on Tap for the Week Ahead

Turning back to the week ahead, as we mentioned above it’s a rather intense one of the economic front, and with the Fed’s comments, it likely means the data will be in focus even more than usual. Luckily, we have no portfolio companies reporting earnings, which will allow us to zero in on the data, and possibly put some more of our cash to work

On deck over the next few days, we have May ISM Manufacturing & Services, the ADP and the Bureau of Labor Statistics May Employment reports, as well as the official PMI data for May from Markit Economics all, arrive over the next few days. Also, don’t forget May auto sales, April construction spending and the Fed’s latest Beige Book. Be sure to check back later in the week at TematicaInvesting.com for our take on the data.

Yep, it’s going to be a humdinger of a week for economic numbers, and making it even more interesting, a few Fed speakers are on tap. As we contend with the what’s ahead, we’ll continue to look for well-positioned companies that shine through our thematic investment perspective and offer a favorable net risk to reward trade-off. In the meantime, should we uncover some well-positioned companies that have some potential, but we need to see the fundamentals firm or the share price come in a bit, we’ll put them on the Contenders List. Speaking of which . . .

 A New Contender for Tooling & Retooling Thanks to Aerospace Mandates!

There are several strategies investors use to uncover companies that are poised to be on the receiving end of improving demand. We can track industry data looking for a rebound or acceleration that point to rising demand, like many do with companies like CSX (CSX) and Norfolk Southern (NSC) for example.

We can look for new and disruptive technologies that are changing the playing field within an industry, and one such example is our Universal Display (OLED), which as subscribers know is poised to benefit from the shift in smartphones, TVs and wearables to organic light emitting diode (OLED) displays from light emitting diode (LED) backed liquid crystal displays (LCDs). Another strategy is to look for pain points and identify those that can solve the chokehold.

There are others of course, including technical tools, but we can also look to regulatory mandates to help uncover potential pain points and the companies that could benefit. While there tends to be some back and forth in DC over regulatory mandates, once they are agreed upon and the timeline is set, we have a line in the sand that results in companies complying or potentially being fined. That line in the sand tends to result in a pull-forward in demand and historically speaking a falloff in demand once the timeline has been achieved.

We’ve seen this demand pull-forward in the trucking industry with new engine emission mandates and in the rail industry with braking technology mandates. We’re in the process of seeing this with another mandate in the trucking industry as fleet operators have until December 2017 to meet the electronic logging device (ELD) mandate to track hours of service. Compliance with this mandate is one factor leading to rising demand for our CalAmp (CAMP)shares, which have climbed more than 29 percent year to date.

Another industry that has its fair share of staged regulatory mandates is aviation. We’ve seen several mandates over the last decade plus, including one to compress the distance between flying aircraft. This was better known as Reduced Vertical Separation Minimum or RVSM for short. Much like mandates for trucks, railcars and others, the addressable market included both new aircraft as well as the existing fleet, which works very well for those companies that serve the after-market. With recent and even newer technologies, we are seeing another round of global mandates that phase in this year, but there is a larger looming mandate for air traffic management in both the US and Europe called Automatic Dependent Surveillance-Broadcast (ADS-B).

Automatic Dependent Surveillance–Broadcast (ADS-B) helps pilots and air traffic controllers create a safer, more efficient National Airspace System (NAS) relies on aircraft avionics, a constellation of GPS satellites, and a network of ground stations across the country to transmit an aircraft’s position, ground speed, and other data to air traffic controllers. Compared to existing radar, the coverage area and accuracy is greater and it can be used in areas where radar coverage is not possible, such as over the Gulf of Mexico. ADS-B also transmits surveillance information about an aircraft in flight or while on the ground. In the US, the Federal Aviation Administration has mandated that aircraft operating in most controlled U.S. airspace be equipped for ADS-B Out by January 1, 2020 and in Europe retrofit compliance is set for June 8, 2020.

Per data from Boeing there were 22,520 jet airplanes in service during 2015, and the over the next 20 years that figure is slated to rise to more than 45,000. This bodes well for those companies like Honeywell (HON) and Rockwell Collins (COL) that serve the OEM aircraft market, but those more than 22,000 planes offer a meaningful retrofit opportunity.

One of the companies that benefitted from the RVSM mandate several years ago was Innovative Solutions & Support (ISSC), which saw its shares climb to more than $24 in 2005 during the height of RVSM compliance. In a nutshell, the company is an avionics company that saw its revenue swell to more than $63 million in 2005, up from just over$28 million in 2003 before rolling over to roughly $18 million in 2007. Over the years, the company continued to innovate with new avionics products, including flat panel displays, and despite the revenue fall off from the RVSM heydays, the company has continued to generate respectable gross margins while still funding new product development.

Currently, there is one lone analyst covering the stock and no published earnings estimates, which can make valuing the shares a little challenging. It can also mean the shares are a potential diamond in the rough.

  • As we look to get a better understanding of the ADS-B and other pending aerospace/avionics mandates, we’re adding Innovative Solutions & Support (ISSC) shares on the Tematica Contender’s List, which is where we list companies that we’re doing more work on and in some cases we’re waiting for the risk to reward trade-off to reach a more appetizing level.
  • We’ll keep you posted on our analysis as we zero in on our valuation of ISSC shares and decide when to move them from a contender to a player.

 

 Amazon (AMZN) and Alphabet (GOOGL) both flirt with the $1,000 price line

From our perspective, we see Amazon crossing that mark on a sustained basis first as it continues to expand its purview on both a service/product offering and a geographic one. Make no mistake, we see Alphabet shares crossing that line too, it’s just likely to take a bit longer as it contends with growing competition in the digital advertising space from the likes of Facebook (FB) and now Amazon (AMZN). That said, as we see advertisers continue to embrace our Connected Society investing theme it means more ad dollars flowing to streaming and digital platforms, which bodes well all three of these companies.

  • Our price target on AMZN shares remains $1,100, which offers just 10 percent upside and this has us reviewing both our price target and potentially our Buy rating on the shares.
  • Following the strong share price runs for both GOOGL and FB, we continue to rate both Hold. Please note, that is not code for Sell, but rather a true Hold as all three of these are stocks to own, not trade.

 

 Dycom (DY) shares hit hard, but thematic tailwinds are still strong

Last week, following the company’s quarterly earnings report that offered a softer than expected near-term outlook, Connected Society player Dycom Corp (DY) shares came under significant pressure, dropping over 25 percent. Of course, we’re still up slightly from when we initiated our positions back in September and October of last year, all of which spells opportunity.

The issue with DY shares essentially boils down to a combination of timing and investor expectations. During the quarter, the mild winter weather allowed Dycom to pull forward projects from the current quarter, and odds are investor enthusiasm for 5G deployments has gotten a tad ahead of itself helping DY’s share price soar to a 52-week high of $110 this month from the low $80s in January.

DY shares are now back at early January levels, but from a fundamental perspective, we continue to see both cable and mobile operators expanding existing network capacity and launching new, next-generation networks to meet the nearly unquenchable demand for data. The silver lining in all of this is Dycom is seeing a broadening set of customer opportunities that are in the initial stages of planning, engineering and design and deployment. Also noted on the company’s earnings call, the company is continuing to win contracts, as customers work to improve their network capabilities and performance.

This brings us back to timing, and that means keeping tabs on Dycom’s customer base and respective network-capacity additions and new technology deployments, such as fiber to the home and business as well as 5G backhaul. We’ve seen timing bumps like this in the past with Dycom and other companies like it, and these pullbacks tend to present a buying opportunity — provided the fundamentals remain intact. Based on what we are hearing and seeing from the consumers and Dycom’s customers, we believe that to be the case.

  • We continue to rate DY shares a Buy with a $115 price target.
  • Subscribers that missed DY shares earlier this year should use the recent drop to either add to or begin a position in DY shares.

 

 

WEEKLY ISSUE: Deploying Several Defensive Measures to Protect Gains

WEEKLY ISSUE: Deploying Several Defensive Measures to Protect Gains

In this Week’s Issue:

  • Deploying Several Defensive Measures to Protect Our Gains
  • Alphabet (GOOGL), Asset-lite Business Models
  • Applied Materials (AMAT), Disruptive Technology
  • Universal Display (OLED), Disruptive Technology
  • Dycom Corp. (DY), Connected Society
  • Facebook (FB), Connected Society
  • USA Technologies (USAT), Cashless Consumption

 

Amid the market’s choppy behavior over the last week, the reality is it was little changed as measured by the performance of the S&P 500. In recent days, the market’s focus has once again turned to Washington, first with Treasury Secretary Steve Mnuchin testifying to the Senate Banking, Housing, and Urban Affairs Committee in which he reiterated that the Trump administration’s goal of 3 percent or better GDP is achievable provided “we make historic reforms to both taxes and regulation.” That was followed up this week with the release of President Trump’s 2018 budget, titled A New Foundation for American Greatness, which includes $639 billion slated for military spending that would allow the Pentagon to bolster its ranks by more than 56,000 troops, buy more helicopters and trucks for the Army, boost the Navy’s fleet and pay for more stealth warplanes for the Air Force.

From a thematic perspective that is shot in the arm for another aspect of our Safety & Security investing theme following last week’s high profile WannaCry ransomware attack. While we have PureFunds ISE Cyber Security ETF (HACK) on the Tematica Select List, we’ll look to uncover well-positioned “bullets” for the Select List in the coming days to round out our exposure to this spending tailwind.

Speaking of our Safety & Security investing theme, if you missed last week’s Cocktail Investing Podcast in which Tematica’s Chief Macro Strategist, Lenore Hawkins and I discussed the WannaCry attack, ransomware and cyber spending with Yong-Gon Chon, CEO of cyber security company Focal Point, click here to download it on iTunes. My advice would be to subscribe on iTunes so you get every podcast each and every week, and remember they are absolutely free.

Deploying Several Defensive Measures to Protect Our Gains

As the stock market has moved higher and higher, it’s not lost on us that a number of holdings on the Tematica Select List have been inching up week after week, closing the gap on our respective price targets — that’s a nice problem to have, isn’t it?

Obviously, we’re not really going to complain about positions like Dycom (DY)or Universal Display (OLED) outperforming the market so far in 2017, but we will look at remaining upside to our price targets with an eye to protect subscribers from piling in at levels that don’t afford sufficient upside to warrant taking on potential risk. Yes, it’s the RISK and REWARD that we look at when assessing whether a position makes the cut onto the Select List.

With less than 10 percent upside to respective price targets, we are downgrading several stocks to “Hold” from “Buy.” Unlike Wall Street traders, our Hold rating is just that – maintain the position to capture additional upside, not “Hold means Sell.” For example, even though there is just 8 percent upside to our Alphabet (GOOGL) price target, there are enough tailwinds blowing that could lead to us to revise our price target upward over the coming months. With that mind, we are now rating shares of Alphabet, CalAmp (CAMP), International Flavors & Fragrances (IFF), and Facebook (FB) as Holds. As we do this, we’ll be mindful of pullbacks in the market that offer buying opportunities as well as potential upside to existing price targets.

We’re also making some prudent changes with regard to stop losses, and with that in mind we will make the following adjustments:

  • Boost our stop loss on IFF shares to $125 from $115, which will lock in a nice profit given our $120ish entry price.
  • Raise the stop loss on our PowerShares Exchange-Traded Fund Trust (PNQI) shares to $98 from $90, which cements at least a 17 percent return in the shares.
  • Increase our stop loss on Universal Display (OLED) shares to $85 from $70, which will ensure a minimum return of 60 percent given our $53 entry point.
  • Finally, with our GOOGL shares, we’re stepping the stop loss up to $900 from $800, which will give us a minimum return of just over 22 percent in the shares.

One last item of note, during the past week our position in AMN Healthcare (AMN) was stopped out when the shares crossed below our $37 stop loss level leaving us with a modest profit. Despite that happening, the drivers that led us to initially add the shares to the Tematica Select List – the intersection of the current nursing shortage and the demand for healthcare workers that is a part of our Aging of the Population investing theme – remain intact. As such, we’ll add AMN shares to the Tematica Contender List while we look for a favorable re-entry price.

 Updates Updates Updates

Below are some happenings for those companies on the Tematica Select List that we found noteworthy over the last week. As 1Q 2017 earnings season finally begins to die down, we expect to resume our quest to find new positions for the Select List or at least the thematic bullpen that we affection call the Tematica Contenders List. Two companies that I’m starting to roll my sleeves up on include MGM Resorts International (MGM) as part of our Guilty Pleasure investing theme and CSX (CSX), which falls under our Economic Acceleration/ Deceleration investing theme.

Alphabet (GOOGL), Asset-lite Business Models

GOOGL shares were largely unchanged this past week on the heels of its annual Google I/O event. There were several notable announcements there, including new hardware and augmented reality (AR) developments, as well as the news that Google Home will be available in more countries outside the U.S. over the coming months.

Earlier in the week Alphabet announced its Waymo division would team up with Lyft to commercialize its driverless technology, which increases the potential for Waymo to go from investment mode to perhaps revenue generating over the next several quarters. Should that happen, Alphabet could either redeploy those investments to other projects and if not we could see a reason to contemplate upside to EPS in 2019-2020.

Getting back to the here and now or at least the nearer term, we continue to see Alphabet as extremely well positioned for the continued acceleration in our increasingly connected society toward digital search (desktop and mobile), advertising dollars shifting to digital platforms (Google, YouTube) and consumer appetite for streaming content. At the same time, the company continues to exhibit a more focused view on delivering profits, something we appreciate as shareholders.

  • Our price target is $1,050, which offers roughly 8% upside from current levels.
  • Even as GOOGL shares approach our target, much like we say with Amazon (AMZN) shares, GOOGL shares are ones to own, not trade.

 

 

Applied Materials (AMAT), Disruptive Technology

Last week Applied Materials (AMAT) reported better-than- expected earnings on in-line revenue due primarily to robust margin expansion versus year-ago levels. Furthermore, given prospects for continued margin improvement and underlying order strength, the company guided the current quarter above consensus expectations. Per the quarterly report, Semiconductor Systems sales rose more than 50 percent year over year, benefiting from the ongoing digitization that has chips becoming the new “fabric” of lives — Connected Car, Connected Home, the Internet of Things (IoT) and wearables. Applied is also benefiting from rising semiconductor capacity in China as well as strong demand for organic light emitting diode displays that led its display equipment sales to spike more than 100 percent in the quarter.

  • On the underlying strength in the current demand up-cycle and prospects for further margin improvement, we are boosting our price target to $55 from $47, which offers upside of 22 percent from current levels.
  • We continue to rate AMAT shares a Buy

 

 

Universal Display (OLED), Disruptive Technology

You probably noticed in our Applied Materials comments earlier that one of the drivers to its strong quarter was robust demand from the currently capacity constrained organic light emitting diode market, or OLED’s for short and not to be confused with Universal Display’s ticker symbol, which is also OLED. If you didn’t feel free to scroll back up and re-read them.

During AMAT’s earnings conference call, the management team gave a rather bullish endorsement for our position in OLED shares when it said, “we see investment in mobile OLED getting stronger as confidence in the adoption rates of OLED technology increases. Recent forecasts indicate that two-thirds of new smartphones could have OLED displays by 2021 and screen manufacturers are accelerating their investment plans accordingly.”

With more applications — ranging from smartphones to TVs and wearables — embracing OLEDs in the coming quarters and ramping industry capacity to meet that demand, the outlook for Universal’s chemicals and licensing business looks very bright.

  • We are reassessing our current $125 price target with an upward bias.

 

 

Dycom Corp. (DY), Connected Society

This morning, our shares of Dycom Corp. (DY) are getting hard hit following the company’s mixed quarterly earnings report. The good news is for the April quarter, Dycom crushed expectations with $1.30 per share in earnings on revenue of $786.3 million compared to consensus expectations of $1.19 and $736.2 million, respectively. Organic revenue nearly 15 percent year on year, while business acquired in the last year contributed $23 million. While details in the pre-earnings conference call press release were scant, we see the year over year growth speaking to the continued build out of next generation networks at core customers like Verizon (VZ), Comcast (CMCSA) and our own AT&T (T).

Now for the less than good news that is pressuring the DY shares  – the company’s outlook for the current quarter. Dycom is forecasting contract revenue to be in the range of $780-$810 with EPS between $1.35-$1.50, which falls short of consensus expectations that were looking for revenue $845-$850 million with EPS in the range of $1.76-$1.79. As we suspected, the culprit given the nature of the company’s business is the timing of projects, and in this case, the mild winter led to some pull forward, hence the part of the better than expected April quarter revenue. The other driver for the April quarter revenue beat was one industry participant has begun to invest in the wireline infrastructure required to enable fully converged wireless-wireline networks. As we’ve seen before, this tends to result in copy-cat spending by competitors, which in our view bodes well for Dycom in the coming quarters.

Stepping back, we see both cable and mobile operators expanding existing network capacity and launching new, next-generation networks to meet need the near unquenchable demand for data. On this morning’s earnings call, Dycom shared that it is seeing a broadening set of customer opportunities that are in the initial stages of planning, engineering and design and deployment. While this has helped temper near-term spending expectations, the company is continuing to win contracts as customers continue to improve their network capabilities and performance. This brings us back to timing, and that means keeps tabs on Dycom’s customer base and respective network capacity additions and new technology deployments, such as fiber to the home and business as well as 5G backhaul. We expect the Wall Street community will trim back near-term revenue expectations, but given the 18 percent drop in DY shares this morning, we would argue those cuts are largely factored into the stock price.

Keeping one eye on the medium to longer-term view as these networks get built out over the next few years (not quarters), we’re inclined to use the pullback in the shares to round out the portfolio’s position size as the shares settle down provided our suspicion over the guidance miss is on point.

  • Given the initial purchase prices on the Tematica Select List at $72.89 and $80.47, we’re going to be patient with this position.
  • For those subscribers that missed the initial run in DY shares, we see this as an excellent jumping on point.

 

 

Facebook (FB), Connected Society

In the last few days, Facebook (FB) was fined by the European Commission just over $100 million on its acquisition of WhatsApp. That’s nothing to sneeze at, but there was far bigger news concerning the social media giant this week.

First, Facebook is expanding its video offering, inking a deal to broadcast a live Major League Baseball game each Friday for the rest of the season. All in all, that’s a 20-game package that begins tonight.

Second, Facebook’s “Order Food” option on both the web and mobile is now in beta testing. This initiative is an expansion of a deal from late last year with Delivery.com and Slice in which users could place orders with supported restaurants from their own Facebook pages. In our view, this speaks to the monetization across Facebook’s multi-platform offering that is benefiting from ongoing feature upgrades.

In the coming months, we’ll look to see if the slowdown in digital advertising, cited on Facebook’s earnings call, is occurring or if the shift to mobile advertising continues to be robust.

  • Our price target remains $160.
  • For now, we would suggest subscribers look to add to FB positions below $145.

 

 

USA Technologies (USAT), Cashless Consumption

Last week, USAT shares rose more than 2 percent during a quiet news week for the company. Despite the relative silence, comments from Alphabet (GOOGL) at its annual I/O developer conference revealed Android Pay was expanding into new markets: Brazil, Canada, Russia, Spain, and Taiwan. As mobile payments expand across the globe, much the way credit and debit cards have, we see an expanding target market for USA’s payment solutions.

  • We intend to be patient investors and hold USAT shares as mobile-payment adoption grows.
  • Our price target remains $6 and the shares are a Buy at current levels.

 

 

 

 

 

WEEKLY ISSUE: “WannaCry” cyber attack impact on our Safety & Security investment theme

WEEKLY ISSUE: “WannaCry” cyber attack impact on our Safety & Security investment theme

In this Week’s Issue:

  • Checking the data, the economic data that is
  • WannaCry makes HACK shares jump for joy
  • Disney (DIS) held movie hostage?
  • Alphabet (GOOGL) and Lyft team to commercialize self-driving cars
  • Amazon’s (AMZN) at it again, this time with furniture
  • Getting ready for earnings from Applied Materials (AMAT) and what it means for Universal Display (OLED)

 

It’s been a much welcomed slower week of economic data and corporate earnings, but Mother Nature sensing we might like the lull after the last few weeks, many across the globe had to contend with the WannaCry ransom ware cyber attack – more on that below and what it means for our Safety & Securityinvestment theme position in PureFunds ISE Cyber Security ETF (HACK) shares. We’ve also got a number of updates to share, so away we go…

 

Checking the data, the economic data that is

Before we dish on WannaCry, let’s recap the economic data received this week, which included the May reading on manufacturing under the purview of the NY Fed, as well as April data for Housing Starts and Industrial Production. Let’s start with the good news, which was manufacturing activity per the April Industrial Production report ticked higher month over month, but even though this took a bite out of excess manufacturing capacity, manufacturing capacity remains underutilized. Moving over the April Housing Starts, single-family homes were flat month over month, while multifamily units fell more than 9 percent compared to March.

 

On the back of that data, the Atlanta Fed boosted its 2Q 2017 GDP reading to 4.1 percent from the prior 3.6 percent reading. Then we received the Empire Manufacturing Index for May, which clocked in at -1.0, well below the expected 7.5 reading and down compared to April’s 5.2 showing. Not exactly supportive of the Atlanta Fed’s revised forecast, and candidly more in line with the slowing evidenced in the majority of the economic data.

 

 

Tomorrow (Thursday), we’ll get the Philly Fed Index and we’ll be matching the May figure against 22.0 in April and consensus forecast of 18.5 for May. As we digest that data point, we’ll be looking for the next 2Q 2017 GDP update from the NY Fed and its Nowcasting model. As a reminder the most recent Nowcasting reading pegged 2Q 2017 GDP at 1.9 percent, down from 2.9 percent at the end of March.
 

WannaCry makes HACK shares jump for joy

Over the last five days, shares of the PureFunds ISE Cyber Security ETF (HACK)rose more than 2 percent bringing the position return to more than 6 percent since being added to the Tematica Select List in early February. As we saw over the last few days, we are seeing a pronounced pick-up in cyber attacks, which include WannaCry and the more than 300,000 computers across over 150 countries that it violated as well as other attacks on hospitals and even clothing retailer Brooks Brothers.

From time to time, we tend to settle in following a headline-worthy cyber attack and complacency returns. We’ve seen this several times, and it tends to result in a demand spike for cyber security stocks, only to see them level off over the coming months. By comparison, we continue to see a growing frequency of cyber attacks both large, medium and small, which is fueling demand and driving revenue for cyber security companies. If one were to postulate, this demand is one downside to our Connected Society investing theme. We would agree, as one company’s tailwind can be another’s headwind, and that pain point can create an opportunity for others. Pretty much what we see here, and it keeps us bullish on HACK shares given our $35 price target.

We’ll be doing a deeper dive on this week’s Cocktail Investing Podcast when Tematica’s Chief Macro Strategist, Lenore Hawkins, and I talk with Yong-Gon (“Young Gun”) Chon, the CEO of Focal Point Data — consulting firm that advises CEOs and Boards on cyber risk.  Be sure the check the website for when the podcast is posted, or subscribe on iTunes to automatically receive each and every episode. While the Cocktail Investing podcast is free – it is, unfortunately, a “BYOB” event.

 

 

Disney (DIS) held movie hostage?

During a town hall meeting with employees, Bob Iger CEO of The Walt Disney Co (DIS) shared “hackers have claimed to have stolen a movie and are threatening to release it in segments until their demands, which include a pirate-like ransom paid with Bitcoin, are met.” While Iger did not identify the would-be stolen film, chatter suggests it to be the new “Pirates of the Caribbean” sequel, which is set to open on May 26. This is the latest film in a franchise that has grossed grossing nearly $3.73 billion worldwide. Disney is currently working with federal authorities to investigate the attack, and we’ll continue to monitor developments and what they may means for the company’s film business in the near-term.

  • The recent post-earnings pullback offers 16 percent upside to our $125 price target at current levels.
  • With a robust movie slate, declining capital spending and a super-sized $10 billion buyback program, we continue to favor the House of Mouse.

 

 

Alphabet (GOOGL) and Lyft team to commercialize self-driving cars

Amid its skirmish with Uber over self-driving technology that it is developing at Waymo, this week Alphabet’s (GOOGL) partnership with ride-hailing startup Lyft took a new turn as they agreed to work together to develop products and technology for autonomous autos. While terms and other details of the arrangement were not disclosed, there are several thoughts on what this could mean for Alphabet’s Waymo. The most obvious of which is a path to commercialization. Even Warren Buffett commented on the threat that driverless cars and trucks pose to several of Berkshire Hathaway’s businesses at the annual shareholder meeting this year, couching his remarks with “at some point.”

As we see it, the arrangement with Lyft has the potential to bring Waymo’s driverless technology to commercialization as it leverages Lyft’s network of taxis operating in more than 300 cities across the United States. What’s Lyft’s motivation in this? Reducing its largest cost, which are the drivers that get as much as 80 percent of fares, not to mention cash subsidies to retain those drivers. With other companies ranging from Apple (AAPL) to Mobileye (MBLY)vying for a slot in the driverless car market, we’ll continue to watch developments.

  • Our price target on GOOGL shares remains $1,050, which offers just under 10 percent upside from current levels.
  • With the market trading at stretched valuations, we would hold off adding to GOOGL positions at current levels.
  • That said, GOOGL shares are ones to own as we move deeper into the Connected Society.

 

 

Amazon’s (AMZN) at it again, this time with furniture

Turning to Amazon, there were two announcements that caught our eye – the first deals with Amazon’s expanding into furniture, while the other is the dismal brick & mortar retail landscapes. We commented on the later in last week’s Roundup, but we’re seeing reminders of retail-megaddon this week in TJX Companies (TJX) dismal earnings report. Our view remains Amazon is net share gainer as it expands its product and geographic footprint. That brings us back to our first point, the expansion of its furniture offering. While Amazon has sold furniture online for years, much like apparel, it is it stepping up its game as it offers a wider variety of selection — Ashley Furniture sofas and chairs and Jonathan Adler home decor. What Amazon is looking to do is tap into the growth prospects for online furniture sales, which eMarketer sees growing to more than $55 billion by 2020, up from $36 billion this year.

  • Our AMZN price target remains $1,100, which offers just under 14 percent upside from current levels. As with GOOGL shares.
  • AMZN shares are one to buy and hold, and that’s exactly what we aim to do.

 

 

Getting ready for earnings from Applied Materials (AMAT) and what it means for Universal Display (OLED)

Applied Materials (AMAT) will report its quarterly earnings after Thursday’s (May 18) market close. Heading into the weekend consensus expectations call for the company to deliver EPS of $0.76 on revenue of $3.54 billion. As we digest the company’s earnings, we’ll be focusing on bookings and backlog with an eye for potential upside to our price target. With that report, we’ll get another take on ramping OLED industry demand. All signs point to rising capacity, and we’ll be listening to Applied’s comments not only for incremental capacity additions but the timing for those new facilities going from beta to commercial production. With more applications ranging from smartphones to TVs and wearables embracing OLEDs in the coming quarters and ramping industry capacity to meet that demand, the outlook for Universal Display’s (OLED)chemicals and licensing business looks very bright.

We’d note the price moves in these two shares have been strong, and both have continued to encroach on our respective price targets. While we anticipate an upbeat quarter and outlook from Applied, we also think expectations are running high into the earnings report. In our view, to justify the Buy ratings on both stocks, we would need to see upside to $52 for AMAT shares and near $135 for OLED shares, respectively, from current levels. We’ll dial into AMAT’s quarterly report and make our next move based on those findings. With OLED shares, we suspect we’re likely to see a series of rising price targets over the coming months as we wait for the initial sales data on Apple’s next iPhone. Odds are Apple will once again under-produce relative to demand, resulting in the headlines touting yet again another new iPhone selling out. Up over 120 percent as of last evening’s close, we will continue to hang onto our OLED shares for the ride that is to come.

 

 

 

 

 

AMN shares Trumped — Washington activity puts shares of AMN Healthcare under pressure

AMN shares Trumped — Washington activity puts shares of AMN Healthcare under pressure

After Thursday’s market close, healthcare workforce solutions company AMN Healthcare (AMN) reported better than expected March quarter results and guided 2Q 2017 a tad shy of existing expectations. EPS came in at $0.63, $0.03 per share better than consensus expectations and compares to the $0.60 earned the year-ago quarter. Revenue rose to $495.1 million for the reported quarter, edging out expectations of $493 million, and was up roughly 6 percent year over year. Despite those results and the continued pain point that is fueling its business, better known as our Aging of the Population investing theme, AMN shares have come under pressure in the last 24 hours.

We attribute this to the TrumpCare passing the House and heading to the Senate for a vote. We’ll be digging into this to determine what if any potential negatives are for AMN’s business over the coming days. We’ll also examine the March JOLTs report that is released next week, as we repeatedly double check our underlying thesis on the shares.

  • For now, our price target on AMN shares remains $47, which offers sufficient upside to keep our Buy rating in play.

 

Getting back to the company’s 1Q 2017 results, from a mix perspective AMN’s Nurse and Allied Solutions business (63% of revenue) rose 5 percent year over year due primarily to a near 7% increase in the average number of healthcare professionals on assignment compared to the year-ago quarter. That performance was bittersweet given its the company’s largest business, and even though gross margins rose to just under 28 percent vs. just under 27 percent in the year go quarter, those margins remained the lowest of among its three businesses.

The Locum Tenens solutions business (21% of revenue) delivered flat revenue as the revenue per day filled (up 5.4%) was offset by a lower number of days filled (down 5% year over year). Both the increase in revenue per day as well as lower number of days fill speak to the widening disconnect we keep seeing in the monthly JOLTS report when it comes to healthcare workers. Lastly, the Other Workforce Solutions business (16% of revenue) delivered a 22% increase in revenue, with a large part of that reflected last June’s acquisition of Peak Health Solutions as well as growth in the VMS and interim leadership businesses.

To sum it up, the quarter was another solid one for AMN and given the demographics, we continue to see the company benefiting from both the aging of the population that will spur demand for healthcare workers as well as be benefitting from the continued nursing shortage.

 

 

Even amid cautious outlook we are boosting target price for Facebook

Even amid cautious outlook we are boosting target price for Facebook

In this Alert:

  • We are boosting our price target on Connected Society company Facebook (FB) to $160 from $150.
  • Even so, we are now rating the shares a Hold, and would only commit new capital if the shares move closer to $145 or below.

We are boosting our price target on Connected Society company Facebook (FB) to $160 from $150 following this week’s better than expected 1Q 2017 quarterly results and arguably cautious outlook. That boost to our price target, paired with the share’s retreat since hitting a new 52-week high on Tuesday, offers upside of roughly 6.5 percent, and as such we are changing our rating on the shares from a Buy to a Hold.

We’ve had a remarkable run in the FB shares, climbing more than 24 percent, even after the week’s lift since we added them to the Tematica Select List back in late November. For subscribers that missed our recommendation, we’d suggest nibbling closer to $145 or below or on signs the telegraphed advertising slowdown fails to emerge.

As we started to say above, earlier this week Facebook reported March quarter revenue and EPS that handily beat expectations with EPS coming at $1.04, $0.18 ahead of expectations. Revenue for the quarter rose just over 49 percent year over year, reaching slightly better than $8 billion with advertising comprising 98 percent of total quarterly revenue. Compared to year ago levels, revenue growth was had in all four geographic regions led by Rest of World up 66 percent and Asia-Pacific up 60 percent. Slower growth was had in the US & Canada, which represented 49.4 percent of quarterly revenue vs. 51 percent in the year ago quarter. The continued shift to mobile by consumers in the US and faster growth in Rest of World and Asia-Pacific, which tends to be more mobile first, led mobile advertising to reach 85 percent of Facebook’s total advertising revenue for the quarter, up from 82 percent in the year ago quarter. To us, data like this cements Facebook’s position in our Connected Society investing theme.

After reporting robust results and beating Wall Street expectations, Facebook threw some cold water on things when it shares it view calling for a meaningful slowdown in ad growth revenue, due in part to desktop ad blockers, and expense to rise 40 percent -50 percent year over year. In looking for some perspective on Facebook’s slowing ad growth claim, we scoured for some perspective and found that eMarketer sees digital advertising hitting $83 billion in the US this year (up more than 15 percent year over year) of which $58.4 billion will be derived from mobile advertising (up 25 percent year over year). This suggests to us at least that Facebook’s claim for slowing ad revenue growth is likely to be conservative, but in the here and now, Wall Street is reacting to management’s outlook.

Over time, we’ll be checking the data and if eMarketers forecast looks to ring true we’ll plan on revisiting our Facebook price target and rating. Even as we remove our Buy rating, we would argue that jus like Amazon (AMZN) and Alphabet (GOOGL), Facebook with its various digital properties that are embracing monetization strategies are shares to own, not to trade as consumers, businesses and other entities migrate deeper into our increasingly Connected Society.