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Monthly Archives: December 2016

Alibaba to invest big time in entertainment taking on Netflix and Amazon

Alibaba to invest big time in entertainment taking on Netflix and Amazon

2016 was a year of marked investment in content from the likes of Netflix, Amazon and Alphabet. But there are more companies entering the fray including Facebook and even Apple. Given the global thirst for content, which both Amazon and Netflix are aiming to cater to, it comes as little surprise that Alibaba is looking to invest in Content, which we all know is King. If there is any question about that, we’d point you to the US box office and Rogue One: A Star Wars Story.

Alibaba Digital Media and Entertainment Group, the entertainment affiliate of Alibaba, plans to invest more than 50 billion yuan ($7.2 billion) over the next three years, the affiliate’s chief executive said.

In an internal email seen by Reuters and confirmed by an Alibaba group spokeswoman, the affiliate’s new CEO Yu Yongfu pledged to invest in content, saying “he didn’t come to play.”

Alibaba’s entertainment business underwent a major reorganisation in October, marking a total consolidation of the company’s media assets.

Source: Alibaba entertainment affiliate to invest over $7 billion over next 3 years

Why the On-Demand Economy Doesn’t Make the Thematic Cut

Why the On-Demand Economy Doesn’t Make the Thematic Cut

We keep hearing that thematic investing is gaining significant popularity in investing circles, especially when it comes to Exchange Traded Funds (ETFs). For more than a decade, we’ve viewed the markets and economy through a thematic lens and have developed more than a dozen of our own investing themes that focus on several evolving landscapes. As such, we have some thoughts on this that build on chapters 4-8 in our book Cocktail Investing: Distilling Everyday Noise into Clear Investment Signals for Better Returns

One of the dangers that we’ve seen others make when attempting to look at the world thematically as we do, is that they often confuse a trend — or a “flash in the pan”  — for a sustainable shift that forces companies to respond. Examples include ETFs that invest solely in smartphones, social media or battery technologies. Aside from the question of whether there are enough companies poised to benefit from the thematic tailwind to power an ETF or other bundled security around the trend, the reality is that those are outcomes — smartphones, drones and battery technologies — are beneficiaries of the thematic shift, not the shift itself.

At Tematica Research, we have talked with several firms that are interested in incorporating Environmental, Social and Governance — or ESG — factors as part of their investment strategy. Some even have expressed the interest in developing an ETF based entirely on an ESG strategy alone. We see the merits of such an endeavor from a marketing aspect and can certainly understand the desire among socially conscious investors to ferret out companies that have adopted that strategy. But in our view and ESG strategy hacks a sustainable differentiator given that more and more companies are complying. In other words, if everyone is doing it, it’s not a differentiating theme that generates a competitive advantage that will provide investors with a significant beta from the market.

But there is a larger issue. A company’s compliance with an ESG movement is not likely to alter the long-term demand dynamics of an industry or company, even if certain businesses enjoy a short-term surge in revenues or increased investor interest based on a sense of goodwill.

For example, does the fact that Alphabet (GOOGL) targets using 100 percent renewable energy by 2018 alter the playing field or improve the competitive advantage of its core search and advertising business? Does it do either of those for YouTube?

No and no.

At the risk of offending those sensitive about their fitness acumen, it makes as much sense as investing in an ETF that only invests in companies with CEOs who wear fitness trackers. Make no mistake, our own Tematica Research Chief Macro Strategist Lenore Hawkins, a fitness tracker aficionado herself, would love to see more fitness trackers across the corporate landscape, but an ETF based on such a strategy means investing in companies across different industries with no cohesive tailwind powering their businesses, likely facing very different market forces that overshadow the impact of the one thing they have in common. To us, that misses one of the key tenants of thematic investing.

The result is a trend that is likely to be medium-lived, if not short lived. Said another way, it looks to us to be more like an investing fad, rather than a pronounced thematic driven shift that has legs.

Subscribers to our Tematica Investing newsletter know we are constantly turning over data points, looking for confirmation for our thematic lens, as well as early warning flags that a tailwind might be fading or worse, turning into a headwind. As we collect those data points, we mine the observations that bubble up to our frontal lobes and at times, ask if perhaps we have a new investing theme on our hands. Sometimes the answer is yes, but more often than not, the answer comes up “no”.

Now you’re in for a treat! Some behind the scenes action if you will on how we think about new themes and why one may not make the cut…

 

The On-Demand Economy:  Enough to become a new investing theme?

 Recently we received a question from a newsletter subscriber asking if the number of “on-demand” services and business emerging were enough to substantiate the addition of a new investment theme to go along with the other 17 themes we currently track.

By on-demand, we’re talking about those services where you can rent a car, (Lyft or Uber) or find private lodging (AirBnB) with the click of a button for only the time you need it rather than rent an apartment or studio for a week or month. It also refers to the many services that will deliver all the ingredients you need to prepare a gourmet meal in your own kitchen, such as the popular service Blue Apron or HelloFresh.

It was an interesting question because we have been debating this at Tematica Research for quite some time. We’re more than fans of On Demand music and streaming video services like those offered by Amazon (AMZN), Netflix (NFLX), Pandora (P), Spotify and Apple (AAPL).  Ultimately, we came to the conclusion that the real driver behind the on-demand economy is businesses stepping into fill the void created by a combination of multiple themes, rather than a new theme in of itself. Here’s what we mean . . .

Take the meal kit delivery services like Blue Apron, what’s driving the popularity of this service? We would argue that it’s not the fact that people like seeing their UPS driver more. Rather it is the result of underlying movement towards more healthy and natural foods that omit chemicals and preservatives — something we have discussed as the driver behind our Foods with Integrity theme — on top of a bigger Asset Light investment theme in which consumers and businesses outsource services, rather than accumulating assets and then performing the service themselves. The on-demand component of Blue Apron is not driving the theme, but is a beneficiary of what we call the thematic tailwind.

The challenge with the shift towards healthier cooking, that sits within our Foods with Integrity thematic, is the amount of work, and in many cases equipment, it takes to cook such foods — the shopping, the measuring, the cutting, special cooking utensils and preparation time, not to mention the cost. Recognizing this pain point, Blue Apron saw opportunity and consumers have flocked to it. As we see it, the meal delivery services are an enabler that addresses a pain point associated with our Foods with Integrity theme, rather than an independent theme unto itself.

There is also a clear element of the Connected Society investment theme behind these services, given how customers order the ingredients to prepare the meals – via an app or online – as well as our Cashless Consumption theme, given the method of payment does not involve cash or check and Asset Light whereby consumers pay for the end product, rather than investing in assets so that they can make it themselves. So that we are clear, the primary theme at play here is Foods with Integrity, but we love to see the added oomph when more than one theme is involved.

 

 Let’s look at Uber, the on-demand private taxi service. 

We’re big users of the service, particularly when traveling, and we love the ease of use. To us, while the service offered by Uber is very much On-Demand, from the customer perspective, it fits into our Asset Light theme, as it removes the need to own a car. If you think about, what’s?  the amount of time you spend using your car compared to the amount of time it spends parked at home, at work or in a parking lot? The monthly cost to own and maintain that vehicle vs. the actual number of hours it is used offers a convincing argument to embrace an Asset Light alternative like Uber.

We also like the payment experience — or the lack of an experience. We’re talking about having the ride fee automatically charged. No cash, no credit card swiping or inserting, no awkward “how much do I tip?” moments. It’s our Cashless Consumption theme in all of its glory, walking hand-in-hand with Asset Light — and the only thing better than a strong thematic tailwind behind a company is two!

The biggest users of the Uber and Lyft services, and the ones driving the firms’ valuations to stratospheric levels, are the Millennials who are opting to just “Uber “ around town — it’s become a verb — or use a car-sharing service like a ZipCar (ZIP) or the like.

Sure, Millennials have the reputation of being a more thrifty, frugal group compared to previous generations. But we have to wonder is it them being thrifty or just coming to grips with reality?

With crushing costs of college and student loans, as well as stagnant wage growth, many young workers are forced to cobble together part-time and contractor jobs rather than enjoying a full-time salaried position, so what choice do they have? Why buy a car and pay for it to sit there 95% of the time when you can just pay for it when you need it?

We call that the Cash-strapped Consumer theme meets Asset Light, and many businesses have also stepped in to service this rising demand for what has become known as the “sharing economy.”

 

Finally, what is the underlying function of all these on-demand services?

As we mentioned earlier, it’s the ability to connect and customize the services that consumers want through a smartphone app or desktop website, or from our thematic perspective, the Connected Society.

One of the key words in the previous sentence was “service.” According to data published by the Bureau of Economic Analysis in December 2015 and the World Bank, the service sector accounted for 78 percent of U.S. private-sector GDP in 2014 and service sector jobs made up more than 76 percent of U.S. private-sector employment in 2014 up from 72.7% in 2004. Since then, we’ve seen several thematic tailwinds ranging from Connected Society and Cash-strapped Consumer to Asset Light and Disruptive Technologies to Foods with Integrity that either on their own, or in combination, have fostered the growth of the US service sector. Given the strength of those tailwinds, we see the services sector driving a greater portion of the US economy. What this means is folks that have relied heavily on the US manufacturing economy to power their investing playbook might want to broaden that approach.

Now let’s tackle the thematic headwinds here

Headwinds involve those companies that are not able to capitalize on the thematic tailwind. A great example is how Dollar Shave Club beat Gillette, owned by Proctor & Gamble (PG), and Schick, owned by Edgewell Personal Care (EPC), by addressing the pain point of the ever-increasing cost of razor blades with online shopping. Boom — Cash-strapped Consumer meets Connected Society.

While Gillette has flirted with its own online shave club, the price of its razor are still significantly higher, and as far as we’ve been able to tell, Schick has no such offering. As Dollar Shave Club grew and expanded its product set past razors to other personal care products, Unilever (UL) stepped in and snapped it up for $1 billion.

Going back to the beginning and the impact of the food delivery services like Blue Apron — are we likely to see food companies build their own online shopping network? Most likely not, but they are likely to partner with online grocery ordering from Kroger (KR) and other such food retailers. That still doesn’t address the shift toward healthy, prepared meals and it’s requiring a major rethink among Tyson Foods (TF), Campbell Soup (CPB), The Hershey Company (HSY), General Mills (GIS) and many others. Fortunately, we’ve seen some of these companies take actions, such as Hershey buying Krave Pure Foods and Danone SA (DANOY) acquiring WhiteWave Foods, to better position themselves within the thematic slipstream.

The key takeaway from all of this is that a thematic tailwind can be thought of as a market shift that shapes and impacts consumer behavior, forcing companies to make fundamental changes to their business model to succeed. If they don’t, or for some reason can’t, odds are their business will suffer as they fly straight into an oncoming headwind.

Recall how long Kodak was the gold standard for family photographs, yet today it is nowhere to be seen, killed by forces that emerged completely from outside its industry. As digital cameras became ubiquitous with the advent of the smartphone and the cost of data transmission and storage continually fell, the capture and sharing of images was revolutionized. Kodak didn’t keep up, thinking that film would forever be the preferred medium, and paid the ultimate price.

As thematic investors, we want to own those companies with a thematic tailwind at their back — or maybe even two or three! — and avoid those that either seem oblivious to the headwind or won’t be able to reposition themselves, like a hiker who finds he or she has already gone way too far down the wrong path and is so utterly lost, needs to be helicoptered to safety.

Of course, when it comes to these “On-Demand Economy” darlings — Uber, Dollar Shave Club, Airbnb —few if any of them are publicly traded, which frustrates us so, since most of them are tapping into more than one thematic tailwind at once. If and when they do turn to the public markets for some added capital and we get a look into the economics of these business models, then we’ll also get to see the key performance metrics and financials behind these businesses.

In the meantime, stay tuned as we will be discussing more readily investable thematics next.

Closing Out 2016: What a Year it Has Been!

Closing Out 2016: What a Year it Has Been!

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As we write this, there are just over six trading days left in 2016. It’s been quite a year on all fronts, but in particular, for the stock market as nearly all of the year’s gains have come in the last several weeks. It seems every few days since the 2016 presidential election the major market indices are posting new highs to the board, including again last night as the Dow flirted with the 20,000 mark, which it is still doing this morning — what a tease!

When we look at the market landscape through our thematic lens we see that a number of our investing themes have performed rather well during 2016. From Aging of the Population and our shares in AMN Healthcare (AMN: +21.31%), to our Connected Society theme and our positions in Dycom Industries (DY: +5.46%), AT&T (T: +10.62%) and CalAmp (CAMP: +7.27%) shares, and Universal Display (OLED: +11.32%) that is a Disruptive Technology play, all of these have performed admirably and we see more upside ahead in the coming quarters.

The same holds true for Alphabet (GOOGL: +11.07%), Facebook (FB: +0.24%) and Amazon (AMZN: +3.9%) that round out our Connected Society holdings, but it’s also the case with Food with Integrity company United Natural Foods (UNFI: +15%) and Cash-strapped Consumer play Costco Wholesale (COST: +9.78%).

We also booked a number of wins over the last 12 months:

  • Aging of the Population and PetMeds Express (PETS) shares, up 13%; 
  • Cashless Consumption with USA Technologies (USAT), up more than 28%, and PayPal (PYPL) up just under 14%;
  • Connected Society and AT&T (T), up 18%;
  • Content is King theme and Regal Entertainment (RGC) shares, up more than 22%;
  • Guilty Pleasure and Philip Morris International (PM), up more than 17%;
  • Rise & Fall of the Middle Class and Kraft Heinz (KHC), up more than 15%.

With the S&P 500 up just under 11% year-to-date, we would argue that it pays to think different from the herd to uncover pronounced thematic tailwinds and uncover the companies best positioned to ride them.

To be fair, from time to time, we do fall short and in our minds both Sherwin Williams (SHW: -13.14%) and Whirlpool (WHR: -13.32%) serve as reminders to let the data talk to us.

In sum, it’s been a barn burner for the stock market post-2016 election, but as we’ve pointed out once again in this week’s Monday Morning Kickoff., the stock market has a habit of getting ahead of itself. Even CNBC’s Market Strategist Survey of 13 strategists’ outlooks published since the US election found the median 2017 S&P 500 price target is 2,325 — that is 2.5 percent ahead of where the S&P 500 currently resides.

Comments from industrial conglomerate Honeywell (HON) offered a more tempered view, which coincides with recent economic data discussed in greater detail in this week’s Monday Morning Kickoff. If you’re not reading each week’s Monday Morning Kickoff you receive as part of your Tematica Investing subscription, you’re really missing out.

In addition, we starting to hear from companies such as Adobe Systems (ADBE) to Nike (NKE), FedEx (FDX), Honeywell and General Electric cite the impact of the strong dollar on their respective 2017 outlooks. As we ponder that, we’d also note:

  • Stretched valuation as the market continues to climb higher of late
  • The current reading of 77 or Extreme Greed on CNN’s Fear and Greed Index.
  • The Consumer Confidence Index is now at its highest since July 2007.
  • The Dow Jones Industrial Average, S&P 500 and the Russell 2000 at or near overbought levels

To us here at Tematica, all of that against the current market environment means we are likely to face a move in the market in early 2017 that will remove some of the current froth. One of Coca-Cola’s old marketing slogans — “A pause to refresh” — is what we’re likely to see, as before too long companies report their December-quarter results. As they do that, some will no doubt raise expectations for 2017 and others, as you’ll see with sneaker retailer Finish Line (FINL) down below, are bound to disappoint.

From our perspective, the thematic tailwinds that power each of our positions on the Tematica Select List not only remain intact but, as we are seeing in the case of the Connected Society, Rise & Fall of the Middle Class, Disruptive Technologies, are only getting stronger. As good as a year as 2016 was for our thematic strategy, we see 2017 being even better. In other words, we’re just getting started…

 

Updates Updates Updates 

Amazon (AMZN) Connected Society 

After a few turbulent weeks, our Amazon shares are off to a solid start this week due to several pieces of news, a few of which solidly confirms one aspect of our thesis on the shares.

The first comes from The Wall Street Journal, which we posted to the Thematic Signals section of our website suggests Amazon is “looking at developing mobile technology for scheduling and tracking truck shipments.” We’d caution that the herd tends to miss what Amazon is doing as often as it gets it right.

In this case, given Amazon’s growing number of warehouse locations and the expanding role of Fulfilled By Amazon (FBA), we would not surprised to see Amazon flex its logistics muscles to get its cost under control as well as have greater control over deliveries. Should this turn out to be the case, we see it very much inline with Amazon’s air cargo efforts — a supplement to current logistics services offered by United Parcel Service (UPS) and others. We’ll continue to monitor this to see how real it is, and if so what the potential implications are.

The second piece of news comes from a new data published by Prosper Insights and Analytics that shows Amazon taking a clear lead in holiday shopping this year. After surveying 7,000 US adults, Propers Insights and Analytic found 26% bought “most” of their gifts from Amazon this year, up 10% over year-ago levels. (That 26% would include nearly all of us here at Tematica!)

Trailing well behind Amazon is Wal-mart (WMT) at 14.5% followed by Target (TGT), Kohl’s (KSS), Macy’s (M) and others, including Best Buy (BBY) and JCPenney (JCP), all of which were in the “single-digit range.”

We find the Prosper Insights and Analytics report rather confirming for the part of our Amazon thesis that focuses on the accelerating shift toward digital shopping and a key part of the Connected Society theme. Paired with data from comScore (SCOR) that online desktop spending is up double-digits since Thanksgiving, it looks like the holiday shopping season will be an Amazon one far more people year over year.

Next up, last night FedEx (FDX) reported inline revenue for the quarter that was up just over 19% year over year. The company, however, missed earnings expectations primarily due to lower operating profit at FedEx Freight and the company’s network expansion. That expansion is likely due to FedEx continuing to position itself for the structural shift that favors digital commerce, one of the key tenants behind our Amazon (AMZN) thesis.

As evidenced by FedEx comments during the earnings call last night, it has much work to do on its e-commerce catch-up initiatives, given “that non-e-commerce deliveries to residences and business-to-business traffic represent the vast majority of FedEx Corporation’s estimated $60 billion in FY ‘17 revenues.”

On the bright side for our Amazon shares, FedEx called out the “continued rapid growth of e-commerce” and the “rapid rise in e-commerce.” Add to this the latest data from comScore (SCOR) that showed online desktop spending continues to accelerate as we close in on the Christmas holiday. comScore noted:

“For the holiday season-to-date, $55.2 billion has been spent online, marking a 13% increase versus the corresponding days last year. The most recent week, Dec. 12-18, posted a strong 15% growth in online sales, marking $7.6 billion in desktop spending during the last full week before Christmas.” 

With Amazon once again taking the top spot for best online customer experience in the 12th annual Foresee Experience Index and surveys pointing to more shoppers buying on Amazon this year, we continue to see it in the pole position this holiday shopping season and beyond.

We have ample upside to our AMZN price target of $975, which keeps the shares a Buy. 

 

Costco Wholesale (COST) Cash-strapped Consumer 

This week Citi upgraded the warehouse retailer’s stock to “buy” from “neutral,” saying it sees a clear path to accelerating comparable sales, thanks to the abatement of deflation in food and gasoline. We’d add the continued expansion in the sheer number of warehouse locations bodes well not only for overall sales growth but also higher margin membership fees.

Over the last week, COST shares have rallied sharply to just under $164, which means there is less than 5 percent upside to our $170 price target. As such, we are not inclined to commit fresh funds to this position, nor should subscribers, and thus rate the shares a Hold for now.

 

Disney (DIS) Content is King 

The early estimates are in for Disney’s weekend debut of Rogue One: A Star Wars Story from Box Office Mojo and others, and they have the latest film in the Star Wars franchise taking in $155 million at the domestic box office and $290.5 million worldwide. That’s the 12th-largest opening of all time and marks only the second December film to debut over $100 million. If you guess the first one was last year’s Star Wars: The Force Awakens, you’d be right.

We see Rogue One’s domestic performance as rather impressive and ahead of the $150 million domestic consensus forecast, despite paling in comparison with last year’s Star Wars film. Make no mistake — despite the headlines saying that Rogue One failed to match Force Awakens, few were expecting it to do so, and even on its recent earnings call Disney warned about tough comparisons compared to Force Awakens. Versace saw the film and thought it was fantastic, especially given the rather surprise appearance at the end.

We do see Rogue One speaking to the power of the Star Wars franchise, which now under the Disney umbrella is set to have a new film each year for the next several years. With the holidays soon upon us, we’ll be monitoring Rogue One’s box office progress to gauge its staying power as we head into the holidays.

We’d also note that Rogue One crushed its next closest competitor, Disney’s Moana, which took in $11 million domestically over the weekend, bringing its domestic box office take to $161.9 million and to more than $280 million worldwide. But $150 million to Rogue versus $11 million for Moana clearly shows that once again, Disney is ruling the box office, and we expect the Disney machine to capitalize on the popularity of these films across its other businesses.

In addition to that, DIS shares were added to the US1 list at Bank of America/Merrill Lynch given what it sees as upbeat prospects for Disney’s parks and resorts, as well as its movie studios. Once again it seems we were ahead of the herd.

Our price target on DIS shares remains $125 and remain a Buy.

 

Under Armour (UAA)  Rise & Fall of the Middle Class 

The last 16 hours have seen a whirlwind of comments from Nike (NKE) and Finish Line (FINL), which on their face offer contrasting views on the athletic footwear market. Let’s tackle what they mean for our Under Armour shares.

Last night Nike bested earnings expectations on better than expected revenue, with strong performance in Western Europe, Greater China and the Emerging Markets as well as the Sportswear and Running categories.

There were two wrinkles that emerged during Nike’s earnings call — one was the company’s North America future orders, which came in at -4% vs. the consensus expectations of +1.2%. In recent quarters, Nike has downplayed the importance of its future orders given the growing impact of direct-to-consumer (DTC) and outlet sales, and talked up new products, especially for the basketball and running categories as it incorporates newer technologies, like Air VaporMax and others, across those lines. We’ve seen similar strong results at UA’s online business over the last several quarters.

Our key takeaway from Nike’s earnings call is that athletic footwear remains solid in North America and robust in markets being targeted by Under Armour.

The second wrinkle concerned the impact of the dollar on the company’s outlook, given Nike’s comment that “FX headwinds from further strengthening of the U.S. dollar have put downward pressure on our second half revenue forecast.” Currency is likely to have a more pronounced impact on Nike than Under Armour given that North America accounted for 47% of Nike’s Nike brand business during the November quarter. That compares to North America being roughly 98% of UA’s revenue in its September quarter.

Turning to Finish Line, its shares are getting crushed as the company reported comparable-store sales rose just 0.7% for its latest quarter vs. +8% consensus forecast. Sifting through comments from Finish Line, CEO Sam Sato said, “steep declines in apparel and accessories offset a high-single digit footwear comp gain.” Considering that footwear accounted for 88 to 89% of Finish Line revenue over the last few years, it seems safe to say it’s apparel and accessory business was crushed during the November quarter.

Given some information scrubbed from Finish Line’s Feb. 2016 10-K filing — 73% of Finish Line’s merchandise was purchased from Nike; FL’s top 5 suppliers accounted for 89% of its merchandise, and Finish Line’s business is nearly 100% US based — when comparing Finish Line’s apparel results vs. that for Nike’s North American apparel business, which rose +4% year over year in the November quarter, it sure smells like apparel share loss at Finish Line.

The bottom line for our Under Armour shares is Nike’s North American footwear comments and apparel results, as well as upbeat tone for the holiday shopping season, bode well for UA’s business and our shares. Finish Line’s comments on the other hand likely point to apparel share to other vendors.

Our price target on UA remains $40

 

Universal Display (OLED) Disruptive Technology 

Over the weekend there were several positive mentions for our Universal Display shares. Both articles were bullish, underscoring our thesis on Universal Display shares that the adoption of organic light emitting diode technology will be significant in 2017 and beyond.

Between the two, the more notable mention was in the Technology Trader column in Barron’s that said, “Other suppliers that could benefit in 2017 include module article chiclet Universal Display (OLED), which helps make possible light-emitting diodes, a technology for sharper, more energy-efficient screens that many expect will come to the iPhone 8 next year.”

True enough, the author trotted out the Apple (AAPL) iPhone speculation, but we have been hearing more and more of that.

That brings us to the second mention, which in our view is far more meaty, but also positive for our Universal Display shares.

Over the weekend, The Korean Herald reported, “All of Apple’s iPhone 8 OLED versions will be curved” and the OLED displays are to be sourced from Samsung. The report also goes on to note that “Samsung Display’s curved OLED capacity for Apple is estimated at around 70 million to 100 million units. This is less than half of Apple’s annual sales of the iPhone series, which stand at around 200 million units a year.”

The comment on limited Samsung capacity supports the growing notion that should Apple make the move to OLED display technology, which chatter suggests is increasingly likely, Apple is likely to do so in the higher end model on the next iPhone. While it doesn’t specifically call out the ramping industry capacity for OLED displays we’ve seen via new equipment orders at Applied Materials (AMAT) and Aixtron AG (AIXG), it does reinforce the shortage pain point. With more devices (TVs, wearables, smartphones, tablets) poised to adopt OLED display technology to improve battery performance and design thickness, we see more resources coming to address this pain point, which bodes well for Universal Display’s chemical and licensing business.

Given prospects for far greater OLED usage in 2017 and 2018, we are rolling up our sleeves to determine potential upside to our $68 price target.
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Facebook to copy Amazon and Netflix with original video programming

Facebook to copy Amazon and Netflix with original video programming

We’ve long suspected Facebook would eventually move past short video advertising into longer format programming to capture an even greater portion of the video advertising dollars that are fleeing traditional broadcast TV. It’s got the user base and aims to improve that monetization. Video content, especially outside the US, is a solid strategy to do so. As it does this and brings original programming to its users, much the way Amazon (AMZN) and Netflix (NFLX) are doing, Facebook starts to blur the lines between our Connected Society and Content is King investing themes.

Facebook wants to bankroll its own original video shows, the company’s global creative strategy chief, Ricky Van Veen, told Business Insider on Wednesday.

The videos Facebook wants to license will live in the new video tab of its mobile app and including “scripted, unscripted, and sports content,” according to Van Veen.

Source: Facebook wants to bankroll its own original shows – Business Insider

The root cause behind Facebook’s unwillingness to accept its role in the “news”

The root cause behind Facebook’s unwillingness to accept its role in the “news”

Facebook’s media headaches don’t start or end with fake news: With 1.8 billion monthly visitors, Facebook is a media-sharing powerhouse. But unlike the search giant Google or other big networks such as Twitter, Facebook exerts more control over what you see. Those News Feed algorithms are really, really good at getting you to click your way down a comfy rabbit hole. The election exposed how your own personal Facebook burrow — with its echo chambers, fake news and entry points for abuse — may not be a safest place to live.

Source: Facebook is the unwilling king of the news – CNET

 

Facebook is firmly rooted at the epicenter of the investment theme we call the Connected Society — the intersection of computing, broadband, mobility and the Internet changing the way we live.  There’s no disputing that.

Also crystal clear is the fact that Facebook pretty much controls the flow of news to a large portion of the world. Think about where you heard about the latest political or economic development? What about celebrity news? Or even more impactful, what about your local community news? Usually, it’s through Facebook that many of us are becoming aware of the happenings of the world.

But Facebook doesn’t seem to want to accept that role — or more specifically, doesn’t want to accept the responsibility of that role. By this, we mean the responsibility to curate, ferret out the minutia and keep the public informed of what’s important. What they need to know. What they should know. It’s what the country used to turn to Walter Cronkite, the major newspapers or the evening news on the major networks for on a daily basis.  “Just give me the facts please.”

But here’s the ugly reality — the dilemma that frankly all the “news” entities are dealing with —  facts don’t get people to click.  Facts don’t keep people tuned in. Facts don’t get people to pick up the paper or magazine. Facts don’t get people to share a story on Facebook. The National Enquirer figured that one out a long, long time ago, and Facebook and all of its engineers are particularly well-adapt and presenting stories and images in a way to drive shares, likes and clicks to no end.

Typically, what gets the metrics pumping, are the sensationalized stories. The stories you can’t believe. The behind-the-scenes gossip that everyone wants to know about. Needs to know about! Won’t believe when you find out about!

So if Facebook accepts its role as THE news curator for the world — which is a reason why it also sits in our Content is King thematic, by the way, — then what happens to the user-engagement metrics? What happens to the number of logins, posts, shares, “likes”, clicks?

If the company starts editing out the “fake news” or promoting the “true news” it might be good for the public, but bad for the business metrics. Or a more cynical viewpoint, if users believe Facebook isn’t just curating the facts, but taking a political slant in how it approaches the process (gasp!), then do users disappear altogether and instead go back to their own “social networks”?

These are the things we are sure Mark Zuckerberg, Sheryl Sandberg and the rest of the team at Facebook are struggling with, especially after the latest election cycle.

Can’t we all just share angry cat memes?

 

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Will the Santa Clause Rally be coming to town this year?

Will the Santa Clause Rally be coming to town this year?

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Since our last Tematica Investing update, the Trump Bump rally has continued and the Dow Jones Industrial Average continues its trek toward 20,000. At last night’s close, the Dow stood less than 100 points away from that level and if it hits it, as many speculate it will, it will stand as of the fastest 1,000 point moves for the index. To put some context around that, on Nov. 4 the Dow closed at 17,888,28 and has since climbed more than 1,110 points.

During that same time, all the major indices have put in record high after record high, with many pointing to what is to come under the Trump administration after the January 20, 2017 inauguration. As we wrote in this week’s Monday Morning Kickoff, there are scant signs of selling pressure given the prospect that tax rates will be lower come 2017 than they are today. This means that even though the indices are in overbought territory, we’re likely to soon see the Santa Claus Rally emerge and push stocks even higher.

 

NOVEMBER RETAIL SALES REPORT — OUR FIRST LOOK AT THE 2016 HOLIDAY SHOPPING SEASON

While we are full swing into the holiday shopping season, this morning we received the November Retail Sales Report, which includes the Black Friday to Cyber Monday shopping bonanza. Per the Census Bureau total, November Retail & Food sales rose 0.1 percent month over month. Stripping out food and auto, Retail sales were flat month-over-month and up 3.6 percent year-over-year. Given the data, we’ve seen and shared about Black Friday — Cyber Monday, it comes as little surprise the strongest category of growth was once again Non-store retailers, which were up 11.9 percent year over year. We see that as confirming for our Connected Society positions in Amazon (AMZN) for obvious reason as well as Alphabet (GOOGL) given its search and Google Shopping businesses.

The next strongest category, which reflects our Aging of the Population investment theme, was Health & Personal Care Stores, up just over 6 percent year-over -year.  Given our position in Starbucks (SBUX) we’d also call out the 3.1 percent year-over-year increase in Food & Beverage Stores for November. Finally, we always say the monthly Retail Sales Reports put context around Costco Wholesale’s (COST) monthly sales figures and once again comparing the two it become rather obvious that Costco continued to take consumer wallet share during the month as Cash-strapped Consumers looked to stretch their spending dollars once again.

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WHAT’S IN STORE COMING OUT OF THE FOMC MEETING TODAY

Later today we’ll hear from the Federal Reserve and the widely held expectation is the boost interest rates by 25 basis points. Our concern is that based on recent data they could surprise the market with a 50 basis point hike. As such, we’re going to hold off adding any new position this week, but we anticipate sharing a new recommendation in next week’s Tematica Investing, if not sooner if conditions are right, so be sure to watch your email and the website closely.

 

UPDATES, UPDATES, UPDATES

Given the market move, the pickings have certainly slimmed down compared to several weeks ago, but we’re already looking at the intersection of thematic tailwinds and stock laggards. You may be surprised to know there are more than a few potentials from our Contenders list and beyond, and now we’re digging in and putting some of those through their paces.

Now with just over two weeks to go until we close the books on the current quarter and 2016, let’s take a look at the current positions on the Tematica Select List. As we get ready to do that, we’d note that we’ve seen a number of positions added in late 3Q 2016 and early this quarter, like AMN Healthcare (AMN), Universal Display (OLED), and CalAmp Corp (CAMP) climb double digits. Quarter to date, we also added new positions in McCormick & Co. (MKC) as well as Facebook (FB) and scaled into International Flavors & Fragrances (IFF), AT&T (T), Amazon (AMZN), Dycom Industries (DY). We’re happy to report each of those positions is nicely profitable with the vast majority offering additional upside from current levels.

The are a couple of sore points on the Select List. One is Under Armour (UAA), but we see the company’s efforts to grow its International, women’s and footwear business starting to pay off and if the number of Under Armour items on our kids’ Christmas lists are an indication, it should be a strong holiday season for the athleisure player. We’d say dividends would also point to a bright future, but UA isn’t a dividend payer.

The other sore point would be the ProShares Short S&P 500 ETF (SH) position, which has come under further pressure as the Trump Bump has pushed the S&P 500 higher over the last several weeks. With that index well in overbought territory, we’ll continue to keep SH shares on the Select List for now, but remember we have these positions in the portfolio as a hedge if the market gets too far into overbought territory, so even though its down right now, it’s doing its job.

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Amazon (AMZN)    Connected Society

Amazon rebounded nicely since last Wednesday, but the shares remain well below late-October levels. There was a lot of chatter on Amazon’s essentially self-automated grocery store that launched for employees and will be opening to residents of Seattle in 2017 (yes, there are residents in Seattle that don’t already work for Amazon). Despite a colorful discussion, Amazon denied it plans to open 2,000 such locations. As we have seen before with its own logistics initiatives, Amazon tends to zag when people expect it will zig. We view its self-automated store as the latest example.

According to comScore (SCOR), holiday season-to-date online desktop spending is up 12 percent year-over-year, with growth picking up significantly since Thanksgiving. Anecdotally, we’ve never seen so many FedEx and UPS trucks making the rounds as early and as late as they are this year. We’ve also even seen quite a few U.S. Postal Service trucks on Sundays — we know, it’s crazy . . . Chick Fil A is closed, but the mailman is working. Who would have thought?

In another key area for Amazon, Amazon Web Services, which is the company’s most profitable division, it was recently revealed that Netflix (NFLX) is partnering with Amazon cloud services group for its infrastructure work. Netflix chief product officer Neil Hunt confirmed that Netflix is “100 percent operating out of AWS.” This is a huge win for Amazon’s higher-margin services business, and likely clears the path for other companies to outsource their data center and cloud operations to Amazon.

  • We see no slowdown in the shift to digital commerce, streaming video consumption, and other drivers behind Amazon’s business and believe the current share price offers more-than-favorable upside potential to our $975 price target.

 

AMN Healthcare Services (AMN)    Aging of the Population

Over the last week, AMN shares surged more than 10 percent with the bulk of the move coming after the October JOLTS report. While that report showed a 5.5 percent month-over-month increase in health care and social assistance hiring, that paled in comparison to the 14 percent rise in health care and social assistance job openings in October relative to September. That mismatch underscores the current nursing and health-care shortage fueling AMN’s business.

The softening of President-elect Trump’s position on certain aspects of the Affordable Care Act signals a potentially smoother revamp than was expected under Candidate Trump, which also bodes well for AMN.

We will see how that  ACA overhaul by Congress plays out, but we continue to like the longer-term favorable dynamics driving AMN’s business. By 2020, forecasts say the U.S. will need 1.6 million more direct-care workers than in 2010, which equates to a 48 percent increase for nursing, home-health and personal-care aides over the decade due primarily to the aging of 78 million baby boomers.

  • Our price target on AMN shares remains $43, which offers 21 percent upside from last night’s close. As such, we would commit fresh capital at current levels to AMN shares.

 

AT&T (T)    Connected Society

AT&T shares rose more than 5 percent for the week, and are now back to late September quarter levels. Last week, the planned acquisition of Time Warner (TWX) took center stage in both Washington, D.C., at a Senate Judiciary Meeting, and at the UBS Global Media & Communications Conference. Despite candidate-Trump’s criticism of the merger during the election cycle, we are encouraged by President-elect Trump’s pro-business perspective as it relates to this pending transaction and his recent comment that AT&T’s intention to acquire Time Warner would be looked at without prejudice. Obviously, a far softer position than his earlier statements that he would block the deal.

Details still need to be sorted out on the regulatory front, including the potential unloading of certain Time Warner TV channels and satellite dishes, which could eliminate a potential review by the FCC. However, we suspect AT&T is open to such options as it looks to transform its business with this transaction, and comments by AT&T CEO Randall Stephenson that consumers will get “better-priced options than they have today” helps thwart concerns about price gouging.

We view the combination of AT&T and Time Warner as bringing content to consumers where and when they want it and a competitive offering to Verizon (VZ) and Comcast (CMCSA).  More competition is a bound to be a good thing, despite what Senator Al Franken who stated during the Senate hearing that he is “skeptical of any further consolidation in the media and telecommunications industries that could lead to higher prices, fewer choices, and even worse service for Americans.” Few choices? Has he looked at all the streaming services out there?

In the coming months, we expect the market to focus on AT&T’s new DirecTV Now subscriber metrics to gauge potential churn, as well as measure how successful the service will be relative to expectations.

  • Our $44 price target on T shares till stands, but we are likely to revisit it as more details on the pending merger with Time Warner emerge.

 

CalAmp Corp. (CAMP)    Connected Society

CAMP shares continued to make headway this past week, pushing our shares further into the green. The only company-specific news last week was CalAmp setting its next quarterly earnings report date for Dec. 21 when current expectations call for it to deliver EPS of $0.25 on revenue of $83.9 million.

During the week, Goodyear (GY) launched a new pan-European business, comprised of vehicle-to-fleet operations management solutions. The offering is a telematics-based solution that leverages Big Data and predictive analytics and enables fleets to monitor their vehicles and tires in real time to avoid breakdowns and lower total cost of operations (TCO). We see this as confirming for the strategies underway as well as potential opportunities at CalAmp.

Meanwhile, at Trucking.com, Scott Perry, chief technology & procurement officer for Ryder System (R), discussed several factors behind the eventual adoption of semi-autonomous vehicle technologies in fleets, including the driver shortage, which is estimated at 70,000 this year, and may rise to 175,000 by 2024.

We see these as additional signposts for the burgeoning Connected Car, Truck and Equipment market for which CalAmp is well positioned. As that market opportunity develops further, we continue to focus on the fundamentals, and near term that means watching public and private fleet management companies deploy telematics solutions to drive productivity and contain costs.

  • With ample upside to our $20 price target, we continue to rate CAMP shares a Buy.

 

Costco Wholesale (COST)   Cash-strapped Consumer

Shares of the warehouse retailer climbed more than 5 percent over the last several days following upbeat comments made on the company’s earnings call last week.  Although Costco will continue to feel the impact of food deflation in the near-term, the company targets growing its warehouse count further over the coming year, which bodes well for sales as well as membership fees. As management overhauls the company’s e-commerce business, it could be a sleeping catalyst for the shares over the coming year.

  • With just over 5 percent to our $170 price target, we are holding steady with COST shares and not adding to the position at current levels.

 

Dycom Industries (DY)    Connected Society

The latest edition of the Ericsson’s Mobility Report forecasts there will be 550 million 5G subscriptions in 2022, with the fastest uptake in North America, which is forecasted to account for roughly 135 million 5G subscriptions. While we’ve seen these hockey stick-like forecasts before with both 3G and 4G adoption, the reality is networks will need to be in place over the coming quarters at companies like AT&T and Verizon, which bodes rather well for both wireless and wireline infrastructure spending.

We see this as further confirmation of the industry investing to be done to deliver faster network speeds and incremental capacity as service providers bring more services to market, and Dycom is a prime beneficiary of that spending. At the same time, we see incremental spending to address capacity bottlenecks on existing networks, which is also good for Dycom.

  • The current share price offers subscribers who are underweight DY an excellent opportunity to acquire the stock at better prices than we’ve seen the last few weeks.
  • Our price target remains $110.

 

Walt Disney (DIS)     Content is King

Disney shares climbed another 3 percent this past week, raising its return to more than 12 percent over the last three months, putting both positions on our Select Investment list back into the green — our patience has paid off.

Concerns certainly still linger over the health of Disney’s ESPN business, which has prompted some chatter questioning whether it might be wise for the company to unload the business, but Disney’s strength at the box office has continued with Marvel’s Dr. Strange and its latest animated family-friendly film Moana. Of course, that’s all ahead of this Friday’s release of Rogue One: A Star Wars Story. Color us excited, but in our view, Friday cannot come soon enough.

We expect Rogue One and related merchandise to perform well this holiday season and in follow up quarters. Looking into 2017, it’s apparent it will be a transition year for Disney due in part to costs associated with ESPN’s new NBA contract that spans to the 2025/2026 season, the launch of new attractions at Disney World and Disneyland and a tough film comparisons year over year due to Star Wars: The Force Awakens.

Earlier this week was the dividend record date (Dec. 12) for the recently hiked semi-annual dividend to $0.78 per share, a 9.9 percent increase from the prior dividend of $0.71. The new dividend is payable on Jan. 11.

We are inclined to be patient with Disney as we see it as THE Content Is King company, with its international efforts propelled by rising disposable incomes and a brand-conscious rising middle class. We continue to see Disney making the right investments (streaming media and turning studio content into park rides and attractions) to drive revenue and profits.

  • Our price target remains $125.

 

Alphabet (GOOGL)    Asset-lite Business Models

GOOGL shares soared 5 percent over the last week, but that only brings them back to levels last seen at the end of September. There was no blockbuster news this week, but there were several minor developments worth noting — the company helped form the Global Virtual Reality Association,  and its self-driving car team made additional hires and launched a new China-based developer site, marking a partial return to the Chinese Web. These are all positive developments that are likely to bear fruit over the medium to longer term. Near-term the core business driver will remain the search and advertising business.

We remain bullish on GOOGL as we see no slowdown in the tailwinds that are propelling the company’s businesses— specifically, the increasing shift toward digital from analog lifestyles that is driving incremental advertising dollars to online and mobile; streaming video consumption; and online shopping. Those drivers have the company tracking to grow earnings more than 20 percent and the shares are trading at 20x consensus 2017 EPS expectations of $40.97, essentially a PEG ratio of 1.0. Alphabet’s board authorized a new $7 billion share repurchase program following completion of the prior one.

  • Our price target on GOOGL shares remains $975.

 

Facebook (FB)    Connected Society

After sliding over the last few weeks, FB rose 2.5 percent over the last five days. Helping move FB higher was the overall uptick in the Nasdaq, but also that the news that company is developing tools to deal with the increasing concern of “fake news.” The company also announced new tools for estimating reach and audience size, which should help ease recent concerns over audience metrics data.

From our perspective, FB remains very well positioned to capture the shift in advertising dollars to digital platforms, not just from radio and print, but broadcast as well. In other words, the key to the shares will be progress on its advertising/monetization strategies (especially video) and international revenue per user growth, and other opportunities that help grow its user base. Those are the factors behind its revenue and EPS expectations, which call for continued growth over the coming years.

Consensus expectations have FB earning $4.10 per share this year, up from $2.28 in 2015. But the valuation story and bullish demeanor across the investment community for FB is really a 2017-to-2018 one. As FB continues to grow and improve its global monetization efforts, EPS expectations rise to $5.20 for 2017 and $6.55 for 2018. The recently announced $6 billion share repurchase program that begins in 1Q 2017 has the potential to shrink the share count by around 2 percent near current share price levels, which should help in meeting those earnings expectations as well as giving the stock some support.

  • Our price target on FB remains $150.

 

International Flavors & Fragrances (IFF)   Rise & Fall of the Middle Class

IFF shares were essentially unchanged over the last week. As with our recently added position in McCormick & Co. (see below), we see IFF as well-positioned as a result of rising disposable income, particularly in the emerging markets, but also from the shift in consumer preferences to natural/organic flavors. At the same time, soda companies, such as Coca-Cola (KO) and PepsiCo (PEP), are looking to reformulate their products to exclude sugar or to utilize organic flavors and fragrances, which bodes well for IFF’s solutions.

In its latest report, “Global Markets for Flavors and Fragrances,” Research and Markets forecasts the global market to grow from $26 billion in 2015 to $37 billion by 2021 — an overall increase of more than 40 percent!

  • We would say there is nothing iffy to us about our position in IFF or our $145 price target.

 

McCormick & Co. (MKC)   Rise & Fall of the Middle Class

Ahead of the Thanksgiving holiday, we started a position in McCormick given the company’s history of annual dividend increases, the shift in consumer preferences that has people favoring eating at home over restaurants, and the rising disposable income outside the developed markets that is spurring a step-up in diets (protein consumption, flavor).

McCormick tends to be a somewhat sleepy name when it comes to news flow, and this week was no exception. That said, MKC shares were recently rated a new “Buy” at Bank of America Merrill Lynch with a $100 price target. Our long-term price target remains $110. As a reminder, the company boosted its quarterly dividend to $0.47 per share from the prior $0.43 — a 9.3 percent boost. These annual dividend increases tend to result in a step function in the share price. This 31st consecutive dividend increase will be paid on Jan. 17, 2017 to shareholders of record this coming Dec. 30.

We see the company as well-positioned to capitalize on “seasons’ eatings” over the coming weeks. Ask anyone that plans on baking if what they’ve paid for vanilla extract this year, and you’ll see what we’re getting at.

 

Starbucks Corp. (SBUX)    Guilty Pleasure

At Starbucks there’s been much a brewin’ as we like to say, as we saw its shares climb more than 3% last week bringing our return on the position to more than 8 percent.

The recent management change sees longtime CEO Howard Schultz stepping down and handing over the reins of the company to Kevin Johnson, the existing COO. While Schultz will remain the Chairman of the Board, he will shift his efforts to the company’s premium segment, Starbucks Reserve Roasteries, and Starbucks Reserve Retail stores, as the company looks to expand these businesses globally. We suspect the day to day details of this management shift have largely been in play behind the scenes for some time. Unlike the last time Schultz left the company that resulted in some misdirection, this time Schultz remains its Chairman, which should allow him to keep a steady read on the overall business.

Soon after that news, Starbucks hosted its biennial Investor Conference at which it presented its five-year strategic plan to grow revenue by 10 percent, EPS by 15-20 percent, and drive mid-single-digit comp growth each year. As part of that plan, it expects by 2021 to add 12,000 stores globally — to a total of 37,000 — while focusing on its Roasteries and Starbucks Reserve stores to elevate the Starbucks brand and customer experience. The company also shared that it will continue to innovate on mobile and expand the menu at its Starbucks store locations.

There is little question that Starbucks will continue to grow as it extends its global reach, particularly in China and other emerging economies. We do find it interesting that the once Affordable Luxury experience offered by Starbucks needs to be reinvested in the form of its Roasteries and Starbucks Reserve stores. That new experience bears further investigation and we’re up for the task. We do see the menu expansion as a positive development as it should help drive the food-beverage attach rate higher.

Finally, as the cold weather and holiday shopping intersect, we can expect long lines at many a Starbucks as consumers look to not only get warm but also plunk down their money for gift cards.

  • With 25 percent upside to our $74 price target, we continue to rate SBUX shares a buy.

 

Under Armour (UAA)    Rise & Fall of the Middle Class

Before we get under way, a quick reminder that last week the ticker symbol for Under Armour’s Class A shares was changed to “UAA” from “UA” This was a little confusing in an unnecessary way, if you ask us, especially since not all quoting services updated the ticker information in a timely fashion last week. But that appears to be all sorted out now.

Despite that disruption, Under Armour shares rose more than 4 percent over the last week, following the positive reception for its recently announced deal with Major League Baseball. In recent quarters, the company has continued to expand its retail presence with Macy’s (M), Foot Locker (FL) and other brick-and-mortar retailers. Versace’s recent holiday mall walks (a holiday season staple) showed Under Armour’s footwear and apparel are clearly on display.

Also receiving some positive buzz last week was the company’s Under Armour Sportswear (UAS) line, which has launched several pop-up shop locations as a showcase. UAS designer Tim Coppens was also featured on the fashion blog Fashionista last week, which should help position UAS differently compared to Under Armour’s expanding athletic apparel and footwear line.

We’ll continue to monitor holiday shopping channel checks for sports apparel and footwear as well as gauge Under Armour’s efforts to bring new footwear and women’s products to market during this all-important season. Longer term, Under Armour is poised to grow its revenue and operating income as its initiatives (footwear, International, women’s and UAS) take hold.

  • Our price target for UAA is $40, which offers attractive upside potential.

 

United Natural Foods (UNFI)    Food with Integrity

Last week, UNFI reported underwhelming quarterly results, largely due to the impact of food deflation, but the company maintained its outlook for the coming quarters. We’ll continue to monitor food deflation trends, but given the expected record corn crop, odds are that deflationary pressure will persist. The silver lining is it is driving consumers back to grocery stores and eating at home. This, of course, will pressure restaurant companies and an early look at 2017 from Fitch Ratings sees the pain continuing for restaurants as grocery spending remains on top.

With the ongoing shift toward natural, organics and “good for you foods” we continue to see United as a prime beneficiary. A recent report from Research and Markets forecasted the global market for organic food would grow at “a CAGR of over 14 percent during 2016-2021, on account of high demand for organic food.”

  • We will continue to be patient with the shares as the company regains investor confidence after stubbing its toe during 2015, but we’ve trimmed our price target to $60 from $65.

 

Universal Display (OLED)     Disruptive Technologies

Universal Display shares catapulted 6.5 percent over the last week following a Wall Street Journal article that said, “Analysts widely expect the next iPhone to adopt a technology called organic light-emitting diode, at least for high-end versions. OLED displays, which are thinner, more flexible and give better contrast, will eventually replace the current liquid-crystal displays, or LCDs.”

Outside of Apple (AAPL) speculation, we continue to hear more reports of increasing industry capacity to meet rising demand from smartphone, TV and other markets that are set to adopt OLED technology. All of this points to improving demand for OLED technology, which bodes well for both the chemical and licensing business at Universal Display. We’ll continue to monitor OLED equipment order activity at Applied Materials (AMAT), Aixtron and Veeco Instruments (VECO) as well as new product announcements and OLED applications from consumer electronics companies at events such as CES 2017.

  • Our price target is currently $68, however, based on the number of new products announced at the upcoming CES event in January, it could be revised higher.
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Impact of Connected Society Taking to the Skies

Impact of Connected Society Taking to the Skies

In a surprising and likely controversial step, U.S. aviation regulators on Thursday suggested they are leaning toward eventually allowing in-flight calls from airline passengers—with two important caveats: airlines will have the option of whether to provide the service, and passengers must be informed well in advance if the flight allows calls.

Source: Transportation Department Weighs Allowing Phone Calls During Flights – WSJ

It seems that much of the swirl around this development by the DoT — reversing course and potentially allowing users to place and receive phone calls while in flight — is focused on the social aspect of the situation. The annoyance of having to listen to someone else’s conversation for 5+ hours on the flight from LAX to JFK.

From our perspective, it’s a trivial issue. As frequent riders of Amtrak between DC and NYC, there aren’t that many people on the phone for the most part, and it’s the reason by God gave us noise canceling headphones.

No, the real issue here is while people will be placing their seats in the full and upright position and locking their tray tables, they won’t be switching their smartphones over to airplane mode. And if the phones are on, think about how much data and content could be consumed during the over 75,000 daily flights across North America! Yes, many flights now have WiFi, but oftentimes we find ourselves just tucking away our phones and focusing on some “offline work.” But staying “connected” via voice calls might just push users over the edge to keep their phone out and signed up for GoGo inflight WiFi.

Of course, just like the jet stream across the United States, one plane’s tailwind is another one’s headwind. More data and connectivity on planes is great news for stocks in our Content is King and Connected Society investment themes . . . bad news for book publishers who cherish those full price book sales at the airport terminal.

It will likely be a few years before this becomes a reality. In the meantime, have a look at this video below that shows all the flights across North America in a single day — like little ants!

 

Could we have a new Investment Theme to add to the mix?

Could we have a new Investment Theme to add to the mix?

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The full content of Tematica Investing is below; however downloading the full issue provides detailed performance tables and charts. Click here to download.

The stock market continued to move higher over the last week, as oil sold off this week and we inch closer to what seems like an inevitable interest rate hike. As we wrote in this week’s Monday Morning Kickoff, the stock market increasingly looks to be ahead of itself and now we are starting to see the conversation regarding 2017 earnings expectations shift to one with an upward bias – analyst code for thinking expectations need to be raised – despite the fact that earnings for the S&P 500 have been flat for the last few years. Let’s remember, those 2017 expectations already call for an 11 percent increase and odds are the earliest we would see any Trump Bump to the economy would be in the second half of 2017.

Yep, it’s looking like the froth is getting a little thick, which is why we’re holding off from adding any new positions to the Tematica Select Investment List. But rest assured, we still have a packed issue this week as we provide updates on many of our positions — most of which have enjoyed the recent market rally — as well as a look inside at an internal debate we’ve been having as we discuss adding a new theme to the line up of our investing themes.

 

Updates, Updates, Updates

We recently added Facebook (FB) as our latest Connected Society investment theme pick as well as McCormick & Co. (MKC), which announced a nice increase in its annual dividend – just like we expected. While both have seen slight short-term setbacks, such retreats we see as an additional opportunity to get in on them if you haven’t already. We continue to rate both as a Buy. 

We’ve also started to see our Amazon (AMZN) and Alphabet (GOOGL) shares rebound – as we said recently, the thematic drivers remain very favorable for those two positions as well as Facebook and we’re going to be patient with all three. The same goes with Dycom Industries (DY) as network capacity issues are only going to get worse as streaming continues to overtake broadcast TV viewing as part of our Connected Society investing theme.

With a deal between CBS Corp. (CBS) and AT&T (T) that would bring the broadcaster’s content to AT&T’s new DIRECTV Now service — which by the way Tematica CIO Chris Versace is enjoying immensely — we continue to be bullish on AT&T shares. Our larger concern remains the uncertainty over AT&T’s acquisition of Time Warner (TWX), which through our thematic lens would transform AT&T into a Connected Society and a Content is King player. President-elect Trump was negative on the proposed merger during the campaign, calling it “an example of the power structure I am fighting.” Of course, we’ve already seen a difference between candidate Trump and President-elect Trump. Capitol Hill hearings on the proposed merger begin today, so we’ll continue to watch all of these developments as we collect on that enviable dividend stream given AT&T’s dividend yield of 5.0 percent.

Our Disney (DIS) positions have continued to rally and are up meaningfully from their summer lows. With the next Star Wars (Rouge One –  A Star Wars Story) installment set to drop at the end of next week — yes, the Tematica team will be there with a large tub of popcorn in hand! — it once again looks to be a very Star Wars Christmas toy season.

Finally, the industry chatter over Apple (AAPL) adopting organic light emitting diode (OLEDs) technology across its iPhones and iPads continues, but come CES 2017 — the big consumer electronic trade show — Sony (SNE) will be introducing its first OLEDs TV. As competitors like LG, Samsung and others look to bring their OLEDs TVs to market, industry capacity will need to expand. Good news for Universal Display’s (OLED) chemical and licensing business, that also happens to be good for our shares of this Disruptive Technology company.

While we know you can find the finer points for those companies in the Select List table that can be found on page 7, each of those companies remains a Buy at current levels. 

 

 

What does it take for an investing theme
to make the thematic cut?

One of the dangers that we’ve seen others make when attempting to look at the world thematically is they confuse a trend or a “flash in the pan” for a sustainable shift that forces companies to respond. Examples include exchange-traded funds (ETFs) that invest solely in smartphones, drones or battery technologies. To begin with, there aren’t enough publicly traded companies to fill out such a strategy, but the reality is those are beneficiaries of the thematic shift, not the shift itself. You would think for all the smart people running around Wall Street they would see this, but they don’t.

We’ve talked with several firms that are interested in incorporating Environmental, Social and Governance — or ESG — factors as part of their investment strategy. Some even have expressed the interest in developing an ETF based on an ESG strategy alone. While we can certainly understand the desire among socially conscious investors to ferret out companies that have adopted that strategy, we do not see it as a sustainable differentiator given that more and more companies are complying.

In other words, if everyone is doing it, it’s not a differentiating theme. Moreover, compliance to an ESG movement does not alter the long-term demand dynamics for a category, even if certain businesses enjoy a short-term surge in revenues.

For example, does the fact that Alphabet (GOOGL) targets using 100 percent renewable energy by 2018 alter the playing field or improve the competitive advantage of its core search and advertising business? Does it do either of those for YouTube?

The result is a trend that is likely to be medium-lived, if not short lived. Said another way, it looks to us to be more like an investing fad, rather than a pronounced thematic driver shift that has legs.

As you know we are constantly turning over data points, looking for confirmation for our thematic lens as well as early warning flags that a tailwind might be turning into a headwind. As we collect those data points, we mine the observations that bubble up to our frontal lobes and at times ask if perhaps we have a new investing theme on our hands. Sometimes the answer is yes, but more often than not, it’s a no.

Now you’re in for a treat! Some behind the scenes action if you will on how we think about new themes and why one may not make the cut…

On-Demand economy enough to become a new investing theme?

Recently we received a question from a subscriber asking if the number of “on-demand” services and business emerging were enough to substantiate the addition of a new investment theme to go along with the other 17 themes we currently track.

By on-demand, we’re talking about those services where you can rent a car (Lyft or Uber) or apartment (AirBnB) with the click of a button for only the time you need it. Or the many services that will deliver all the ingredients you need to prepare a gourmet meal in your own kitchen. We’re talking about things like Blue Apron or Hellofresh.

It was an interesting question because frankly, it’s something we have been debating at Tematica Research for quite some time. Ultimately, we came to the conclusion that the real driver behind the on-demand economy is businesses stepping into fill the void created by a combination of multiple themes, rather than a new theme in of itself. Here’s what we mean . . .

 

Take the meal kit delivery services like Blue Apron.

What’s driving the popularity of this service? We would argue that it’s not the fact that people like seeing their UPS driver more (although we do know many women that seem to have a thing for the brown shorts and socks). Rather it is the result of underlying movement towards more healthy and natural foods that omit chemicals and preservatives — something we have discussed as the driver behind the Foods with Integrity theme.

The key barrier to this movement towards healthier cooking that is Foods with Integrity is the amount of work it takes to cook such foods — the shopping, the measuring, the cutting and preparation time, not to mention the cost. In steps Blue Apron and consumers flock to it. So we see the meal delivery services as an enabler of Foods with Integrity rather than a theme itself.

There is also a clear element of the Connected Society investment theme behind these services, given how customers order the ingredients to prepare the meals – via an app or online – as well as Cashless Consumption given the method of payment does not involve cash or check. So we are clear, the primary theme at play here is Foods with Integrity, but we do like the added oomph from those other themes.

 

Let’s look at Uber, the on-demand private taxi service. 

We’re big users of the service, particularly when we are traveling, and we love the ease of use. We also like the payment experience — or the lack of an experience. We’re talking about having the ride fee automatically charged to our account. No cash, no credit card swiping or inserting, no awkward “how much do I tip?” moments. It’s our Cashless Consumption theme in all of its glory.

The big users of the Uber and Lyft services and the ones driving the firms’ valuations to stratospheric levels are the Millenials who are opting to just “Uber “ around town — it’s become a verb — or use a car-sharing service like a ZipCar (ZIP) or the like.

Sure, the Millenials have the reputation of being a more thrifty, frugal group compared to previous generations. But we have to wonder is it them being thrifty or just coming to grips with reality? With crushing costs of college and student loans, as well as stagnant wage growth and many young workers having to cobble together part-time and contractor jobs rather than a full-time salaried position, what choice do they have? So why buy a car and pay for it to sit there 75% of the time when you can just pay for it when you need it? We call that the Cash-strapped Consumer theme and many businesses have stepped into this void as part of what has become known as the “sharing economy.”

 

Finally, what is the underlying function of all these on-demand services?

As we mentioned earlier, it’s the ability to connect and customize the services through a smartphone app or desktop website, or from our thematic perspective, the Connected Society.

Now let’s tackle the headwind, which involves those companies that are not able to capitalize on the thematic tailwind. In many respects, it reminds us of how Dollar Shave Club beat Gillette, owned by Proctor & Gamble (PG), and Schlick, owned by Edgewell Personal Care (EPC), by addressing the pain point of the ever-increasing cost of razor blades with online shopping.

Boom! Cash-strapped Consumer meets Connected Society. While Gillette has flirted with its own online shave club, the price of its razor are still significantly higher and as far as we’ve been able to tell Schick has no such offering. As Dollar Shave Club grew and expanded its product set past razors to other personal care products, Unilever (UL) stepped in and snapped it up for $1 billion.

Going back to the beginning and the impact of the food delivery services like Blue Apron — are we likely to see food companies build their own online shopping network? Most likely not, but they are likely to partner with online grocery ordering from Kroger (KR) and other such food retailers. That still doesn’t address the shift toward healthy, prepared meals and it’s requiring a major rethink among Tyson Foods (TF), Campbell Soup (CPB), The Hershey Company (HSY), General Mills (GIS) and many others. Fortunately, we’ve seen thematic signals for many of those companies doing just that.

The key takeaway from all of this is a thematic tailwind can be thought of as a market shift that shapes and impacts consumer behavior, forcing companies to make fundamental changes to their businesses to succeed. If they don’t, or for some reason can’t, odds are their business will suffer as they fly straight into an oncoming headwind.

As thematic investors, we want to own those companies with a thematic tailwind at their back — or maybe even two or three! — and avoid those that either seem oblivious to the headwind or won’t be able to reposition themselves like a sailor looking to tac across a body of water to where the wind is blowing.

Of course, when it comes to these “On-Demand Economy” darlings — Uber, Dollar Shave Club, Airbnb —few if any of them have been publically traded, which frustrates us so, since most of them are tapping into more than one thematic tailwind at once. If and when they do turn to the public markets for some added capital and we get a look into the economics of these business models, then we’ll also get to see the key performance metrics and financials behind these businesses. One can only hope . .  .
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Italy’s Complex Choice — Toronto Sun

Toronto Sun: December 3, 2016

While financial, industrial and small cap stocks in the US have been partying like it’s 1979, investors would be wise to take more than a passing look across the Atlantic at Europe’s next biggest threat.

You’ve probably seen commentary about Italians voting on constitutional referendum; not exactly riveting material. Continue >>

Italy’s referendum has the potential to set off a global landslide

Italy’s referendum has the potential to set off a global landslide

While financial, industrial and small cap stocks in the US have been partying like it’s 1979, investors would be wise to take more than a passing look across the Atlantic at Europe’s next biggest threat.

You’ve probably seen commentary about Italians voting on a constitutional referendum; not exactly riveting material.

Italy, Europe’s fourth-largest economy, is a nation in desperate need of reforms, having underperformed its major trading partners for decades, with the latest per capita GDP below 1997 levels and metropolitan area employment levels well below those in most of Europe.

Obviously, change is needed, but what is this referendum, why do you care and what is the herd getting wrong?

If you google the topic, you can get endless details on the vote, but here are the salient points. The Italian nation in its current form was born right after WWII and as such, has a deep-seated fear of concentrated power; pretty understandable after the fun times under Mussolini and his buddy Hitler.

That fear created a government with essentially two congressional bodies, both like America’s House of Representatives, except with more than double the members and even more layers of government from the top federal level on down to localities. There are a lot of people whose entire raison d’etre is to express their opinions and these are Italians, so the whole thing takes longer and is more emphatic.

The intention of the measures in the referendum, according to Prime Minister Mario Renzi, is to make government less complex and more functional, with fewer people involved and fewer layers. For example, today the Chamber of Deputies (Congress) has 630 members, (elected by voters age 18 and older) and the Senate has 350 members, (elected by voters 25 and older). The Senate would be cut to 100 members appointed by the regional elected governors, rather than by voters, and would only be involved in major decisions such as war or international treaties versus today where both houses basically participate in everything equally. The province layer of government would be officially removed.

David Cameron

Britain’s Prime Minister David Cameron wipes his eye as he addresses a news conference during a European Union leaders summit in Brussels March 20, 2015. REUTERS/Francois Lenoir

There’s more to it, but that gives a general sense. This bill is vast and complex, making a vote on it challenging as voters are unable to decide between the changes they support and those they don’t; it is all or nothing.

The bill was originally introduced by Renzi and his center-left party, then voted on by the Chamber and Senate twice. Yes, twice. It is now being put to a general vote by the electorate, illustrating the challenges of getting anything done in Italy’s government.

When it was first introduced and discussed, Renzi was enjoying more support than he is today, which led him to make the same mistake made by former UK Prime Minister David Cameron with Brexit, by making passage of the bill an endorsement of him. Back then Renzi vowed he’d not only resign, but would give up his political career; talk about laying it on thick. Recently Renzi has tried to soften his rhetoric, but most think that in the public’s that mind ship has long since sailed, so it would be tough for him to renege on those vows.

A man walks on a logo of the Monte Dei Paschi Di Siena bank in Rome, Italy September 24, 2013. REUTERS/Alessandro Bianchi/File Photo

A man walks on a logo of the Monte Dei Paschi Di Siena bank in Rome, Italy September 24, 2013. REUTERS/Alessandro Bianchi/File Photo

Opponents claim that a “yes” vote would give Renzi excessive power, which when you think back to the 1930s and 1940s, gives anyone in that part of the world understandable heartburn. While many are likening this vote to Brexit and Trump, the dynamics here are materially different. Brexit was primarily a, “Screw you!” to the status quo and bureaucrats in Brussels. Trump stormed into D.C. amongst cries of “Drain the Swamp!” Many are looking at the polls in Italy today, which indicate a “no” vote majority, and likening them to the inaccuracies of the Brexit and Trump predictions – that is a mistake.

The truth is at this point, most Italians don’t really even understand what the referendum is all about and Beppe Grillo, the leader of the Five Star movement, is helping to give voters the impression that a “yes” vote would give Renzi near-dictatorship powers.

Those Italians who understand that red tape is the biggest enemy of the country would vote “yes” over and over again. The problem is that those that would vote “yes”, tend to be better educated and higher income earners, which has given this vote a vibe of class warfare. With many of Italy’s business elite thinking that Renzi may be Italy’s last hope, that schism is visible to most everyone.

The Importance of this Referendum on Worldwide Markets

Investors need to care about this because the market has decided that this vote is an indicator of Italy’s ability to make much-needed reforms and that matters because of the impact of Italy’s banks and sovereign debt. The actual quality or validity of the reforms proposed in the referendum have become almost meaningless. For those within Italy the vote has become a referendum on Renzi and as Italians grow increasingly frustrated that their lives haven’t materially improved, even some members of Congress from within Renzi’s own party who originally voted for the referendum are now scrambling to develop compelling arguments for why they now oppose it.

Italian banks are in a world of hurt, which is almost intuitive if you look at the nation’s credit markets and weak economy. Italy has negligible public credit markets, so borrowing means a trip to the bank, which makes credit risk more highly concentrated than in countries like the US, which have robust bond markets. During the financial crisis and in the years following, banks engaged in a lot of extend-and-pretend, some of that of their own volition, some after cozy chats with government officials, hoping that at some point in the not-too-distant future, the economy would get back on its feet and those struggling loans could be made good.

Despite a rapid procession of new leaders, the economy has yet to recover. Granted, it is better today than in 2012, with a few new stores popping up here and there rather than seeing yet another one shut down week after week. The unemployment rates for younger Italians, however, remain tragic and intense frugality is more the fashion than Milan’s latest catwalk. Businesses remain weak, so borrowers and banks that made those loans are still struggling. Adding to the pain are the piles of sovereign bonds warehoused at banks and the even more painful dirty little secret that the Italian government is notorious for not paying its own bills. This creates a twisted triangle between the bank pressuring companies to pay their debts, those companies, in turn, trying to collect from the government and bureaucrats dialing up the banks for leniency towards those the government owes.

The Shake Out From this Vote Will be Felt Worldwide

Beppe Grillo

Leader of the Five Star Movement and comedian Beppe Grillo.REUTERS/Remo Casilli

If contrary to the polls the “yes” vote wins, Italian bonds and banks will rally and the MIB (Italian stock index) will have a huge relief rally, particularly given its over-exposure to banks, and the euro will likely strengthen relative to other currencies.

If the polls are right and we see a “no” vote by a large margin, Italian yield spreads over German bunds will widen a lot. Italian bank stocks will accelerate downward and Banca Monte dei Paschi di Siena (MPS) will likely need external aid, which will put the European Central Bank in the hot seat,  and all eyes will be on German Chancellor Angela Merkel who is also watching Germany’s Deutsche Bank spiraling downward.

Renzi will be pressured to resign, (unless the win is by the smallest of margins) and the Italians will find themselves back at the polls, with the outside chance that Beppe Grillo’s Five Star could gain additional traction, which would be terrifying for anyone doing business in the region. The euro will weaken materially. European banks as a whole will likely take a hit and the dollar will get pushed further and further up as money races out of increasingly dicey Eurozone into the relative safety of the US dollar and US assets – a tailwind to US stocks and bonds. The Italy economy would slow further thanks to the increased uncertainty, which would bleed over into other European nations and global trade. The acceleration to the rising dollar headwind facing US multinationals could render the Fed’s rate hike decision irrelevant in comparison and harm growth back in the States at a point when the economy looks just finally be gaining a bit of traction.

While it may seem like a minor event on the global stage now, history is full of moments that initially seemed of little importance, but like the final grain of sand that ignites a landslide, in retrospect, those moments changed the global landscape in ways that were previously unimaginable.