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Monthly Archives: January 2017

Making a Nuanced Move With The Tematica Select Investment List

Making a Nuanced Move With The Tematica Select Investment List

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Over the last week, while many have been watching the Dow Jones Industrial Average flirt with 20,000, the Nasdaq Composite Index continued to climb higher. That led our Connected Society investment theme positions in Facebook (FB), Alphabet (GOOGL) and Amazon (AMZN) higher over the last week.

  • Even so, we still have ample room to our respective price targets for each of those positions and our buy rating on all three remains.

 

Over the last few months, we’ve been talking about the impact of food deflation, which has been confirmed by our Cash-strapped Consumer play that is Costco Wholesale (COST) as well as grocery chain Kroger (KR) and others.

We’ve also called out the inability of restaurants to harness that deflation for their own margins given minimum wage increases and other cost drivers. The latest findings from Fitch Ratings sees restaurant sales slowing this year, and the NPD Group expects traffic will be flat this year, with a 2 percent decline at dine-in restaurants offsetting a 1% increase at quick-service concepts.  We expect confirmation to be had this coming earnings season, and if Kona Grill’s (KONA) 4 percent decline in same-store sales for the December quarter is any indication it’s not going to be pretty.

Still, we know that people need to eat and are continuing to shift toward organic and natural foods and other products, which bodes well for our McCormick & Co. (MKC) and United Natural Foods (UNFI) shares. Recent findings from a new poll conducted by Pew Research Center underscore our bullish position. According to the Pew poll, 55 percent of Americans believe that “organic food, particularly organically grown fruits and vegetables, are healthier than conventional.” The same poll also showed a growing distrust of GMO foods and concern over pesticide use.

A different study conducted by the European Parliament’s Independent Research Service, titled “Human health implications of organic food and organic agriculture,” concluded that eating organic food improves early development, reduces pesticide exposure, strengthens the nutritional value of food, and mitigates disease risks.
We do not see this as a short-term fad and point to a recent report from Research and Markets that forecasts the global market for organic food to grow at “a CAGR of over 14 percent during 2016-2021, on account of high demand for organic food.”

  • Both MKC and UNFI remain Buys at current levels.

 

rogueonecharact-6d3c3120104-originalOn the continued strength of Rouge One at the box office and the news that Content is King investment theme company The Walt Disney Co. (DIS) is firming up plans for a streaming ESPN service, our Disney shares moved higher over the last several days.

The same can be said with our CalAmp (CAMP) shares following management’s presentation at the annual Needham Growth Conference that focused on its expanding market opportunities across fleet management, Connected Car and enterprise asset tracking markets.

Adding Nuance Communications (NUAN)
to the Tematica Select List as Voice Goes Big

Last week was the tech world descended upon Las Vegas for CES 2017. The annual trade show kicks off the new year and introduces a number of new consumer gadgets that we’re likely to see — some this year and others in the coming ones.

Among the sea of announcements, there were a number that focused on one aspect of our Disruptive Technology investing theme and that is the area of voice recognition technology. Over the years we’ve seen various incarnations of this technology, most recently with Siri from Apple (AAPL), Cortana from Microsoft (MSFT), Google Assistant from Alphabet (GOOGL) and Alexa from Amazon (AMZN). Each of these has come to the forefront like in products like Amazon Echo and Google Home that house these virtual digital assistants (VDAs), but for now one of the largest consumer-facing markets for voice interface technology has been the smartphone. Coming in 2016, Parks Associates found that nearly 40 percent of all smartphone owners use some sort of voice recognition software such as Siri or Google Now.

 

 

In 2016, the up and comer was Amazon as sales of its Echo devices were up 9x year over year this past holiday season and “millions of Alexa devices sold worldwide this year.” If you’re a user of Amazon Echo like we are, then you know that each week more capabilities are being added to the Alexa app such as ordering a pizza from Dominos (DPZ), calling for an Uber, checking sports scores and weather to getting holiday cocktail recipes.

As we entered 2017, Amazon announced that Prime members can voice-order their next meal through Amazon Restaurants on their Alexa-enabled devices including the Amazon Echo and Echo Dot. Once an order is placed, Amazon delivery partners deliver the food in one hour or less. Pretty cool so long as you have Amazon Restaurants operating in and around where you live.

 

 

Virtual digital assistants cut across more than just smartphones and devices like Amazon Echo and the recently announced Google Home. According to a new report from Tractica, while smartphone-based consumer VDAs are currently the best-known offerings, virtual assistant technologies are also beginning to penetrate other device types including smart watches, fitness trackers, PCs, smart home systems, and automobiles.

We saw just that at CES 2017 with some landscaping changing announcements for VDAs. Alphabet had several announcements surrounding its Google Home product at CES 2017, including integration into upcoming Hyundai and Chrysler models; and acquiring Limes Audio, which focuses on voice communication systems, and will likely be additive to the company’s Google Home, Hangouts and other products. Microsoft also scored a win for Cortana with Nissan.

While those wins were impressive, the big VDA winner at CES was Amazon as it significantly expanded its Alexa footprint on deals with LG, Dish Network (DISH), Whirlpool (WHR), Huawei and Ford (F). In doing so Amazon has outflanked Alphabet, Microsoft and even Apple in the digital assistant market. To us, that’s another leg to the Amazon stool that offers more support to the share alongside the digital shopping/services, content, and Amazon Web Services businesses. You don’t need to read between the lines to think that we still see big upside to our $975 Amazon price target.

To be fair, Apple originally did not license out its Siri technology and only in June 2016 did it announce that it would open the code behind Siri to third-party developers through an API, giving outside apps the ability to activate from Siri’s voice commands, and potentially endowing Siri with a wide range of new skills and datasets.
Tractica forecasts that unique active consumer VDA users will grow from 390 million in 2015 to 1.8 billion worldwide by the end of 2021.  During the same period, unique active enterprise VDA users will rise from 155 million in 2015 to 843 million by 2021.  The market intelligence firm forecasts that total VDA revenue will grow from $1.6 billion in 2015 to $15.8 billion in 2021.

 

An Overlooked Player in the VDA Segment

Nuance Communications logoThe one drawback when it comes to the VDA market is the players mentioned above have large existing businesses, which means their respective VDA businesses, at least in the next few yeas, will have at best modest influence on their overall financial picture. In keeping with our “buy the bullets not the guns,” coming out of CES 2017 we find ourselves looking at speech technology and voice recognition company Nuance Communications (NUAN).

Nuance’s voice solutions compete in four markets:

  • Healthcare (49 percent of revenue): In this business, Nuance supports clinical documentation workflows and electronic medical record (EMR) adoption through flexible offerings, including transcription services, dictation software for the EMR, diagnostics workflow, and mobile applications. Recently Nuance released Dragon Medical Advisor, an AI Assistant for doctors. More than 500,000 clinicians and 10,000 healthcare facilities worldwide use Nuance’s healthcare solutions, which are sold through customers that include Cerner (CERN), Epic, McKesson (MCK), UPMC, Cleveland Clinic, Siemens, and the Mayo Clinic. Over the last few quarters, Nuance has been transitioning this business from a perpetual license business to a software as a service (SAAS) one, but with that shift expected to be largely completed by the second half of 2017 that revenue drag should be eliminated.
  • Enterprise (20 percent of revenue): This business segment offers automated intelligent self-service solutions that include speech and artificial intelligence (AI) technologies that reduce or replace human contact center agents with conversational systems, across voice, mobile, web and messaging channels. Think of when you call your bank, broker or even consider using the phone to call for a pizza from Dominos (candidly we’re not sure why you would call given the ease of the Domino’s app that can be used on either your smartphone, Apple TV, or Amazon’s Alexa, but hey that’s us). Representative customers include Avaya, BT, Cisco, DiData, Genesys, Huawei, MoshiMoshi, NICE, Telstra, and Verint. Nuance’s customers include: American Airlines, Amtrak, Bank of America, Barclays, Dominos, Delta, Deutsche Telekom, e*trade, ING Bank, Lloyds Banking Group, T-Mobile, Telefonica, Telstra, and Vodafone.
  • Mobile (19 percent of revenue): Here Nuance offers a portfolio of specialized virtual assistants and connected services built on voice recognition, text-to-speech, natural language understanding, dialog, and text input technologies across automotive, device and mobile operator solutions. With regard to automotive in particular, Nuance has announced Daimler, Ford and BMW as customers, and as evidenced at both CES 2017 and the 2017 North American International Auto Show we are nearing the tipping point for the Connected Car, which should bode well for this business segment.
  • Imaging (12 percent of revenue): In this division, segment Nuance provides software solutions and expertise that help professionals and organizations to gain optimal control of their document and information processes. Customers and partners include Ricoh, Xerox, HP, Canon, and Samsung. This business has been bumping along at around 11 to 12 percent of revenue the last few years as Nuance has reorganized itself over the last several quarters.

When we step back from Nuance’s business segments and look at the overall market growth for voice recognition technologies, BCC Research sees it growing to $184.9 billion in 2021, up from $90.3 billion in 2015. Breaking these two markets down into Consumer and Enterprise markets, BCC expects the Consumer market to grow to $95.9 billion in 2021 from $54.4 billion in 2016 and the Enterprise market to reach $79.0 billion by 2021 up from $44.0 billion in 2016. Viewed against that larger market, we see ample room for Nuance to expand beyond the $1.9 billion in revenue it generated in 2016.

Over the last few years, after delivering significant revenue growth during 2010-2014,  the pace of revenue growth, while positive, has dipped. Part of that is due in part to erosion for the transcription business in the company’s Healthcare business, as well as the shift from a contract business model to a Cloud based one that offers integrated solutions. In 2016, roughly 70 percent of the company’s revenue stream was recurring in nature, up from 65 percent or so in 2015.

What this tells us is the bulk of the revenue shift is largely behind the company. Like a turning tanker, these changes take time, but once they catch momentum they tend to pick up speed and Nuance should see its recurring revenue growth to 70-75 percent of overall revenue during 2017. As investors, we like the nature of a recurring revenue model, given that it affords far greater visibility and shares tend to be rewarded with better multiples given that predictability.

We’ve seen the power of this business shift already at Adobe Systems (ADBE), which now has more than 70 percent of its revenue recurring in nature, up from 19 percent in 2011, and its shares that have climbed to just over $108 from $28 at the end of 2011.

Looking Ahead to 2017 for Nuance

The growth businesses at Nuance include its automotive, voice biometrics, omni-channel customer care, unified print and scan solutions, Dragon Medical, CDI and diagnostics. Paving the way is the company’s most recent quarterly bookings, which were up 45 percent year on year. Longer-term we expect more applications across the consumer electronics market to develop. As noted above, Whirlpool is working with Amazon and odds are that means before too long we’ll see VDAs built into various appliances across the kitchen and laundry rooms. In our view, that’s just scratching at the surface.

The big question circling Nuance is the competitive landscape, particularly the move by Amazon, Alphabet and Apple to open up their application programming interface (API) to third-parties. Just like Rackspace (RACK) specializes in Cloud computing, but thus far has remained unharmed by Amazon’s AWS, Nuance specializes in selling to global brands, health care, and large corporations, which are not likely to utilize Google’s free API for its business needs. As you’ve probably notice with Android, one of the issues with a free API is malware and cyber hacking.

It’s also not lost on us that Alphabet recently acquired Limes Audio to improve its voice recognition capabilities. As anyone who has used Apple’s Siri knows, it’s far from perfect in voice recognition and voice to text. In our view, this means Nuance could be an attractive candidate for a larger player that needs to improve its technology positioning.

 

What are NUAN shares worth?

In looking over historic multiples, including P/E and Enterprise Value to Revenue, and applying them to consensus 2017 earnings expectations that call for EPS of $1.59 on revenue of just over $2 billion, we see upside to $21 and downside to just under $15.

At the current share price — $15.45 as of market close on 1/10/17 — NUAN shares are trading at under 10x expected 2017 earnings of $1.59 per share. We certainly like that risk-to-reward trade-off in NUAN shares at a time when voice technology is expanding its market size across the device, automotive and Internet of Things markets.

 

Bottomline on Nuance Communications (NUAN)
  • We’re adding NUAN shares to the Tematica Select list with a price target of $21.
  • Because this is a new position, we are holding off with a stop loss recommendation at this time, preferring to use near-term weakness to scale into the position and improve the cost basis.

 

* We strongly recommend you use the link below to download the full report on Nuance Communications (NUAN), which includes background on our Disruptive Technology thematic as well as financials on NUAN.

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2016 – Another Year Thematic Investing Beats the S&P 500

2016 – Another Year Thematic Investing Beats the S&P 500

Looking back 2016 was quite the year with Greek debt relief, the EU’s tax crackdown, the sale of Yahoo ([stock_quote symbol=”YHOO”]) and rumored takeover of Twitter ([stock_quote symbol=”TWTR”]), the unexpected Brexit vote and the ensuing British Pound Sterling’s plunge to multi-decade lows, the Italian referendum followed by Prime Minister Renzi’s resignation, the troubled Monte dei Paschi (BMDPY) bailout, Russian hacking, OPEC’s deal to cut output, and one of the most vicious presidential campaigns culminating in Donald Trump’s election, followed by the Fed’s lone rate hike in 2016 and a corresponding surge in the US dollar. We think we would be hard-pressed to find many that predicted all of those happenings this time last year.

We also think there were few and far between that thought back in January 2016 that the S&P 500, the preferred metric among fund managers, would have climbed 9.5% by the end of 2016. Let’s remember, after the first several weeks of 2016 that index was down just over 8.7%. That makes the rebound and climb higher over the balance of 2016 that much more impressive if you bought the market.

The problem is, despite all the mutual funds and ETFs that are out there, very few investors actually “buy the market.” Buying the market can, at times, deliver rewards as we saw in 2016. According to Openfolio, the average investor in 2016 didn’t “buy the market” and instead had a gain of roughly 5%, due in part to having their portfolio too concentrated in stocks that didn’t perform. Let’s face it, if you didn’t own shares of Goldman Sachs in the back half of 2016, odds are you didn’t beat the Dow Jones Industrial Average.

Lest we let the year’s heady gains of cloud our judgment, for every 2016 — where buying an ETF that mimicked the performance of the S&P 500 or the Dow worked well by year’s end — there tends to be a year like 2015 when the S&P 500 fell nearly 1%. While we tend to hear about the great bull market that transpired during the late 1980s and 1990s, we also have to remember that if you were an investor that, “bought the market” in early 2000, it would have taken you until July 2007 to recoup your losses. Then came the Great Recession, which meant if you held “the market,” it meant meaningful positive returns would have eluded you until after March 2013.

As we like to say perspective is everything. That same perspective also reminds us that the world is a very different place than it was in the last part of the 20th Century. Consider that back then there was no such thing as the smartphone, the Internet, Amazon, streaming content, online shopping, mobile payments, and texting only caught on toward the end of the 1990s. Back then we also saw a labor force growing versus the relatively stagnant levels since the financial crisis.

We live in a very different world today compared to a few decades ago, which makes comparisons more like apples to oranges than apples to apples. There continue to be many transformative elements at play today and we are only now starting to see the impact of some, like mobile commerce and artificial intelligence, as well as augmented and virtual reality, that will likely see that transformation continue. That’s before we contemplate what will happen once President-elect Trump becomes President Trump. While we are optimistic about the pending policy changes and what they could mean for businesses and stock prices, they have yet to be fully spelled out, which makes it hard to assess their potential impact.

As we say at Tematica Research, only by thinking differently than the herd can you truly outperform the market. We believe that traditional sector investing is dead, and investors need to position themselves to capture the shifting landscapes that are resulting in pronounced tailwinds and headwinds. That thinking led to our creation of the Thematic Index, which reflects our 17 investment themes across more than 150 stocks.

 

So how did the Thematic Index perform in 2016?

Once again it outperformed the S&P 500 in 2016, marking the sixth consecutive year it has done so. Some of our stronger performing thematics in 2016 included Tooling & Re-Tooling, Economic Acceleration/Deceleration, and Scarce Resources.

Were all of our 17 themes strong performers in 2016? Of course not, but the overall performance speaks to having a balance thematic portfolio rather than favoring any one particular theme.

Before accounting for dividends, eight of our investment themes outperformed the market by a wide margin, one was essentially in line with the S&P 500 and eight underperformed with two of those under performing themes down slightly for the year. There were a number of high fliers across our 17 investment themes, including Grand Canyon Education ([stock_quote symbol=”LOPE”]), iRobot ([stock_quote symbol=”IRBT”]), IDEXX Laboratories ([stock_quote symbol=”IDXX”]) and Mueller Water Products ([stock_quote symbol=”MWA”]), Parker-Hannifin ([stock_quote symbol=”PH”]), Wynn Resorts ([stock_quote symbol=”WYNN”]), and ZELTIQ Aesthetics ([stock_quote symbol=”ZLTQ”]) to name just over a handful. The index was also dealt a helping hand from M&A activity during the year, which led to hefty gains in Lifelock, LinkedIn, and ARM Holdings.

It wasn’t all peaches and cream, as the Thematic Index felt the weight associated with drops in Stonemore Partners, Corrections Corp. of America ([stock_quote symbol=”CXW”]), Nuance Communications ([stock_quote symbol=”NUAN”]) and Under Armour ([stock_quote symbol=”UAA”]).  We’ll reassess those under-performing positions to see if either the thematic drivers that first landed them in the Thematic Index are intact or has the business has shifted such that they are no longer in the thematic slipstream. During the December quarter, we exited Corrections Corp. of America and Shake Shack ([stock_quote symbol=”SHAK”]), replacing them with OSI Systems ([stock_quote symbol=”OSIS”]) and Insulet Corp ([stock_quote symbol=”PODD”]).

We’ll continue to make refinements and needed adjustments to the Thematic Index as dictated by the shifting and intersecting landscapes of economics, demographics, psychographics, technology and other key factors to identify the companies best positioned to ride the thematic transformation and avoid those companies that either can’t or won’t adjust their business model. In our view, those latter companies are poised to hit a headwind that will not only impact their business, but their stock price as well. When it comes to investing minimizing the number of underperforming positions can be as important as identifying the winners if you’re looking to beat the market. When it comes to investing minimizing the number of underperforming positions can be as important as identifying the winners if you’re looking to beat the market.

 

The Best Stock for 2017

The Best Stock for 2017

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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.

We’re back! We hope you enjoyed Christmas and the year-end holidays.

We’ve closed the books on 2016 and thanks to the push higher since early November, the S&P 500 closed the year up 9.5 percent. The other major market indices — the Dow Jones Industrial Average and the Nasdaq Composite Index — also finished out 2016 up more than 13 percent and 7 percent, respectively. That’s far better than most thought the market would do back some 11 months ago and certainly much better than what we were looking at towards the end of last summer.

 

indices

 

Even with those year-end results, we can’t lose sight of the fact the market has faded as we closed out 2016. While there was fervent hope around mid-December that the Dow would cross the 20K line before year’s end, the index faltered as of late, which could be attributed to a combination of profit taking and a sobering view over how far, how fast the stock market has moved since the election in November.

 

Before we jump on the 2017 train,
let’s take a moment to look back at 2016

In hindsight, 2016 was quite a year with Greek debt relief, the EU’s tax crackdown, the sale of Yahoo (YHOO) and rumored takeover of Twitter (TWTR), the unexpected Brexit vote and British Pound Sterling’s plunge, the Italian referendum and the troubled Monte dei Paschi (BMDPY) bailout, Russian hacking, OPEC’s deal to cut output, and one of the most vicious presidential campaigns that culminated with Donald Trump’s election, and was followed by the Fed’s lone rate hike in 2016 and a surge in the US dollar. We think we would be hard-pressed to find many that predicted all of those happenings this time last year.

 

The Resiliency of the Markets

Despite all of those happenings, the Dow, S&P 500 and Nasdaq all hit historic highs during the year, even though 2016 earnings expectations were dialed back throughout the year. At the start of 2016, analysts were projecting year-over-year earnings growth of 5.3 percent on revenue growth of 4.4 percent for the year. As we all know by now, during the first half of the year the S&P 500 companies reported falling revenues and earnings, with the second half delivering better performance. Sifting through that performance data, however, we find 4Q 2016 earnings will dip following the 6.4 percent sequential increase achieved in 3Q 2016.

The bottom line is earnings delivered by the S&P 500 group of companies is likely to have increased less than 1 percent in 2016 compared to 2015, leaving S&P 500 earnings relatively unchanged since 2014. To be fair, there have been several drags on those results, including big earnings declines from energy companies as well as other such contractions at telecom, industrials and materials companies. While there are prospects for a reversal at energy companies over the coming quarters, the reality is the S&P 500 is closing 2016 with a P/E ratio near 18.9 — remember that number.

Looking back, the S&P 500 peaked on December 13th, following investor enthusiasm for potential tax cuts, deregulation and fiscal spending that on a combined basis would jump-start economic growth. Since December 13th, however, the S&P 500 was trading sideways until last week when it fell roughly 1 percent. We see this cooling off as reflection of the sobering view that not only has the market move been too far, too fast, as well as the growing realization that not only did the pace of economic growth slip in the fourth quarter, but odds are the impact of Trump policies will not be felt until at least the second half of 2017 at the earliest.

We’d note the Tematica Select List had several positions that handily beat the S&P 500’s December quarter return of 3.3 percent. We had strong showings during the December quarter from our AMN Healthcare (AMN; Aging of the Population), AT&T (T; Connected Society), Disney (DIS; Content is King), Dycom Industries (DY; Connected Society), and United Natural Foods (UNFI; Food with Integrity) positions.

The Latest Set of Expectations from Wall Street Strategists for 2017

As a whole, the strategists on Wall Street see the S&P 500 climbing to the 2,300 to 2,500 range, for a potential increase of 2.5 to 11.5 percent in 2017. The range for expected 2017 S&P 500 company earnings spans from a low of $123.90 to a high of $134 per share.

Averaging out those 15 forecasts, the consensus price target for the S&P 500 is 2,356 and consensus earnings expectations for the S&P 500 group of companies lands at $127.46, up 5 percent and 7.4 percent, respectively.

Based on those averages, the P/E multiple accorded to the S&P 500 to hit that average price target is 18.5x. Given that expected modest contraction from the current 18.9x multiple (remember, that’s the number we said to keep in mind), this tells us one of the key drivers of stock prices next year will be earnings growth. As such, we’ll continue to focus on those companies that are poised to grow their earnings faster than the S&P 500. By this, we mean real earnings growth, not spanx-led earnings growth that hinges more on buybacks, which give a cursory appearance of improved fundamentals rather than true operating profit growth and margin expansion. In other words, we’ll be seeking growth in 2017 and beyond, much like we have with a number of our existing positions.

As we sharpen our pencil to kickoff 2017, the vast, vast majority of companies have yet to deliver their December quarter results, which are likely to include some initial or updated views on what they see coming over the coming quarters. We’ve already heard several mention the potential impact of continued dollar strength, and we suspect we are bound to hear more about the impact of higher energy costs that will flow through to higher gas prices should OPEC production cuts stick. We also expect to hear more on the impact of higher minimum wages given that 19 states are boosting minimum wages in 2017.

 

What the Data is Telling Us

Towards the end of 2016 in the Monday Morning Kickoff, we touched on the negative revisions in the Atlanta Fed’s GDP Now 4Q 2016 forecast to 2.5 percent, and pointed out that even after that downtick it stood well above the 4Q 2016 forecast offers by the NY Fed and several investment banks. Last week it was rather quiet on the data front, but the data we did get — November Pending Home Sales and the December Chicago PMI — both missed expectations. While the December Chicago PMI dipped in December to 54.6 from November’s 57.6, we’d note its fourth quarter average of 54.3 is the highest it has been in two years.

What we found most interesting in the December Chicago PMI report was the findings from a “special question” that pertains to the outlook for 2017 — over half the respondents said they expect their business “to prosper, aided by tax reforms and deregulation.” Not to be overly cynical, but the risk we see is those expectations being ahead of themselves vs. what we’re likely to see near-term. The likely reality is those expectation hinge on policies President-elect Trump has yet to flesh out fully, and while we too are optimistic, we see a two steps forward, one step back kind of progress in the coming months for the economy and the stock market.

As you can imagine, we’re rather curious to see the Atlanta Fed’s next update to GDP Now that lands on Jan. 6 as well as updates for those other GDP forecasts. Odds are we will still see a downtick in 4Q 2016 GDP expectations compared to 3Q 2016, but we’ll have a better sense after this week’s usual start of the month data. In this case, it will include the December ISM indices as well as the December PMI readings from Markit Economics and the usual Employment Data build up that culminates with the December Employment Report. In other words, by the end of next week, we should have a pretty good feel for 4Q 2016 GDP. We’ll also get some insight into the Fed’s December rate hike as we digest those FOMC meeting minutes next week.

 

While Lite on Earnings, the week ahead includes two key events 

From an earnings perspective, things are rather lite this week, but we do have the Citi 2017 Internet, Media & Telecommunications Conference, which is likely to have some commentary relevant to our Amazon (AMZN) shares. Also, this week is CES 2017, the annual global consumer electronics and consumer technology tradeshow, that should generate quite a bit of news surrounding new gadgets and technologies. In the past, this annual conference has shed some light on what’s coming for our Connected Society and Disruptive Technology investment themes and we see that happening once again.

Among the CES news flow, we’ll be listening for any and all commentary regarding organic light emitting diode demand, and what that means for our Universal Display (OLED) shares — more on why further down. Comments on wireless/wireline network build outs and 5G deployments at the show as well as those for the Connected Car should bode well for our Dycom Industries (DY) and CalAmp (CAMP) shares.

  • All three stocks — OLED, DY and CAMP — are rated buys at current levels.

 

Also on the dais at CES will be Amazon (AMZN) as well as Under Armour (UAA) — not your typical presenters at the largest electronics show in the world. Amazon will be taking the stage to discuss artificial intelligence, digital assistants and its Alexa family of products. Ahead of tomorrow’s conference kickoff, Lenovo has announced it has partnered with Amazon to offer up the Alexa digital assistant in its own digital assistant device called Smart Assistant. We’ve noted a similar deal with Hyundai in the past that puts Alexa into the car, and suspect we will be hearing more such announcements in the coming months.

Under Armour CEO Kevin Plank, on the other hand, will give a keynote at CES 2017 that will likely discuss connected fitness, including UA’s UA Record, MapMyFitness, Endomondo, and MyFitnessPal, all of which have been unified to run on Amazon Web Services… yeah, that company again.

  • We continue to rate both AMZN and UAA shares buy at current levels.

 

As that event dies down, the North American International Auto Show of Detroit 2017 will soon take its place only to be followed by the presidential inauguration on Jan. 20th. At that show, we’ll be listening for developments on the Connected Car, Connected Truck and telematics front and what it may mean for our CalAmp shares. Also too, we’ll be eyeing new car models to see if they are incorporating OLED technology for in-car lighting and instrumentation panel displays.

If you were expecting a calm before the 4Q 2016 earnings storm, our advice to you is enjoy the quiet while it lasts. As 2016 moves further and further into our rearview mirror, and we’ll be looking ahead in the coming weeks to take advantage of any near-term pullback in the market as expectations come to grips with near-term economic reality. We suspect this means we’ll find share prices of companies we want to own at better prices than we’ve seen in recent weeks.

This has us excited to enter 2017 and we hope you are too.

 

Tematica Best Pick for 2017

As we begin 2017, several positions on our select list have been named “best picks for 2017” at several bulge bracket Wall Street firms:

  • Amazon (AMZN; Connected Society) – Top Pick for 2017 at Evercore
  • Facebook (FB; Connected Society) – Top Pick for 2017 at Evercore
  • Alphabet (GOOGL: Asset Lite) – Top Pick for 2017 at Evercore
  • Starbucks (SBUX; Guilty Pleasure) – Top Restaurant Pick for 2017 at Nomura

As much as we’d like to claim surprise, we have to admit that we’re not. We just wonder if those firms are starting to recognize the thematic drivers behind those companies and their businesses that led us to add them to our select list in the first place.

Ever since the 2016 presidential election, the domestic stock market has been on fire, which means we need to look past the current market move and any pullback that is likely to happen as 2017 gets underway. Given our thematic way of looking the world, instead of the herd centric sector perspective, we see a number of tailwinds powering on in 2017. For example, we don’t see any slowdown in the shift toward digital commerce, nor do we see it abating for the growing consumer preference toward streaming media. Both of those, as well as other drivers, will continue to pressure already capacity restrained mobile and broadband networks.

That’s certainly an enticing opportunity for investors, but as we move into 2017 we are also at a key tipping point for organic light emitting diode (OLED) display technologies. In the past we’ve seen the impact of similar Disruptive Technologies thematic companies as we call them when TV moved from bulky and hot cathode ray tube displays to much sleeker liquid crystal display (LCD) screens and then again when light emitting diodes became the backlight source of choice for LCD TVs, collapsing their thickness and heat emission in the process. We’ve already started to see OLED technology replace LCD displays in the smartphone market, helping improve thickness and battery life in Samsung’s smartphone models.

In 2017, more smartphone companies, including those based in China as well as Apple (AAPL) are poised to replace existing smartphone displays with OLED based ones. A recent 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 speculation, we continue to hear more reports of increasing industry capacity to meet rising demand from smartphone, TV, wearables and other markets that are set to adopt OLED technology. Both LG and Sony (SNE) recently announced they will be bringing its first OLED-based TV to market, debuting the products at 2017 CES in January. If history holds, it means a slew of competitive responses from Samsung, and other mainstays in the TV market. Soon after we have the North American International Auto Show (Jan. 8-22) and we’ll be looking for a variety of used of OLEDs at the show including lighting and instrumentation.

To date, industry manufacturing capacity for organic light emitting diodes has been constrained industry, but existing players such as Samsung and LG as well as newer entrants are adding organic light-emitting diode capacity to meet demand from the smartphone market as well as new applications that include OLED TVs, wearables, virtual reality and augmented reality, and for emerging opportunities including automotive OLED display and lighting.

 

OLED technology is poised to hit a tipping point during 2017

Signposts to watch include orders for semiconductor capital equipment that are used in manufacturing OLED displays. Simply put, the industry has to enough manufacturing capacity in place to meeting expected demand. Breaking down new order flow at companies like Applied Materials (AMAT), Veeco Instruments (VECO) and Aixtron AG (AIXG) reveals these orders have already begun to mount. More evidence that 2017 is poised to be the OLED tipping point.

From an investor perspective, those three capital equipment companies are not pure-plays on the OLED tipping point, just beneficiaries. Much the way Cree Inc (CREE) was the pure play on the light emitting diode (LED) wave of disruptive technology, Universal Display (OLED) is the OLED pure-play. Much the way Qualcomm (QCOM) has a push-pull between its chip and higher margin licensing business, so too does Universal Display with its OLED chemicals and licensing business. Moreover, Universal already counts the big players in the OLED industry — Samsung and LG — as customers. As their capacity and capacity from others ramps, so too should demand for Universal’s chemical business.

We see several catalysts coming in the first half of 2017, including the aforementioned 2017 CES as well soon to follow events such as Mobile World Congress 2017 and CeBIT 2017, which should propel OLED shares higher. As products announced at those events launch we are apt to see the Wall Street following grow for OLED shares, especially once we learn Apple’s plans for its next iPhone. Keep in mind the Apple halo cuts both ways, which means OLED shares could be volatile, but we would use that to build the position throughout 2017 given that 2018 looks to be a better volume year.

 

Adjusting the Contender List

Over the last few weeks, we’ve been reflecting not only on our select list positions, but also the Tematica Contender List. Given the way stocks have run over the last eight weeks and prospects for a pullback, odds are there will be more than a few we’ll want to add. That means making some room on the contender list. As such, we’re removing Verizon (VZ), EPR Properties (EPR), Lifelock (LOCK), Immersion (IMMR) and comscore (SCOR) from the list of prospects. While it’s never fun to ship off your toys, we know that at some point there’s a pretty good chance they could one day make their way back onto the contender list and perhaps even the select list.

Click here to see the full Contender List (listed below the current holdings)

 

Tematica at Business Insider

We hope you enjoyed the break over the holidays, but we were a tad busy spreading the word on thematic investing, which included a new article we penned for Business Insider. If you missed, “Here’s how thematic investing really works” you can read it by clicking here. It offers some insight into how we think not only about some of our existing themes, but also sheds some light on how we think about potential ones. We also point out some of the faults we find with would be thematic ETFs. Give it a read, we’ll think you’ll enjoy it.

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