Weekly Issue: Tidying Up Our Desk as We Get Ready for the 250 Trading Days of 2018
Key Points from this Week’s Issue:
- Boosting our price target on International Flavors & Fragrances (IFF) shares to $165 from $160;
- Increasing our price target on USA Technologies (USAT) to $11 from $9;
- Raising our Alphabet (GOOGL) price target to $1,200 from $1,150.
- Lifting our Costco Wholesale (COST) price target to $200 from $190.
- Following a 21% move in United Parcel Service Shares (UPS), we are selling half the position at current levels. As we do this, we’ll set a $120 stop loss that should yield a minimum return of just over 17% for our remaining UPS shares.
Happy new year and welcome to 2018! As we begin the year, on behalf of team Tematica I’d like to wish you a healthy and profitable road ahead.
Before we look forward to the 250 trading days to be had in 2018, let’s take a quick moment to enjoy the successes we saw on the Tematica Investing Select List in 2017. To level set, the S&P 500 finished 2017 up 19.5%, one of its best moves in several years. Utilizing our thematic lens during 2017 the Select List had 9 positions that handily outperformed that benchmark with returns ranging between 31%-208%:
- Alphabet (GOOGL)
- Amazon (AMZN)
- AXT Inc. (AXTI)
- Applied Materials (AMAT)
- Facebook (FB)
- International Flavors & Fragrances (IFF)
- United Parcel Service (UPS)
- Universal Display (OLED)
- USA Technologies (USAT)
I’d call out that several of those outperformers were added to the Select List back in 2016 and serve as an example of being patient investors provided we continue to receive confirming thematic data points. I’d also note, we identified several of these positions well ahead of the herd, which eventually came around to see what we did in these business and their corresponding shares.
As I look into 2018 with an eye on the Select List, I continue to see further upside for the vast majority of existing positions. Over the last few weeks, a number of supporting data points have come out including:
- Apple (AAPL) devices accounted for 44 percent of smartphone and tablet activations over the holidays, with nearly a third of those coming from new devices including the iPhone 8, 8 Plus and X, according to new data from Flurry Analytics. We also see this as a positive for both our Universal Display (OLED) and Corning (GLW) shares.
- According to news from CNBC, Amazon (AMZN) said customers shopped on its website at “record levels” throughout November and December. Over the course of one week, more than 4 million people became Prime members or started a free trial, sending its membership count to new highs. There is also growing chatter that Amazon is poised to disrupt the pharmaceutical industry in 2018 and murmurs beginning to point to Amazon entering the banking sector.
- Universal Display (OLED): Monthly sales of organic light emitting diode TVs in the Japan market surpassed the 10,000-unit mark for the first time in November, according to data compiled by the Japan Electronics and Information Technology Industries Association. We see this as a precursor to the upcoming annual CES tradeshow, which has historically been a showcase for TVs hitting the market later in the year. We see the ramping demand for organic light emitting diode displays as a positive for display equipment demand at Applied Materials (AMAT).
- AXT (AXTI), Applied Materials and Nokia (NOK): With the 3rd Generation Partnership Project (3GPP), a collaboration among groups of telecommunications associations, announcing its round of 5G specifications, DigiTimes is reporting that a number of Taiwan chip and optical component suppliers are pivoting their business not only toward 5G chipsets but also optical communication ones in light of the demand associated with 5G network base stations and backhauling data traffic.
Boosting IFF, USAT, GOOGL and COST price targets
There are a few Select List positions that are bumping up against their respective price targets, such as International Flavors & Fragrances (IFF), USA Technologies (USAT), Alphabet (GOOGL), United Parcel Service (UPS) and Costco Wholesale (COST), which climbed more than 17% for us in 2017. As you probably recall, over the last year, I’ve raised our price targets on IFF, USAT, and GOOGL shares several times, and over the holidays I’ve put fingers to spreadsheet to revisit. Today, I am making the following price target changes:
- Boosting the price target on International Flavors & Fragrances (IFF) shares to $165 from $160;
- Increasing the price target on USA Technologies (USAT) to $11 from $9;
- Raising our Alphabet (GOOGL) price target to $1,200 from $1,150.
- Lifting our Costco Wholesale (COST) price target to $200 from $190.
Trimming back our position in UPS shares
With UPS shares, we’ve enjoyed a 21% move over the last 11 months and while the company is well positioned to capitalize on the $90 billion in returns this holiday season as well as post-holiday sales according to research firm Optoro, we have roughly 5% upside to our $130 price target. Over the coming year I continue to see UPS’s business benefitting from the ongoing shift to digital commerce that is a cornerstone of our Connected Society investing theme, but in the coming weeks, we will see a seasonal slowdown as the impact of the holiday sales season is once again in the rearview mirror. Being prudent investors, we are trimming the position on the Tematica Select List back and reducing it by half at current levels.
- We are trimming back the United Parcel Service (UPS) position by selling half the position at current levels.
- As we do this, we’ll set a $120 stop loss that should yield a minimum return of just over 17% for our remaining UPS shares.
What’s ahead in the coming weeks?
Over the next several weeks there will be a number of catalysts to be had for both existing Select List positions as well as prospective ones. Several paragraphs above I mentioned the upcoming CES technology trade show, which runs Jan. 9-12. The week after we will see the earnings report spigot turn on and then near the end of January we have the State of the Union Address 2018 (Jan. 30). Ahead of that presidential address, President Trump is expected to release his rebuilding U.S. infrastructure framework, and I’m already looking at other candidates for the Select List now to join our LSI Industries (LYTS) shares.
As we get ready for this, I’ll also be assessing potential EPS upside to be had due to the impact of tax reform. As I shared in this week’s Monday Morning Kickoff, we’re already starting to see market strategists boost their price targets on the S&P 500. In scrutinizing those targets against their revised 2018 EPS expectations, the reality is they are not looking for much multiple expansion, which means those targets rest largely on EPS growth. The big question is will the benefits of tax reform be spent by consumers and businesses alike or will it be used by consumers to reduce debt while businesses fund buybacks and dividends due to skilled worker shortages that could deter property, plant equipment, and other investments?
The answer is we’ll see, and with the market trading at more than 20x 2017 EPS expectations for the S&P 500, any disappointment is bound to weigh on the overall market. That makes the upcoming earnings season and corporate outlooks more crucial than usual as investors look to not only assess the impact of tax cuts but also the health of their businesses in the 9th year of the current business cycle. While the holiday season and related spending is winding down, I’m assembling our shopping list should short-term investors get a bought of post-holiday indigestion in the coming weeks.
