WEEKLY ISSUE: Some Unfinished Business for 2017
In a relatively short time, we’ll close the books on December and for all of 2017 as well. Next week we plan to share some of our thoughts looking ahead to 2018, but first, it always pays to maintain some perspective on the ground we’ve covered these past 12 months.
Looking back, like most years, there were a number of notable events, and more than a few unexpected ones. Some of the former include Whole Foods being acquired by Amazon (AMZN), CVS Health (CVS) angling for Aetna (ATNA), Disney (DIS) pursuing assets of Twenty-First Century Fox Inc (FOXA) and one-time mobile stalwart Qualcomm (QCOM) being the recipient of a takeover bid. That activity and more serves as a reminder that the stock market, much like our investing themes here at Tematica, is a living thing that changes over time and the ripple effects of these changes can have profound reverberations that can reward certain stocks and punish others.
We’ve seen this happen in 2017 given the sharp drop we expected in shares of Blue Apron (APRN) given the potential fall out to be had from the Amazon-Whole Foods tie up, and we could see some at Netflix (NFLX) should a Disney-Fox deal go through. Imagine finally being able to see all of Marvel’s characters on the same screen, at the same time in a movie developed by Marvel. For us comic-book nerds, it would be a dream come true.
The stock market and the Tematica Investing Select List
While the last few weeks have seen some ups and downs, the down and dirty for the Select List is we had a number of strong performers over the last year as well as a good number of market-beating ones. That’s even after the recent pressure in both technology stocks and small-cap stocks, which we see as the market being fussy.
As we look at those and other positions on the Tematica Investing Select List, we continue to see thematic tailwinds powering them ahead in the coming months and quarters. It can be frustrating at times as we wait for the investing herd to catch up to what we are thematically seeing, but as we have seen with shares of Costco Wholesale (COST), International Flavors & Fragrances (IFF) and USA Technologies (USAT) it pays to listen to the data and be patient. Amid all the buzz of Bitcoin, we’ll continue to that knitting, which has served us so well. That doesn’t mean we’ll be sitting on our laurels, clipping dividends from those Dividend Dynamo companies on the Select List – far from it! We’ll be mining for new data sources and nuggets, stress testing our investment themes and turning rocks over for new candidates and new positions to build on the returns the Select List has generated this year.
With the prospects for tax reform improving, odds are we will see another Santa Claus rally occur even though it means the stock market’s already stretched market is likely to become even more so. That could make finding thematically well-positioned stocks at favorable prices a bit more challenging than it was in 2017, but we’re up to the task and we’ll be sure to add a new position only as the thematics and valuation warrant doing so.
- Our price target on International Flavors & Fragrances remains $160, but we plan on revisiting that target based on what we learn from competitor Givaudan SA’s Middle East non-deal roadshow later this week.
- With shares of USA Technologies (USAT) trading above our $8 price target, we are once again assessing additional upside to be had at current levels. We would not commit fresh capital to the position at current levels.
- As for Costco (COST) shares…
Here Comes the Fed
Later today as the Fed concludes its last FOMC policy meeting for 2017 expectations have baked a rate hike of 0.25% into the market cake. As we’ve said, we see the Fed doing what they can to get their monetary policy tools back in the toolbox given how long in the tooth the current recovery is. What I’ll be taking a harder look at it is the Fed’s economic outlook for 2018 and 2019, which heading into the two-day meeting called for GDP of 2.1% and 2.0%, respectively. Not quite the upswing that President Trump is calling for. During the subsequent press conference, the last for current Fed Chair Janet Yellen, I’ll be once again parsing the Fed speak to determine what might influence monetary policy in the coming months as new Fed Chair Jerome Powell takes the helm as well as items that could lead the Fed to not only accelerate its rate hike timetable.
With Yellen leaving her post and holding her last press conference, it will be interesting to see if breaks form to talk tax reform, infrastructure spending, Bitcoin or the evolving role of the Fed. If the past is indicative of how she will communicate her thoughts today, odds are it will all be less than crystal clear. But again, with one foot out the door wouldn’t it be refreshing for Yellen to be far clearer than usual. We’ll have more on what is and isn’t said today in this week’s Weekly Wrap.
Costco Earnings later this week
After Thursday’s market close, Cash-Strapped Consumer company Costco Wholesale (COST) will report its quarterly earnings. Based on the company’s string of stellar same-store sales reports over the last few months that shows Costco is not suffering from the Amazon-effect, we expect an upbeat report. We will, of course, be closely watching new warehouse figures and outlook for more given their role in generating profits and EPS for the company. Consensus expectations call for EPS of $1.34 on revenue of $31.38 million for the quarter, up 14.5% and 11.7% year over year, respectively.
If we had one concern, it’s the speed at which COST shares have climbed – more than 18% since we scaled into the position on the Select List in early September – and what it could mean for what the market expects Costco to not only report on Thursday, but also forecast for the current quarter and beyond. Over the last several quarters, we’ve seen the damage that can be done when a company delivers either a modest miss for its earnings or offers up a somewhat softer than expected outlook.
While it may not be probable, all things are possible and we’re inclined to remain, patient investors, as Costco continues to expand its warehouse footprint in 2018. That said, with COST shares bumping up against our $190 price target, vs. the Wall Street consensus of $185, we’ll be mining the results to determine incremental upside to be had in the shares.
Housekeeping
PS – I almost forgot to mention this, but given how I am fond of saying that our investing themes are recognizable in the real world, Tematica has finally taken to Instagram. Follow us there ( @TematicaResearch ) as we share visual examples (better known as pictures) of our various investment themes in action as well as some other fun stuff. And for those wondering, we can also be found on Twitter (@TematicaGroup ) and Facebook. Now go finish that holiday shopping already!
