WEEKLY ISSUE: Watching Thematic Sign Posts Ahead of 3Q 2107 Earnings Deluge
As we noted in this week’s Monday Morning Kickoff, we have closed the books on 3Q 2017, which offered positive returns for the market. Before we get down to business as usual, we’d note the Tematica Investing Select List had a number of outperformers over the last three months, including a number of outsized Facebook (FB), Universal Display (OLED), AXT Inc (AXTI), Applied Materials (AMAT) and USA Technologies (USAT). These stocks shined, but we also realize that some of our recent Select List additions have been underperforming. As longtime subscribers are probably thinking, “these folks tend to be ahead of the herd, so let’s be patient and let the thesis play out.” We could not agree more, and that strategy has served us well as evidenced by those enviable 3Q 2017 moves we just mentioned.
That said, we’ve have entered 4Q 2107, and as we all know it starts off slow and then seems like a mad dash at the end of the year both for the market as well as day to day life given the holiday season. Despite the shooting in Las Vegas, which we discussed earlier this week including its likely impact on shares of Guilty Pleasure investment theme company MGM Resorts (MGM), the market has continued to grind its way higher, setting new highs along the way. We believe that while the tragedy is likely to lead to greater security spend in Las Vegas to help ensure an orderly flow of tourists — another positive for our Safety & Security investing theme — the market largely viewed it as causing little disruption to overall corporate earnings.
- Our price target on MGM Resorts (MGM) is $37
Looking for Foods with Integrity Sign Posts
One thing we haven’t seen emerge in the market thus far is sellers, and the continued move lower in the CBOE Volatility Index (VIX) probably means we aren’t likely going to see many if any until 3Q 2017 earnings season kicks off into high gear starting Monday, October 16. Between now and then, we’ll get a handful or two of companies reporting, and we’ll be pouring over the results as well as looking for sign posts for our investing themes. This includes sifting through today’s results from PepsiCo (PEP) for an update on how it is shifting its beverage and snacking businesses to be more in-line with our Food with Integrity investing theme, and what it means for our International Flavors & Fragrances (IFF) and Amplify Snacks (BETR) shares.
- Our price target on International Flavors & Fragrances (IFF) shares remains $150
- Our price target on Amplify Snacks (BETR) shares is $10.50.
Alphabet Positioning Itself for the Connected Home
Today Alphabet (GOOGL) is expected to unveil a number of new hardware products including a revamped Pixel smartphone, a new smart speaker and others items as well. Amid the introductions, we’ll be listening to what these means for the Android echo system and how they help position Alphabet for the Connected Home and other aspects of our Connected Society investing theme. Following on Applied Materials’s (AMAT) upbeat 2017 Analyst Day last week that was bullish for both AMAT shares, as well as Universal Display (OLED) shares, we’ll be looking to see if like Apple (AAPL), Alphabet is jumping on the organic light emitting diode wagon with its new products.
- Our price target on Alphabet (GOOGL) shares is $1,050.
- Our price target on Applied Materials (AMAT) is $60
- Our price target on Universal Display (OLED) shares is $175
Will September Weather Disruptions Impact Overall Retail Sales?
With the calendar turning to the month of October, we are now in the midst of the usual start of the month data. What we’ve received so far once again leads to some head-scratching as the September ISM Manufacturing Report gapped up month over month to one of its strongest levels in several years, but the IHS Markit US Manufacturing PMI data barely budged in September compared to August. When we see conflicting data like this, it tends to put us in a cautionary stance – much like when we look at valuation metrics to assess a stock price, we prefer to see corroborating indicators rather than ones in conflict. One thing to keep in mind, we have to see the impact of the recent hurricanes, and we suspect that will be felt primarily in the September Retail Sales and Personal Income & Spending Reports. As we saw in results from Darden (DRI), it appears the impact has been much worse than Wall Street has baked in the earnings cake. We’ll continue to factor this into our thinking near-term.
Our time-tested strategy heading into earnings season is to be mindful of those companies we’d be inclined to buy at higher prices as well as those that are likely to be the greater sources of volatility for the Tematica Select List. The ones that fit into that second bucket are those that may see some disruption in their businesses during September, and candidates include Amazon (AMZN) as well as United Parcel Service (UPS) and Starbucks (SBUX). Candidly, we see those companies getting a pass by Wall Street as we wade into the seasonally strongest time of the year for all three.
Earlier this week we shared the bullish forecast for digital shopping this holiday season, which led us to boost our price target on UPS shares to $130 from $122. Those same forecasts, which call for digital shopping to once again grow faster than brick & mortar retail and capture a greater piece of consumer wallets this holiday season, bodes extremely well for Amazon as well. With Starbucks, we once again see the combination of cooler weather and seasonal drinks driving traffic, and we’ll be looking to see if the revamped food offering drives higher ticket sales in the domestic business. Internationally, Starbucks likely benefitted from favorable exchange rates as it expands its footprint in both Europe and the emerging markets, especially China.
- Our price target on Amazon (AMZN) remains $1,150
- Our price target on United Parcel Service (UPS) is $130
- Our price target on Starbucks (SBUX) is $74
Additional Confirming Data Point for LSI Industries (LYTS)
Before we go, I also wanted to share a new report from Philips Lighting that confirms one aspect of our thesis on adding LSI Industries (LYTS) to the Tematica Select List. As a reminder, our thesis on the shares centers on the company benefiting from post-hurricane rebuilding efforts in the coming quarters as well as the structural shift that favors the adoption of green-friendly light-emitting diode technology at the expense of other forms of lighting (incandescent, cathode ray tube). Regarding the latter, Philips Lighting has published a study showing businesses around the world could realize savings of up to $1.5 trillion in reduced rental costs alone if their office buildings were refurbished with LED lighting systems and other smart technology. We certainly see this as a positive data point for the LYTS shares on the Tematica Investing Select List.
- Our price target on LSI Industries (LYTS) remains $10.
