Menu

Category Archives: Tematica Investing

Weak Economic Readings Are Good News for Our Positions

Weak Economic Readings Are Good News for Our Positions

From a market perspective, this holiday-shortened trading week certainly started off on a high note, reflecting what appeared to be progress in stabilizing oil prices in an OPEC and non-OPEC production deal. As more details became clear, however, it appeared there were cracks already in the works as oil production levels were to be frozen at January 2016 levels. Soon thereafter, we learned that Iran would be able to continue ramping up its production, which raised eyebrows over the likelihood that this deal would have even more problems. As we’ve seen in the past when oil prices collapse, these agreements tend to be fraught with side dealings. Time will tell if that once again turns out to be the case.

After two more days of an up market that built on Friday’s strong move, which was mostly oil and buyback-upsizing driven, we were reminded that there is still much uncertainty out there. I’m not referring to the 2016 presidential election, although as we inch closer and closer, it is becoming harder to guess who will be facing off with whom this fall.

No, I’m taking about the rash of news that hit on Thursday in the form of:

  • The U.S. Energy Information Administration (EIA) showing that U.S. crude stockpiles rose by 2.1 million barrels.
  • And then also this from the EIA — “U.S. Gulf of Mexico (GOM) crude-oil production is estimated to increase to record high levels in 2017 even as oil prices remain low. The EIA projects GOM production will average 1.63 million barrels per day in 2016 and 1.79 million b/d in 2017, reaching 1.91 million b/d in December 2017. GOM production is expected to account for 18% and 21% of total forecast U.S. crude-oil production in 2016 and 2017, respectively.”
  • Finally, the Organization for Economic Cooperation and Development (OECD) cut its 2016 economic-growth forecast once again. The group lowered its 2016 global-growth forecast by 0.3 percentage points to 3% for the year. That’s the second cut since October, when the OECD pegged 2016 growth at 3.6%.

Of course, government statistics and forecasts like the OECD’s tend to be a beat or two behind what’s happening on the economic dance floor, so you should keep tabs on other indicators in addition to these.

Candidly, that announcement was hardly surprising given the economic data we’ve been getting, and even that has been teed up by other data that I’ve been watching.

Chinese manufacturing remained slack in January, including the weakest reading for the government’s official purchasing managers’ index since August 2012. Longtime readers know that one data point I closely follow is the Association of American Railroads’ (AAR) weekly reading on U.S. railcar traffic and loadings. Let’s just say that if you’ve been paying attention to this indicator in the year-to-date period, the recent contracting regional Fed manufacturing reports haven’t been much of a surprise.

The AAR reported this week that U.S. weekly rail traffic totaled 505,148 carloads and intermodal units in the seven days ending Feb. 13. That’s down 3.8% from the same period last year. But a single week doesn’t make a trend, so we need to look at year-to-date data. On that basis, combined U.S. traffic for 2016’s first six weeks has fallen 5.8% year over year to 3,017,321 carloads and intermodal units. A similar drop has occurred in truck tonnage, the Dry Baltic Index and the Cass Freight Index, which combine to indicate that products, assemblies and parts are not moving to where they are needed. As we all know, that is not a good sign for the economy.

Add in the contractionary readings for the Philly Fed and Empire Manufacturing indices this week for February and it lets us know the domestic economy is not rebounding.

Now you might think that was it, but it wasn’t. Yesterday, heavy equipment company Caterpillar ([stock_quote symbol=”CAT”]) presented at the Barclays Investor Conference and shared the following information:

  • CAT expects sales and revenue to be about 10% below 2015.
  • CAT also said it’s seeing a lot of global market uncertainty, as well as overall weak industry demand. Management added that global economic growth is slowing, which generally drives weak industry performance in CAT’s markets.

It looks to me like the OECD may have another round of cuts to make to its 2016 forecast

For those who were hoping the consumer aspect of our economy would provide some needed lift, I’m sad to say that the details from the earnings reports for both Wal-Mart ([stock_quote symbo=l”WMT”]) and Nordstrom ([stock_quote symbol=”JWN”]) tell us something different.

While Wal-Mart reported a beat on fiscal fourth-quarter earnings with $1.49 per share during the latest quarter vs. the $1.46 expected, the chain also issued a lighter-than-expected outlook, including virtually no revenue growth this year.

“Net sales growth is now expected to be relatively flat, which compares to the previous estimate for growth of 3% to 4% on a constant-currency basis,” WMT reported in a statement. “This change reflects the impact from recently announced store closures globally, as well as the continued strengthening of the U.S. dollar.”

Last night, shares of retailer Nordstrom fell 8% following the company’s weaker-than-expected December-quarter results. It posted earnings per share of $1.17 on $4.19 billion in revenue; the consensus estimates from Thomson Reuters called for EPS of $1.22 on $4.22 billion in revenue. Guidance was weaker than the market was expecting.

Taken together, these two retail reports are likely to be harbingers of what’s to come as more retailers begin reporting their last-quarter results. To me, it says the Cash Strapped Consumer theme is alive and well.

Needless to say, I’m glad we have no industrial or retail names inside our current Tematica Select List holdings. In fact, the weak economic news is actually good news for our dividend-heavy holdings, and here’s why — Federal Reserve Bank of St. Louis President James Bullard is saying it would be “unwise” for the central bank to raise rates near-term. That comment is interesting, given that Bullard was one of those supporting rate hikes during most of 2015.

Also, Fed watcher Jon Hilsenrath of The Wall Street Journal is saying what more and more people are coming to realize: The Fed is unlikely to boost rates in the year’s first half. He said the central bank prefers to wait and measure the economy’s vector and velocity over the coming months. Depending on what the Fed finds, we could see one or two rate increases during 2016’s back half.

This combination of slower economic growth, uncertainty and the increasingly likelihood that the Fed rate hike will be pushed out means our dividend-heavy portfolio should continue to prosper in the coming weeks.

As we keep the current course steady, I’m going to start filling our shopping list. I shared some prospects in the last issue of the newsletter, but I have a few more, including one that should benefit from the continued shift in advertising dollars from traditional media to online and mobile. Given that it is an election year and we have the Olympics, this one sure is looking to be a winner. I’ll share my recommendation once I’ve completed my analysis.

Enjoy your weekend and I’ll see you back here next week.

Set a Protective Stop on a Winning Position to Lock in a Gain of More than 20%

Set a Protective Stop on a Winning Position to Lock in a Gain of More than 20%

Actions from this post

Ratings changes included in this dated post

  • Set a protective stop loss at $16 for Physicians Realty Trust (DOC) shares.
  • Maintained “Hold” rating all seven positions in the Tematica Select List — [stock_quote symbol=”AGNC”], [stock_quote symbol=”DOC”], [stock_quote symbol=”PM”], [stock_quote symbol=”PYPL”], [stock_quote symbol=”RGC”], [stock_quote symbol=”SH”] and [stock_quote symbol=”T”].

Despite ending on a high note, this past week was another rough one for the stock market with the S&P 500 falling another 1.3%. The increasingly familiar cast of characters — oil price swings, economic growth concerns, renewed European banking issues and the notion the Fed may not really know what it is doing — all were factors in the market decline this week. Friday’s rebound was led primarily by comments from the energy minister of OPEC member United Arab Emirates that probably sparked some short covering ahead of the holiday weekend, but, all told, oil still dipped for the week, as did the market. A flurry of buyback announcements and insider buying, including leading members of Amazon ([stock_quote symbol=”AMZN”]) and JPMorgan Chase ([stock_quote symbol=”JPM”]), also helped move the market higher on Friday.

From a GDR portfolio perspective, the vast majority of our positons once again outperformed the S&P 500 this week with notable high fliers including Regal Entertainment ([stock_quote symbol=”RGC”]) and our insurance position ProShares Short S&P 500 ETF ([stock_quote symbol=”SH”]), which is great to have during turbulent times like these. The one sore spot this week was Physicians Realty Trust ([stock_quote symbol=”DOC”]), which saw its shares drop some 5% this week following comments from competitor HCP Inc. (HCP). With DOC not reporting its quarterly results until Feb. 29, let’s be smart, given the current market, and set a protective stop loss at $16, which will lock in a profit of more than 22% for subscribers that heeded my call to add the shares back in June 2014.  By comparison, the S&P 500 is down 5.5% since then.

While early trading on Friday likely left investors feeling a little better, the reality is there are still a number of concerns that will pressure the market, particular if the comments from United Arab Emirates turn out to be something other than what the market is reading.

We saw this just a few weeks ago and prefer to be cautious ahead of what could be yet another “buy the rumor, sell the news” moment. Other shoes yet to drop include what’s going on with the European banks, the latest corporate earnings and additional economic data in the coming two weeks that will give us a clearer picture of how the current quarter is doing. Earlier this week, Deutsche Bank and others cut GDP expectations for the first half of 2016, and, subsequently, their full-year expectations as well. I expect more to follow.

In the latest issue of Tematica Investing, I shared with you a number of confirming data points for our thematic approach to investing — if you haven’t read it yet, you can find it here. The good news is those confirming data point just keep coming. This week, Gallup reports that obesity rates have hit an all-time high here in the United States at 28% and the number of diabetes cases are at a record high. Those findings indicate that the Fattening of the Population has not diminished one pound. I’m investigating several investments on this theme that are even more attractive, given the year-to-date market drop of just more than 9% for the S&P 500. I’m also keeping my eyes and ears open for more such confirming data points, and, of course, I’ll continue to share them. In fact, I’m working on a new way to bring them to you each week. Stay tuned for more on this

While the market is frustrating for sure, I would much rather “measure twice and cut once” to steal an old carpenter saying when it comes to putting capital to work in this market. We still have roughly 25% of the S&P 500 companies yet to report their quarterly results. In the upcoming holiday-shortened trading week, we’ll be getting 56 S&P 500 company earnings reports. Earnings expectations for the index this year continued to move lower this week to hit $122.42 per share (3.7% year over year) and I suspect it still has room to drift lower as those remaining S&P 500 companies report their results. The expected earnings rise of 3.7% is being aided by huge stock buyback activity. Given the number of upsized share repurchase authorizations that continue to be announced, this is likely to continue in light of some of the significant pullbacks in stock prices. From a fundamental perspective, I’ll look to sidestep any and all financial mumbo-jumbo related to that by continuing to focus on operating profit growth and operating margin expansion.

Turing our gaze to next week, we have no portfolio companies reporting their quarterly results, but we do have a full plate of economic data coming our way. This includes several regional Fed manufacturing surveys and housing reports, as well as the latest Industrial Production reading. We also have both inflation indicators — the PPI and CPI — for January coming at us. But given the moves in oil and other commodities, we are not expecting any pronounced changes in those indices. Following Fed Chair Janet Yellen’s testimony this week, all eyes will be looking to read into the Federal Open Market Committee (FOMC) minutes from the Fed’s Jan 27th meeting when they are released this coming Wednesday, Feb. 17. My view remains that any next increase in rates by the Fed will come later rather than sooner, as I doubt the Fed wants to pour a combination of sand and water on the flailing fire that is the domestic economy amid the latest data.

Buckle up, it’s going to be another fun ride next week.

Enjoy the long weekend and I’ll update you again next week.

The Wild Ride Continues as the East Coast Braces for ‘Snowmageddon’ 2016

The Wild Ride Continues as the East Coast Braces for ‘Snowmageddon’ 2016

Amid the volatility that has led all the major markets lower on a year-to-date basis, yesterday we saw a bit of a reprieve following comments from European Central Bank President Mario Draghi suggesting perhaps another round of stimulative monetary policy could be in the cards. Perhaps he had a preview of this morning’s Eurozone Flash Composite PMI report for January, which hit an 11-month low with declines in both manufacturing and services orders.

Additionally, one of the main drivers of the stock market of late — falling oil prices — recovered a bit yesterday. The move higher in oil prices reflects a smaller inventory build per today’s Energy Information Administration (EIA) report, as compared with the American Petroleum Institute’s previous report. Peering into that EIA report, however, U.S. crude oil inventories are at levels not seen in the last 80 years. While oil prices probably will trend higher near term as the East Coast gets hit with a massive snowstorm this weekend, with U.S. refineries still clocking in at 90.6% capacity utilization and crude oil imports up year over year, I expect the recent oil price bump could be short lived amid the slowing global economy.

This morning’s December read on the Chicago Fed’s National Activity Index marked the fifth consecutive month of contracting national activity in the United States. To me, that adds to the concern raised by the January Empire Manufacturing Report that was published last week and showed “that business activity declined for New York manufacturers at the fastest pace since the Great Recession.” Digging into that report, new orders, shipments and overall business conditions fell sharply during the month. That weakening outlook was reiterated this week in the January Philly Fed Index, which not only remained in contraction territory, but also showed yet another drop in its six-month outlook indicator — down to 19.1 from 24.1 in December and 43.4 in November.

Against that backdrop, it’s not hard to see how in its December earnings report this morning, General Electric’s ([stock_quote symbol=”GE”]) industrials segment posted a 1% decline in both organic profit and revenue for the quarter.

In other economic news, a rather unsurprising December Consumer Price Index report showed a deflationary environment, which I chalk up to the drop in oil and gas prices. Given the weakening economic climate and continued lack of inflationary pressures thus far in the data, there is a high probability the Federal Reserve will leave interest rates unchanged at their meeting next week (Jan. 26-27).

Amid those latest gleanings that show the domestic economy is losing ground, the velocity of earnings reports has started to pick up, and so far I have to say we’ve seen more than a fair amount of disappointing, if not flat out weaker-than-expected, outlooks from IBM ([stock_quote symbol=”IBM”]), Starbucks ([stock_quote symbol=”SBUX”]), Deutsche Bank ([stock_quote symbol=”DB”]), United Continental ([stock_quote symbol=”UAL”]), Intel ([stock_quote symbol=”INTC”]), Union Pacific ([stock_quote symbol=”UNP”]), American Express ([stock_quote symbol=”AXP”]) and others. That velocity only will accelerate further given the number of companies that will be reporting their quarterly earnings next week and the week after. In total, I count more than 1,200 companies issuing their December quarterly results in the next two weeks, with a good percentage of them updating their outlook for the coming months. It’s not all going to be peaches and cream, it probably won’t even be close, given the economic climate that is developing and other factors that are helping to ratchet up uncertainty. In such an environment, management teams tend to be cautious, if not overly so.

Turning to our Tematica Select List holdings, even after factoring in yesterday’s 0.5% move higher in the S&P 500, the index is still down some 8.6% on the year as of Thursday’s market close. That should leave us feeling pretty good with the decision to shed more growth-oriented, and therefore more volatile, positions. Granted, on Wednesday we saw what could have been our first glimmer of market capitulation as the S&P swung 63.9 points (or 3.4%), but the data — both economic and earnings — suggest we have more to go in terms of expectations being reset lower. Such volatility tells me we should continue to treat any bounce as something of the dead cat kind until we see the market gyrations settle down on a sustained basis. I suspect that, like me, you do not want to walk headlong into an unexpected frying pan to the face just because we’d like to think things have settled down even though they probably haven’t.

To me, this is time to calmly and coolly sit back and add to our thematic investing shopping list. That’s what I’ve been doing and plan on continuing to do in the coming week. In the meantime, let’s continue to keep our insurance position, the ProShares Short S&P 500 ETF ([stock_quote symbol=”SH”]), intact as it will help hedge us against additional market turbulence.

As I look over our current crop of holdings, many of which offer hefty dividend yields, I am placing our shares of American Capital Agency Corp. ([stock_quote symbol=”AGNC”]) on my watch-closely list. We enjoy a monthly $0.20 per share dividend, which equates to a staggering 15% dividend yield at the current share price, and the shares are trading near a 30% discount to book value at current levels. To me, the factor to watch will be the Fed’s language next week — if it softens a bit, and Fed Chair Janet Yellen once again touts her now infamous “data dependent” line. If she does, I suspect shares of our deeply discounted real estate investment trust will get a boost. If Yellen continues her “tough” interest rate talk, then it could be time to re-evaluate this positon.

For those of you on the East Coast, and more specifically in and around the Washington, D.C., area like me, please hunker down and stay safe this weekend. For those of you looking to generate a short-term profit from the storm, there are the obvious players, such as Home Depot ([stock_quote symbol=”HD”]) and the Utilities Sector SPDR ([stock_quote symbol=”XLU”]), that you should consider. Given our thematic investing perspective and medium-to-longer-term investing time horizon, I’m not making a formal recommendation, but I easily can see those getting a short-term boost from the storm.

When it comes to Fitbit (FIT), is now the right time to jump in?

When it comes to Fitbit (FIT), is now the right time to jump in?

If you saw a great product on sale at the store, you would be excited, maybe even ecstatic, if it was one you had been looking at for some time. The same is true with stocks!

We all tend to get caught up in the emotional response of the market moving lower, which usually is viewed as a bad thing, rather than an OPPORTUNITY to buy shares at an even better price. When viewed through that lens, who doesn’t love it when stocks go on sale… so long as the fundamentals and business drivers remain intact.

Here’s a great example — at the Consumer Electronics Show held earlier this month, Fitbit ([stock_quote symbol=”FIT”]) announced its first smart watch, dubbed the Blaze  . . .

DOWNLOAD
Set a Protective Stop on a Winning Position to Lock in a Gain of More than 20%

Set a Protective Stop on a Winning Position to Lock in a Gain of More than 20%

Actions from this post

Ratings changes included in this dated post

  • Changing our rating on USA Technologies (USAT) to “Sell”, booking a near 30% return since our “Buy” rating was issued.
  • Updating Kraft Heinz (KHC) to a “Sell” rating, marking a hefty double-digit percentage return.
  • Closing out Disney (DIS), Under Armour (UA), Netflix (NFLX), LifeLock (LOCK), American Airlines (AAL) and Fitbit (FIT) — updated all with a “Sell” rating.
  • That leaves Physicians Reality Trust (DOC), Philip Morris (PM), American Capital Agency (AGNC), AT&T (T) and Regal Cinemas (RGC) in the Tematica Select List — all of which have dividend yields between 4.6% (Philip Morris) and 14% (American Capital Agency). Given the nature of their businesses as well as those dividend yields, those shares are apt to drum up investor interest as people look for safe havens.Let’s continue to hold these shares and “clip our dividend coupons” along the way.
  • Also, we recommend investors add some protection in the form of the ProShares Short S&P 500 ETF (SH), which trades in the opposite direction of the S&P 500.

What began as a bad start to 2016 only has gotten worse over the last few days. There are a number of reasons behind this move lower as II see the stock market, at best, moving sideways through earnings season, but more likely to come under additional pressure as expectations are scaled back. When I say expectations, I mean those for global growth, oil prices, corporate earnings and so on. You’ve seen me write more than a few times about the aggressive earnings expectations for the S&P 500 this year and the revisions lower that I’ve been expecting have only just begun.

In an environment like this, it tends to be shoot first and ask questions later, particularly as growth expectations get reset. While it is tempting to weather the storm, my preference is to lock in existing gains, limit losses and, above all, preserve capital at times such as this one. I know times like now, when the market seemingly goes down day after day, can be frustrating, if not confusing. I would not be surprised if you were having flashbacks to March 2008, wondering if we are heading for a repeat of what happened from May 2008 to March 2009, a period of intense pain for the stock market.

The famous phrase, “better safe than sorry,” comes to mind. For us, that means exiting the following positons:

  • Changing our rating on USA Technologies (USAT) to “Sell”, booking a near 30% return since our “Buy” rating was issued.
  • Updating Kraft Heinz (KHC) to a “Sell” rating, marking a hefty double-digit percentage return.
  • Closing out Disney (DIS), Under Armour (UA), Netflix (NFLX), LifeLock (LOCK), American Airlines (AAL) and Fitbit (FIT) — updated all with a “Sell” rating. 
  • That leaves Physicians Reality Trust (DOC), Philip Morris (PM), American Capital Agency (AGNC), AT&T (T) and Regal Cinemas (RGC) in the Tematica Select List — all of which have dividend yields between 4.6% (Philip Morris) and 14% (American Capital Agency). Given the nature of their businesses as well as those dividend yields, those shares are apt to drum up investor interest as people look for safe havens.Let’s continue to hold these shares and “clip our dividend coupons” along the way.
  • Also, we recommend investors add some protection in the form of the ProShares Short S&P 500 ETF (SH), which trades in the opposite direction of the S&P 500.

Over the next few weeks, we could get a bounce in the market here and there, but I would feel much better putting capital to work with a strong conviction that the storm has passed. As such, I will keep one eye on the market (the indicator of price) and the other on our investing themes as I look for data points that show companies whose businesses will continue to perform regardless of what’s happened in the stock market over the last month or will happen in the next month or next few months. If you were with me while I write this update, you would hear me muttering questions like some of these:

  • Has the drop in the stock market changed the outlook for cyber attacks and related threats in 2016? Safety & Security
  • Despite the unseasonably warm temperatures in the eastern United States thanks to El Niño, has the California drought situation been eradicated? Scarce Resources
  • Has the shift toward streaming and other digital content consumption slowed because the stock market has lost close to $1 trillion in value, lessening the demand for content? Connected Society
  • By some strange hocus-pocus, have people been “de-aged” so that less than 15% of the population is over 65 years old? Aging of the Population
  • As if by magic, did all of those people with little to no retirement savings suddenly land on firm financial footing? Aging of the Population
  • Over the last few days, has the costly and deadly impact of obesity and the prevalent condition of so many people being overweight been reversed? Fattening of the Consumer
  • Have retailers, both brick & mortar as well as online, shifted to only taking cash and checks as payment for goods and services? Cashless Consumption
  • Are people all of a sudden smoking less in the last few days? If anything, I would argue those who do indulge in this guilty pleasure are probably smoking more and having an extra drink or two along with it. Guilty Pleasure/Affordable Luxury
  • Has the domestic middle class started to expand dramatically in January? Rise and Fall of the Middle Class

And so on… Foods with Integrity… Asset-Lite Business Models… Economic Acceleration/Deceleration… Tooling & Retooling…

The bottom line is these investing themes of ours continue to benefit from the shifting and evolving landscape that is the intersection of the global economy, changing demographics, disruptive technologies, regulatory mandates and other tailwind drivers.

As I said earlier, the stock market is simply the indicator of price.

If you saw a great product on sale at the store, you would be excited, maybe even ecstatic, if it was one you had been looking at for some time. The same is true with stocks!

We tend to get caught up in the emotional response of the market moving lower, which usually is viewed as a bad thing, rather than an OPPORTUNITY to buy shares at an even better price. When viewed through that lens, who doesn’t love it when stocks go on sale… so long as the fundamentals and business drivers remain intact. To me, this says we’ll be able to buy back a number of the growth positions at the same or lower prices when the current market storm has cleared and things have settled down. Let’s be prudent and patient together.

Throwing in the towel on AAPL and SWKS

Throwing in the towel on AAPL and SWKS

We are throwing in the towel on both Apple ([stock_quote symbol=”AAPL”]) and Skyworks Solutions ([stock_quote symbol=”SWKS”]), given respective supplier and competitor warnings that point to a very rocky road ahead in the first half of 2016.

Following Thursday’s market close, both Cirrus Logic ([stock_quote symbol=”CRUS”]) and Qorvo ([stock_quote symbol=”QRVO”]) pre-announced weaker-than-expected December-quarter results, which they attribute to “customer demand.” I see that wording as code for demand from Apple (AAPL). Cirrus derives more than half of its revenue from Apple and Qorvo counts the smartphone company as a key supplier. There has been growing concern over iPhone production levels, which I’ve discussed at length — including Nikkei’s recent re-hash of a Morgan Stanley forecast predicting an iPhone production cut for the March quarter. However, Cirrus’s comments give me reason to think this will persist past the next few months. The company announced, “This weakness escalated over the last few weeks of December and is expected to continue to significantly impact our revenue in the March quarter.” To me, this suggests a weak outlook not only for the March quarter, but for the June quarter as well.

For Apple, the iPhone is its largest product business and sharp production cuts past the next few months mean the shares are likely to be dead money until perhaps its next iPhone refresh cycle. If history holds, that will not likely happen until the back half of 2016.

While I continue to like the rising dollar content and growth opportunities outside the smartphone market that is a key part of the Skyworks story, given the growing uncertainty of the overall market and potential for smartphone-related weakness to persist longer than previously expected, we would rather err on the cautious side, preserve capital and limit losses.

For those reasons, even though the shares have entered oversold territory, we are changing our rating on SWKS to “Sell” and dropping it from the Tematica Select List, as I suspect they will be in the “show me” camp for the next several months. We would look to revisit SWKS shares later in 2016 as smartphone industry expectations reset and non-smartphone growth opportunities that Skyworks has ahead of it mature further.

Apple plus Facebook plus Google equals death to sector investing

Apple plus Facebook plus Google equals death to sector investing

It seems that at least once or twice per week we are asked, in some form or another, one of the following questions:

• What sectors do you rate as a buy right now?
• Do you like Financials? What about Technology?
• What is going to be the next big sector?
• What sectors do you think are best in bull markets? And which ones are best for sheltering gains in bear markets?

Our short answer to any sector questions is simple: we like NONE of them. But, at the same time, we also can say we like ALL sectors. Or more specifically, we like certain aspects of every sector, while we also dislike aspects of all sectors.

Confused? Guess it’s not so simple of an answer.

In this special edition of Tematica Insights we explain why thinking of investments from a sector perspective is out-dated at best, and fatally flawed at worst. Thinking of investments from a sector perspective is out-dated at best, and fatally flawed at worst. It’s over simplifying to identify any one or two sectors as having the most potential. In any sector, there will be some companies that seize on a new opportunity faster than others as new trends or themes emerge in today’s world.

Click the link below to share this free special report on a smarter approach over sector-based investing:

Download Monday Morning Kickoff

 

 

Companies Mentioned
  • Alphabet (GOOGL)
  • Amazon Prime (AMZN)
  • American Water Works (AWK)
  • Apple (AAPL)
  • Chipotle Mexican Grill (CMG)
  • Etsy (ETSY)
  • Exxon (XOM)
  • Facebook (FB)
  • InterDigital (IDCC)
  • McDonald’s (MCD)
  • Netflix (NFLX)
  • Qualcomm (QCOM)
  • Royal Dutch Shell (RSH.A)
  • Shopify (SHOP)
  • Tesla Motors (TSLA)
Turn off the music, close up the bar and call it a night

Turn off the music, close up the bar and call it a night

While the “bad news is good news” move in the market over the last few days is decidedly more enjoyable than those gut-wrenching market falls of late, it’s like a party that goes on for too long; at some point someone has to turn off the music, close up the bar and call it a night.
We’ve already seen some warning signs that it might be time to head out before things get awkward in the form of negative earnings pre-announcements for several companies.

 

In this week’s issue of Tematica Insights:

  • With the September ISM Manufacturing Survey out, what does it mean for inflation and any potential Fed action on rates later this year.
  • Is this a good time to jump on buying opportunities with all the negative earnings pre-announcements coming out?
  • China’s adoption of Western diet demonstrates how thematics can play-out in society.
  • Tematica Select List company Skyworks ([stock_quote symbol=”SWKS”]) makes a move, which has adds an interesting wrinkle to our Connected Society thematic.

Download Monday Morning Kickoff

 

 

Companies Mentioned
  • Alcoa (AA)
  • Amazon.com (AMZN)
  • American Airlines (AAL)
  • Apple Inc. (AAPL)
  • Bank of America (BAC)
  • Caterpillar (CAT)
  • Chegg Inc. (CHGG)
  • ConAgra (CAG)
  • Corning Inc. (GLW)
  • Dunkin’ Brands (DNKN)
  • DuPont (DD)
  • FedEx (FDX)
  • Hewlett Packard (HPQ)
  • Illumina (ILMN)
  • Immersion Corp. (IMMR)
  • Kimco Realty (KIM)
  • Lifelock (LOCK)
  • Merk & Co. (MRK)
  • Netflix (NFLX)
  • Nu Skin (NUS)
  • Palo Alto Networks (PANW)
  • PayPal (PYPL)
  • PMC-Sierra (PMCS)
  • Skyworks Solutions (SWKS)
  • Starbucks Inc. (SBUX)
  • Swift Transportation (SWFT)
  • Synaptics Inc. (SYNA)
  • Taiwan Semiconductor (TSM)
  • The Container Store (TCS)
  • U.S. Global Jets ETF (JETS)
  • United Natural Foods (UNFI)
  • Verizon Communications (VZ)
  • Wal-Mart (WMT)
  • Walt Disney (DIS)
  • Whole Foods Market (WFM) Xylem, Inc (XYL)
  • Yum! Brands (YUM)
A return of the market roller coaster ride we experienced in August

A return of the market roller coaster ride we experienced in August

The calendar has officially turned to Fall here in the United States. Of course, on the East Coast, where Tematica is based, we’ve had days that haven’t felt much different than the dog days of summer. But the level of pumpkin-spice “everything” in the stores is what we call a “confirming data-point” for the changing season, even if the weather still feels like Summer.

And while the calendar never stops, so too does the drumbeat of the market and the flow of economic data.  In this week’s edition of Tematica Insights, we provide subscribers with:

  • A first look at the trifecta of flash PMI data from China, the Eurozone and the U.S. — what it means for industrials such as Ingersoll-Rand (IR), Honeywell (HON), General Electric (GE), Crane (CR) and Caterpillar (CAT)
  • As we head into the quiet period, we take a look at the impact of global manufacturing data and other economic data can have on third quarter earnings for U.S. Securities.
  • We take a look at confirming data points on several thematics, including Cashless Consumption, Safety and Security and the Connected Society.
  • Adding a couple of new names to our shopping list as we look for opportunities in the near-term market.

Download Monday Morning Kickoff

 

 

 

 

COMPANIES MENTIONED

  • Amazon.com (AMZN)
  • American Airlines (AAL)
  • Apple (AAPL)
  • Caterpillar (CAT)
  • Chegg Inc. (CHGG)
  • ComScore (SCOR)
  • Corning Inc. (GLW)
  • Crane (CR)
  • Facebook (FB)
  • First Trust NASDAQ CEA Cybersecurity ETF (CIBR)
  • General Electric (GE)
  • Google (GOOGL)
  • Honeywell (HON)
  • Immersion Corp. (IMMR)
  • Ingersoll-Rand (IR)
  • Intel (INTC)
  • Kimco Realty (KIM)
  • Lifelock (LOCK)
  • Merk & Co. (MRK)
  • Microsoft (MSFT)
  • Netflix (NFLX)
  • Palo Alto Networks (PANW)
  • PayPal (PYPL)
  • PureFunds ISE Cyber Security ETF (HACK)
  • Skyworks Solutions (SWKS) Starbucks (SBUX)
  • Synaptics Inc. (SYNA)
  • U.S. Global Jets ETF (JETS)
  • United Natural Foods (UNFI)
  • Verizon Communications (VZ)
  • Walt Disney (DIS)
  • Xylem, Inc. (XYL)

APPLE (AAPL): Still the Epicenter of the Connected Society?

The odds are pretty high that your home or office has at least one Apple device if not more. A new report from the digital media analytics company comScore suggests that Apple’s iPhone has continued to grow its lead in the U.S. smartphone market, with just over 44 percent share of all American smartphone users in July 2015, an increase from the 43.1 percent share it held in April of this year.

We’ve long seen Apple sitting in the pole position of our ever increasing Connected Society, with its iPhone, iPad, Mac, Apple TV, Apple Watch, iTunes and App Store platforms, as well as iOS and HealthKit, CarPlay and HomeKit solutions. As we see it, Apple has strong assets across the smartphone and computing spaces, but a position that is far less commanding in the living room compared to Microsoft’s ([stock_quote symbol=”MSFT”]) or Sony’s ([stock_quote symbol=”SNE”]) PlayStation, and a presence that is just burgeoning in the Connected Car and Connected Home markets. Don’t get us wrong, we’ve loved our Apple TV as a video portal for iTunes videos and other streaming apps like Netflix, Hulu, Vimeo and others. But to be fair, it contributed to the console clutter sitting next to the cable set top box, DVD player, and gaming system.

That was until this past week when Apple took the wraps off several new products at what’s become its annual showcase for announcing what will be hitting the shelves in the coming weeks, in preparation for the upcoming holiday shopping season (yes folks, the holidays are not too far away). This week, there were new iPhone 6S and 6S Plus models, a new enterprise and small to medium size geared iPad Pro complete with the new Apple Pencil and detachable smart keyboard; some new features for the Apple Watch along with some new watch bands and colors; and an upgraded Apple TV complete with voice interface, an improved OS (dubbed tvOS), and it’s own Apple TV App Store.  Let’s dig into the details:

Apple Watch. Things started off with the Apple Watch, and we have to be honest: we still want-to-want one, but don’t feel compelled to buy one, simply because we’re not sure we need one. In talking with folks who have taken the plunge, they praise the ability to pay with their wrist and see messages; however more than a few quickly shoehorned into the conversation that “well, it was a gift.”

Apple did announce more fashion-related items, bands and colors, but in our view that doesn’t really move the needle like the way the new iPad Pro did. The bottom line on the watch is, at least from our perspective, there is much more to go, and companies like FitBit (FIT) and others are way ahead of them, much the way Amazon’s ([stock_quote symbol=”AMZN”]) Kindle hardware continues to have a place in the e-reader space.

Apple TV.   Long positioned within Apple as a “hobby”, Apple TV gets a much-needed upgrade. Much the way the original App Store transformed the iPhone into a digital Swiss Army knife — allowing you to play games, shop, check your finances, post to Facebook or tweet on Twitter and over the ensuing years do almost anything — we see the new Apple TV app store having a similarly transformative effect on how people use their TV. Pulling up sports stats as you watch a game, shop online via Gilt or other apps that will soon be available, downloading games to play such as “Galaxy on Fire” and Walt Disney Co.’s new Star Wars game, “Disney Infinity,” would come to Apple TV. Popular real estate sites like AirBnB and Zillow also are developing apps that would allow big-screen house hunting.

Of all the improved features, it’s the gaming potential that could be the most disruptive long-term.  Over the last few years Apple’s iPods, iPhones and iPads have demolished the handheld gaming market, much the way iTunes and iPod completely eviscerated the rest of the MP3 player market. In the console gaming market, Apple is going head to head with Amazon and Sony. But with a $149 price point, the Apple TV is well below the $250 or so sticker price of Microsoft’s current Xbox. Granted, the initial slug of games will be found wanting relative to Xbox and even Sony’s ([stock_quote symbol=”SNE”]) PlayStation, but we know Apple will continue to pack more memory and improve the chip speed in the device over time.  Let’s not forget the content leverage Apple has with the developer community — a quiet competitive advantage it has enjoyed with its tablets and smartphones and is now extending into Apple TV. We anticipate now that Apple has “figured out” Apple TV, the product will be on the annual model upgrade path that we’ve seen with iPhone and iPad. More processing power, more storage, better graphics…. Apple TV.

As part of the Apple TV unveiling, Apple CEO Tim Cook made what we found to be an interesting comment:

“We believe the future of TV is apps.” 

He probably saw the same report we did from research company Millward Brown Digital that showed 22 percent of cable subscribers also subscribe to an over-the top service, such as Netflix, Hulu and others. As consumers of content through Netflix, HBO Go, Amazon Prime and other apps, we are believers in the time shifted approach (yes you can call it binging if you want) or the app-ification of TV. Combined with its expanding global footprint (more on that on page 14), this was one of the core reasons why we used the recent market pullback to add Netflix ([stock_quote symbol=”NFLX”]) shares to our Tematica Select List.

iPad Goes Pro.  Over the last few quarters, the iPad has been one of the sore spots in Apple’s quarterly reports. Even so, Apple CEO Tim Cook has remained upbeat about the tablet category. Apple recently announced a new partnership with Cisco Systems ([stock_quote symbol=”CSCO”]) that builds on the enterprise-focused relationship with IBM (IBM). We suspect that Apple has used these and other partnerships to determine the needs and wants of the enterprise market to develop the much talked about iPad Pro.

We’ve tried several times to use the iPad in place of our MacBook products and found it to be relegated to the realm of pinch-hitting when it comes to getting any substantive work done. Editing documents and toggling back and forth between apps for example was more than cumbersome…it was downright painful compared to the notebook or desktop experience.

With the debut of the iPad Pro it looks like we now have a serious productivity tool in tablet form. Hand in hand is iOS 9, which brings split screen, drag and drop, and other multitasking productivity features to Apple’s iPad — no more toggling with the home button. You can tell we’re excited about this. With Apple Pencil, Apple’s also addressed some of the annoyances with editing and marking up documents, but we’ll need to see what bells and whistles the developer community brings forth with this accessory to make its $99 price point palatable.

In our view, the new iPad Pro targets the enterprise customer segment from a tablet and app perspective rather than a stripped own notebook computer, which is pretty much what we think of the Microsoft Surface. Before we get all “boo-hoo” for Microsoft, let’s remember that outside the Xbox, hardware is a relatively small contributor to Microsoft, which has increasingly become an enterprise software play.

One announcement that Apple slipped in during all of this comes as mobile operators like Verizon ([stock_quote symbol=”VZ”]) and AT&T ([stock_quote symbol=”T”]) are moving away from the long-standing practice of signing customers up for long-term service contracts and offering subsidies to blunt the high cost of smartphones. Seeing the potential dilemma for its smartphone business, Apple introduced its own installment and leasing programs.

By buying directly from Apple, a consumer can pay $27 to $31 a month for 24 months for the iPhone 6S and 6S Plus. At the end of those two years, the consumer would own the phone outright. Cell phone service fees, of course, come on top of that.

Apple also introduced, and is displaying prominently on the Apple.com store, a new iPhone Upgrade program. You can purchase the iPhone 6S on a monthly payment plan starting at $32.41 for the 16GB model or $36.58 for the 16GB 6S Plus (going up by a little over $4 a month if you want more storage). The pricier plan includes the ability to upgrade to a new iPhone after 12 months. You would continue to pay the installments on the new phone and would just be “restarting the clock,” having to pay the monthly fee for another two years before you would own the newer phone. In this way, the customer is essentially leasing the phone from Apple.

Taking a step back and viewing Apple’s upgrade program alongside its recently introduced Apple Music, we see Apple is quietly shifting its business towards a subscription-based revenue stream. From a business perspective, subscription-based business models have great visibility, planning and consistent cash-flow attributes. From an investor perspective, those recurring payments and cash flow offer predictability and reliability, which tends to be rewarded when valuing the shares, assuming the subscriber-rate continues on an upward trajectory. Past examples include the subscription businesses of AOL dial-up service, Weight Watchers ([stock_quote symbol=”WTW”]), NutriSystem ([stock_quote symbol=”NTRI”]) and Netflix ([stock_quote symbol=”NFLX”]). We’ll need to see evidence of consumers getting onboard with this subscription approach from Apple — remember, Apple Music is still in it’s three month free trial mode, with the first automatic payments kicking in over the next month for those that were first to sign-up with the offering was released. If consumers do go for it, this could all turn Apples’ valuation on its head, and we mean that in a good way.

Does all of this make Apple shares attractive at current levels? 

With the launch of its iPhone 4s model in 2011, Apple shifted to a fall release for its smartphone business.  With each new release, Apple shares have tended to march significantly higher over the following six month period, reflecting the staged nature of launches around the globe and this impact on Apple’s earnings.

What’s different this year is, with the exception of its Mac line of products and to some extent Apple Watch, Apple is launching several new products ahead of the all important year-end holiday gift giving season and Chinese New Year, one of the biggest gift giving holidays.

Current expectations have Apple growing its earnings to $9.75 per share over the coming twelve months, up from $9.13 per share the company is expected to deliver for the twelve months ending September 2015. Given the timing of these new product announcements, expectations for revenue, profits and earnings in the coming quarters have yet to be revised.

We suspect Wall Street will wait until these new products hit the shelves so they can gauge the initial reception before adjusting their models and forecasts. With a strongly invigorated Apple TV and iPad Pro as well as the inherent iPhone upgrade cycle for those still using an iPhone 5s or earlier model we find the odds of Apple euphoria returning to be rather high.

From a stock valuation perspective, over the last few years Apple shares have peaked at an average multiple just shy of 16x earnings. Even in 2013, a year in which Apple’s earnings fell 11 percent, the shares still peaked at 14.2x earnings. Applying those two figures to the consensus expectation of $9.75 per share in earnings over the coming year derives a price target of $140-$150, or an upside of 29 percent at the midpoint.

Let’s remember, Apple is on a path to return cash to shareholders, in part with its quarterly $0.52 per share dividend payment as well as share repurchase program. While the current dividend yield is just below 2 percent, added to the $145 price target, the shares offer 30 percent upside from current levels.

On the downside, Apple shares have bottomed at 10.5x forward earnings on average over the last four-year, period which implies potential downside to $103 (which is close to where shares bounced on August 24) or roughly 8 percent from current levels. In more absolute terms, Apple shares bottomed at less than 10x earnings in 2012 and 2013, but counter balancing that today is Apple’s massive share repurchase plan. Apple has committed to returning $200 billion of cash through dividends and share repurchases over the August 2012- March 2017.  As of its June 2015 quarter, the company had more than $100 billion remaining under its current authorization. That’s a lot of dry powder to back stop the shares, and we’d note that since Apple embarked on its capital return program its share have bottomed closer to 11x earnings on average.

The Bottom Line on Apple

From several perspectives, the risk-to-reward ratio in Apple shares is compelling at a time when the company has one of its most pronounced new product cycles hitting, which will likely result in ratings upgrades and boosted earnings expectations. Ahead of that —and because of its now at the epicenter in our Connected Society thematic, we are adding Apple shares to our Tematica Select List. 


Playing Apple through an ETF

With our recent PayPal ([stock_quote symbol=”PYPL”]) recommendation, we included an ETF alternative for those that would prefer a more diversified approach. With Apple and it’s halo effect that touches many companies, including the Tematica Select List Skyworks Solutions ([stock_quote symbol=”SWKS”]), there are many ETFs involved. As we see it however, an ETF play would need to have meaningful exposure to Apple as well as several of its key suppliers in order to pack a meaningful punch.

Two such ETFs are the Technology Select Sector SPDR ETF ([stock_quote symbol=”XLK”]), which hold roughly 16 percent of its assets in Apple shares, and the other is iShares U.S. Technology ETF ([stock_quote symbol=”IYW”]) that holds more than 19% of its assets in Apple shares. Between the two we would favor XLK shares given the larger market capitalization as well as far greater average daily trading volume and higher dividend yield.