Category Archives: Digital Lifestyle

When it comes to Fitbit (FIT), is now the right time to jump in?

When it comes to Fitbit (FIT), is now the right time to jump in?

If you saw a great product on sale at the store, you would be excited, maybe even ecstatic, if it was one you had been looking at for some time. The same is true with stocks!

We all tend to get caught up in the emotional response of the market moving lower, which usually is viewed as a bad thing, rather than an OPPORTUNITY to buy shares at an even better price. When viewed through that lens, who doesn’t love it when stocks go on sale… so long as the fundamentals and business drivers remain intact.

Here’s a great example — at the Consumer Electronics Show held earlier this month, Fitbit ([stock_quote symbol=”FIT”]) announced its first smart watch, dubbed the Blaze  . . .

Set a Protective Stop on a Winning Position to Lock in a Gain of More than 20%

Set a Protective Stop on a Winning Position to Lock in a Gain of More than 20%

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Ratings changes included in this dated post

  • Changing our rating on USA Technologies (USAT) to “Sell”, booking a near 30% return since our “Buy” rating was issued.
  • Updating Kraft Heinz (KHC) to a “Sell” rating, marking a hefty double-digit percentage return.
  • Closing out Disney (DIS), Under Armour (UA), Netflix (NFLX), LifeLock (LOCK), American Airlines (AAL) and Fitbit (FIT) — updated all with a “Sell” rating.
  • That leaves Physicians Reality Trust (DOC), Philip Morris (PM), American Capital Agency (AGNC), AT&T (T) and Regal Cinemas (RGC) in the Tematica Select List — all of which have dividend yields between 4.6% (Philip Morris) and 14% (American Capital Agency). Given the nature of their businesses as well as those dividend yields, those shares are apt to drum up investor interest as people look for safe havens.Let’s continue to hold these shares and “clip our dividend coupons” along the way.
  • Also, we recommend investors add some protection in the form of the ProShares Short S&P 500 ETF (SH), which trades in the opposite direction of the S&P 500.

What began as a bad start to 2016 only has gotten worse over the last few days. There are a number of reasons behind this move lower as II see the stock market, at best, moving sideways through earnings season, but more likely to come under additional pressure as expectations are scaled back. When I say expectations, I mean those for global growth, oil prices, corporate earnings and so on. You’ve seen me write more than a few times about the aggressive earnings expectations for the S&P 500 this year and the revisions lower that I’ve been expecting have only just begun.

In an environment like this, it tends to be shoot first and ask questions later, particularly as growth expectations get reset. While it is tempting to weather the storm, my preference is to lock in existing gains, limit losses and, above all, preserve capital at times such as this one. I know times like now, when the market seemingly goes down day after day, can be frustrating, if not confusing. I would not be surprised if you were having flashbacks to March 2008, wondering if we are heading for a repeat of what happened from May 2008 to March 2009, a period of intense pain for the stock market.

The famous phrase, “better safe than sorry,” comes to mind. For us, that means exiting the following positons:

  • Changing our rating on USA Technologies (USAT) to “Sell”, booking a near 30% return since our “Buy” rating was issued.
  • Updating Kraft Heinz (KHC) to a “Sell” rating, marking a hefty double-digit percentage return.
  • Closing out Disney (DIS), Under Armour (UA), Netflix (NFLX), LifeLock (LOCK), American Airlines (AAL) and Fitbit (FIT) — updated all with a “Sell” rating. 
  • That leaves Physicians Reality Trust (DOC), Philip Morris (PM), American Capital Agency (AGNC), AT&T (T) and Regal Cinemas (RGC) in the Tematica Select List — all of which have dividend yields between 4.6% (Philip Morris) and 14% (American Capital Agency). Given the nature of their businesses as well as those dividend yields, those shares are apt to drum up investor interest as people look for safe havens.Let’s continue to hold these shares and “clip our dividend coupons” along the way.
  • Also, we recommend investors add some protection in the form of the ProShares Short S&P 500 ETF (SH), which trades in the opposite direction of the S&P 500.

Over the next few weeks, we could get a bounce in the market here and there, but I would feel much better putting capital to work with a strong conviction that the storm has passed. As such, I will keep one eye on the market (the indicator of price) and the other on our investing themes as I look for data points that show companies whose businesses will continue to perform regardless of what’s happened in the stock market over the last month or will happen in the next month or next few months. If you were with me while I write this update, you would hear me muttering questions like some of these:

  • Has the drop in the stock market changed the outlook for cyber attacks and related threats in 2016? Safety & Security
  • Despite the unseasonably warm temperatures in the eastern United States thanks to El Niño, has the California drought situation been eradicated? Scarce Resources
  • Has the shift toward streaming and other digital content consumption slowed because the stock market has lost close to $1 trillion in value, lessening the demand for content? Connected Society
  • By some strange hocus-pocus, have people been “de-aged” so that less than 15% of the population is over 65 years old? Aging of the Population
  • As if by magic, did all of those people with little to no retirement savings suddenly land on firm financial footing? Aging of the Population
  • Over the last few days, has the costly and deadly impact of obesity and the prevalent condition of so many people being overweight been reversed? Fattening of the Consumer
  • Have retailers, both brick & mortar as well as online, shifted to only taking cash and checks as payment for goods and services? Cashless Consumption
  • Are people all of a sudden smoking less in the last few days? If anything, I would argue those who do indulge in this guilty pleasure are probably smoking more and having an extra drink or two along with it. Guilty Pleasure/Affordable Luxury
  • Has the domestic middle class started to expand dramatically in January? Rise and Fall of the Middle Class

And so on… Foods with Integrity… Asset-Lite Business Models… Economic Acceleration/Deceleration… Tooling & Retooling

The bottom line is these investing themes of ours continue to benefit from the shifting and evolving landscape that is the intersection of the global economy, changing demographics, disruptive technologies, regulatory mandates and other tailwind drivers.

As I said earlier, the stock market is simply the indicator of price.

If you saw a great product on sale at the store, you would be excited, maybe even ecstatic, if it was one you had been looking at for some time. The same is true with stocks!

We tend to get caught up in the emotional response of the market moving lower, which usually is viewed as a bad thing, rather than an OPPORTUNITY to buy shares at an even better price. When viewed through that lens, who doesn’t love it when stocks go on sale… so long as the fundamentals and business drivers remain intact. To me, this says we’ll be able to buy back a number of the growth positions at the same or lower prices when the current market storm has cleared and things have settled down. Let’s be prudent and patient together.

Apple plus Facebook plus Google equals death to sector investing

Apple plus Facebook plus Google equals death to sector investing

It seems that at least once or twice per week we are asked, in some form or another, one of the following questions:

• What sectors do you rate as a buy right now?
• Do you like Financials? What about Technology?
• What is going to be the next big sector?
• What sectors do you think are best in bull markets? And which ones are best for sheltering gains in bear markets?

Our short answer to any sector questions is simple: we like NONE of them. But, at the same time, we also can say we like ALL sectors. Or more specifically, we like certain aspects of every sector, while we also dislike aspects of all sectors.

Confused? Guess it’s not so simple of an answer.

In this special edition of Tematica Insights we explain why thinking of investments from a sector perspective is out-dated at best, and fatally flawed at worst. Thinking of investments from a sector perspective is out-dated at best, and fatally flawed at worst. It’s over simplifying to identify any one or two sectors as having the most potential. In any sector, there will be some companies that seize on a new opportunity faster than others as new trends or themes emerge in today’s world.

Click the link below to share this free special report on a smarter approach over sector-based investing:

Download Monday Morning Kickoff

 

 

Companies Mentioned
  • Alphabet (GOOGL)
  • Amazon Prime (AMZN)
  • American Water Works (AWK)
  • Apple (AAPL)
  • Chipotle Mexican Grill (CMG)
  • Etsy (ETSY)
  • Exxon (XOM)
  • Facebook (FB)
  • InterDigital (IDCC)
  • McDonald’s (MCD)
  • Netflix (NFLX)
  • Qualcomm (QCOM)
  • Royal Dutch Shell (RSH.A)
  • Shopify (SHOP)
  • Tesla Motors (TSLA)
Turn off the music, close up the bar and call it a night

Turn off the music, close up the bar and call it a night

While the “bad news is good news” move in the market over the last few days is decidedly more enjoyable than those gut-wrenching market falls of late, it’s like a party that goes on for too long; at some point someone has to turn off the music, close up the bar and call it a night.
We’ve already seen some warning signs that it might be time to head out before things get awkward in the form of negative earnings pre-announcements for several companies.

 

In this week’s issue of Tematica Insights:

  • With the September ISM Manufacturing Survey out, what does it mean for inflation and any potential Fed action on rates later this year.
  • Is this a good time to jump on buying opportunities with all the negative earnings pre-announcements coming out?
  • China’s adoption of Western diet demonstrates how thematics can play-out in society.
  • Tematica Select List company Skyworks ([stock_quote symbol=”SWKS”]) makes a move, which has adds an interesting wrinkle to our Connected Society thematic.

Download Monday Morning Kickoff

 

 

Companies Mentioned
  • Alcoa (AA)
  • Amazon.com (AMZN)
  • American Airlines (AAL)
  • Apple Inc. (AAPL)
  • Bank of America (BAC)
  • Caterpillar (CAT)
  • Chegg Inc. (CHGG)
  • ConAgra (CAG)
  • Corning Inc. (GLW)
  • Dunkin’ Brands (DNKN)
  • DuPont (DD)
  • FedEx (FDX)
  • Hewlett Packard (HPQ)
  • Illumina (ILMN)
  • Immersion Corp. (IMMR)
  • Kimco Realty (KIM)
  • Lifelock (LOCK)
  • Merk & Co. (MRK)
  • Netflix (NFLX)
  • Nu Skin (NUS)
  • Palo Alto Networks (PANW)
  • PayPal (PYPL)
  • PMC-Sierra (PMCS)
  • Skyworks Solutions (SWKS)
  • Starbucks Inc. (SBUX)
  • Swift Transportation (SWFT)
  • Synaptics Inc. (SYNA)
  • Taiwan Semiconductor (TSM)
  • The Container Store (TCS)
  • U.S. Global Jets ETF (JETS)
  • United Natural Foods (UNFI)
  • Verizon Communications (VZ)
  • Wal-Mart (WMT)
  • Walt Disney (DIS)
  • Whole Foods Market (WFM) Xylem, Inc (XYL)
  • Yum! Brands (YUM)
Recent data is fanning the flames of uncertainty

Recent data is fanning the flames of uncertainty

3Q15 was a blow to consumer confidence, and fanned the flames of uncertainty – one thing the stock market does not like.

Earlier this week we closed the books on September, and we all know the market ended the month on a weak note.

Taking a step back, the September quarter was mired with issues — the Greek Crisis, the devaluation of the Chinese Yuan, the accelerated decline of the Chinese economy, the back and forth of the “hike, no-hike” by the Fed, and more — all of which pointed toward a slowing domestic economy. The third quarter was a blow to consumer confidence, and fanned the flames of uncertainty, and we all know uncertainty is one thing the stock market does not like. Neither do we, and we suspect you and your clients don’t either.

In this week’s issue of Tematica Insights:

  • A look at PMI Manufacturing data, a miss on the Employment Report, and what else is to come on the missed earnings front.
  • Why we are not “buying the dip” this time.
  • iPhone shipment numbers: a good things for more than just Apple ({stock_quote symbol=”AAPL”]).
  • The Force is with Disney {stock_quote symbol=”DIS”]).

Download Monday Morning Kickoff

 

COMPANIES MENTIONED
  • American Airlines (AAL)
  • Apple (AAPL)
  • Bank of America (BAC)
  • Caterpillar (CAT)
  • ConAgra (CAG)
  • Dunkin Brands (DNKN)
  • FedEx (FDX)
  • Hewlett-Packard (HPQ)
  • Skyworks Solutions (SWKS)
  • Swift Transportation (SWFT)
  • Taiwan Semiconductor (TSM)
  • The Walt Disney Company (DIS)
  • Whole Foods Market (WFM)
A return of the market roller coaster ride we experienced in August

A return of the market roller coaster ride we experienced in August

The calendar has officially turned to Fall here in the United States. Of course, on the East Coast, where Tematica is based, we’ve had days that haven’t felt much different than the dog days of summer. But the level of pumpkin-spice “everything” in the stores is what we call a “confirming data-point” for the changing season, even if the weather still feels like Summer.

And while the calendar never stops, so too does the drumbeat of the market and the flow of economic data.  In this week’s edition of Tematica Insights, we provide subscribers with:

  • A first look at the trifecta of flash PMI data from China, the Eurozone and the U.S. — what it means for industrials such as Ingersoll-Rand (IR), Honeywell (HON), General Electric (GE), Crane (CR) and Caterpillar (CAT)
  • As we head into the quiet period, we take a look at the impact of global manufacturing data and other economic data can have on third quarter earnings for U.S. Securities.
  • We take a look at confirming data points on several thematics, including Cashless Consumption, Safety and Security and the Connected Society.
  • Adding a couple of new names to our shopping list as we look for opportunities in the near-term market.

Download Monday Morning Kickoff

 

 

 

 

COMPANIES MENTIONED

  • Amazon.com (AMZN)
  • American Airlines (AAL)
  • Apple (AAPL)
  • Caterpillar (CAT)
  • Chegg Inc. (CHGG)
  • ComScore (SCOR)
  • Corning Inc. (GLW)
  • Crane (CR)
  • Facebook (FB)
  • First Trust NASDAQ CEA Cybersecurity ETF (CIBR)
  • General Electric (GE)
  • Google (GOOGL)
  • Honeywell (HON)
  • Immersion Corp. (IMMR)
  • Ingersoll-Rand (IR)
  • Intel (INTC)
  • Kimco Realty (KIM)
  • Lifelock (LOCK)
  • Merk & Co. (MRK)
  • Microsoft (MSFT)
  • Netflix (NFLX)
  • Palo Alto Networks (PANW)
  • PayPal (PYPL)
  • PureFunds ISE Cyber Security ETF (HACK)
  • Skyworks Solutions (SWKS) Starbucks (SBUX)
  • Synaptics Inc. (SYNA)
  • U.S. Global Jets ETF (JETS)
  • United Natural Foods (UNFI)
  • Verizon Communications (VZ)
  • Walt Disney (DIS)
  • Xylem, Inc. (XYL)

Forbes: Will Government Listen to the Market and Lower Streaming Music Royalty Rates?

I have written extensively about the efforts of the recording industry to squeeze blood from the streaming music industry stone by attempting to get allies in Congress and the White House to increase the royalty rate paid by streaming companies like Pandora , Apple ([stock_quote symbol=”AAPL”]), Amazon.com ([stock_quote symbol=”AMZN”]), Spotify, Google ([stock_quote symbol=”GOOGL”]) Play Music, and other companies. The battle royale over the future of music streaming has taken a strange and potentially dangerous turn over the past month.

By the end of the year, the Copyright Royalties Board (CRB) at the Library of Congress will determine the new royalty rate streamers will have to pay record labels and artists. The CRB has been charged under statute to “establish rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller.” An attempt by a federal agency to set rates that accurately mimic what a competitive marketplace would yield is no easy task, however the CRB has before it approximately 30 privately negotiated royalty agreements between streamers (willing buyers) and record labels (willing sellers). These voluntary, in-market deals provide a roadmap to what the price of music should be.

Read More  >>

APPLE (AAPL): Still the Epicenter of the Connected Society?

The odds are pretty high that your home or office has at least one Apple device if not more. A new report from the digital media analytics company comScore suggests that Apple’s iPhone has continued to grow its lead in the U.S. smartphone market, with just over 44 percent share of all American smartphone users in July 2015, an increase from the 43.1 percent share it held in April of this year.

We’ve long seen Apple sitting in the pole position of our ever increasing Connected Society, with its iPhone, iPad, Mac, Apple TV, Apple Watch, iTunes and App Store platforms, as well as iOS and HealthKit, CarPlay and HomeKit solutions. As we see it, Apple has strong assets across the smartphone and computing spaces, but a position that is far less commanding in the living room compared to Microsoft’s ([stock_quote symbol=”MSFT”]) or Sony’s ([stock_quote symbol=”SNE”]) PlayStation, and a presence that is just burgeoning in the Connected Car and Connected Home markets. Don’t get us wrong, we’ve loved our Apple TV as a video portal for iTunes videos and other streaming apps like Netflix, Hulu, Vimeo and others. But to be fair, it contributed to the console clutter sitting next to the cable set top box, DVD player, and gaming system.

That was until this past week when Apple took the wraps off several new products at what’s become its annual showcase for announcing what will be hitting the shelves in the coming weeks, in preparation for the upcoming holiday shopping season (yes folks, the holidays are not too far away). This week, there were new iPhone 6S and 6S Plus models, a new enterprise and small to medium size geared iPad Pro complete with the new Apple Pencil and detachable smart keyboard; some new features for the Apple Watch along with some new watch bands and colors; and an upgraded Apple TV complete with voice interface, an improved OS (dubbed tvOS), and it’s own Apple TV App Store.  Let’s dig into the details:

Apple Watch. Things started off with the Apple Watch, and we have to be honest: we still want-to-want one, but don’t feel compelled to buy one, simply because we’re not sure we need one. In talking with folks who have taken the plunge, they praise the ability to pay with their wrist and see messages; however more than a few quickly shoehorned into the conversation that “well, it was a gift.”

Apple did announce more fashion-related items, bands and colors, but in our view that doesn’t really move the needle like the way the new iPad Pro did. The bottom line on the watch is, at least from our perspective, there is much more to go, and companies like FitBit (FIT) and others are way ahead of them, much the way Amazon’s ([stock_quote symbol=”AMZN”]) Kindle hardware continues to have a place in the e-reader space.

Apple TV.   Long positioned within Apple as a “hobby”, Apple TV gets a much-needed upgrade. Much the way the original App Store transformed the iPhone into a digital Swiss Army knife — allowing you to play games, shop, check your finances, post to Facebook or tweet on Twitter and over the ensuing years do almost anything — we see the new Apple TV app store having a similarly transformative effect on how people use their TV. Pulling up sports stats as you watch a game, shop online via Gilt or other apps that will soon be available, downloading games to play such as “Galaxy on Fire” and Walt Disney Co.’s new Star Wars game, “Disney Infinity,” would come to Apple TV. Popular real estate sites like AirBnB and Zillow also are developing apps that would allow big-screen house hunting.

Of all the improved features, it’s the gaming potential that could be the most disruptive long-term.  Over the last few years Apple’s iPods, iPhones and iPads have demolished the handheld gaming market, much the way iTunes and iPod completely eviscerated the rest of the MP3 player market. In the console gaming market, Apple is going head to head with Amazon and Sony. But with a $149 price point, the Apple TV is well below the $250 or so sticker price of Microsoft’s current Xbox. Granted, the initial slug of games will be found wanting relative to Xbox and even Sony’s ([stock_quote symbol=”SNE”]) PlayStation, but we know Apple will continue to pack more memory and improve the chip speed in the device over time.  Let’s not forget the content leverage Apple has with the developer community — a quiet competitive advantage it has enjoyed with its tablets and smartphones and is now extending into Apple TV. We anticipate now that Apple has “figured out” Apple TV, the product will be on the annual model upgrade path that we’ve seen with iPhone and iPad. More processing power, more storage, better graphics…. Apple TV.

As part of the Apple TV unveiling, Apple CEO Tim Cook made what we found to be an interesting comment:

“We believe the future of TV is apps.” 

He probably saw the same report we did from research company Millward Brown Digital that showed 22 percent of cable subscribers also subscribe to an over-the top service, such as Netflix, Hulu and others. As consumers of content through Netflix, HBO Go, Amazon Prime and other apps, we are believers in the time shifted approach (yes you can call it binging if you want) or the app-ification of TV. Combined with its expanding global footprint (more on that on page 14), this was one of the core reasons why we used the recent market pullback to add Netflix ([stock_quote symbol=”NFLX”]) shares to our Tematica Select List.

iPad Goes Pro.  Over the last few quarters, the iPad has been one of the sore spots in Apple’s quarterly reports. Even so, Apple CEO Tim Cook has remained upbeat about the tablet category. Apple recently announced a new partnership with Cisco Systems ([stock_quote symbol=”CSCO”]) that builds on the enterprise-focused relationship with IBM (IBM). We suspect that Apple has used these and other partnerships to determine the needs and wants of the enterprise market to develop the much talked about iPad Pro.

We’ve tried several times to use the iPad in place of our MacBook products and found it to be relegated to the realm of pinch-hitting when it comes to getting any substantive work done. Editing documents and toggling back and forth between apps for example was more than cumbersome…it was downright painful compared to the notebook or desktop experience.

With the debut of the iPad Pro it looks like we now have a serious productivity tool in tablet form. Hand in hand is iOS 9, which brings split screen, drag and drop, and other multitasking productivity features to Apple’s iPad — no more toggling with the home button. You can tell we’re excited about this. With Apple Pencil, Apple’s also addressed some of the annoyances with editing and marking up documents, but we’ll need to see what bells and whistles the developer community brings forth with this accessory to make its $99 price point palatable.

In our view, the new iPad Pro targets the enterprise customer segment from a tablet and app perspective rather than a stripped own notebook computer, which is pretty much what we think of the Microsoft Surface. Before we get all “boo-hoo” for Microsoft, let’s remember that outside the Xbox, hardware is a relatively small contributor to Microsoft, which has increasingly become an enterprise software play.

One announcement that Apple slipped in during all of this comes as mobile operators like Verizon ([stock_quote symbol=”VZ”]) and AT&T ([stock_quote symbol=”T”]) are moving away from the long-standing practice of signing customers up for long-term service contracts and offering subsidies to blunt the high cost of smartphones. Seeing the potential dilemma for its smartphone business, Apple introduced its own installment and leasing programs.

By buying directly from Apple, a consumer can pay $27 to $31 a month for 24 months for the iPhone 6S and 6S Plus. At the end of those two years, the consumer would own the phone outright. Cell phone service fees, of course, come on top of that.

Apple also introduced, and is displaying prominently on the Apple.com store, a new iPhone Upgrade program. You can purchase the iPhone 6S on a monthly payment plan starting at $32.41 for the 16GB model or $36.58 for the 16GB 6S Plus (going up by a little over $4 a month if you want more storage). The pricier plan includes the ability to upgrade to a new iPhone after 12 months. You would continue to pay the installments on the new phone and would just be “restarting the clock,” having to pay the monthly fee for another two years before you would own the newer phone. In this way, the customer is essentially leasing the phone from Apple.

Taking a step back and viewing Apple’s upgrade program alongside its recently introduced Apple Music, we see Apple is quietly shifting its business towards a subscription-based revenue stream. From a business perspective, subscription-based business models have great visibility, planning and consistent cash-flow attributes. From an investor perspective, those recurring payments and cash flow offer predictability and reliability, which tends to be rewarded when valuing the shares, assuming the subscriber-rate continues on an upward trajectory. Past examples include the subscription businesses of AOL dial-up service, Weight Watchers ([stock_quote symbol=”WTW”]), NutriSystem ([stock_quote symbol=”NTRI”]) and Netflix ([stock_quote symbol=”NFLX”]). We’ll need to see evidence of consumers getting onboard with this subscription approach from Apple — remember, Apple Music is still in it’s three month free trial mode, with the first automatic payments kicking in over the next month for those that were first to sign-up with the offering was released. If consumers do go for it, this could all turn Apples’ valuation on its head, and we mean that in a good way.

Does all of this make Apple shares attractive at current levels? 

With the launch of its iPhone 4s model in 2011, Apple shifted to a fall release for its smartphone business.  With each new release, Apple shares have tended to march significantly higher over the following six month period, reflecting the staged nature of launches around the globe and this impact on Apple’s earnings.

What’s different this year is, with the exception of its Mac line of products and to some extent Apple Watch, Apple is launching several new products ahead of the all important year-end holiday gift giving season and Chinese New Year, one of the biggest gift giving holidays.

Current expectations have Apple growing its earnings to $9.75 per share over the coming twelve months, up from $9.13 per share the company is expected to deliver for the twelve months ending September 2015. Given the timing of these new product announcements, expectations for revenue, profits and earnings in the coming quarters have yet to be revised.

We suspect Wall Street will wait until these new products hit the shelves so they can gauge the initial reception before adjusting their models and forecasts. With a strongly invigorated Apple TV and iPad Pro as well as the inherent iPhone upgrade cycle for those still using an iPhone 5s or earlier model we find the odds of Apple euphoria returning to be rather high.

From a stock valuation perspective, over the last few years Apple shares have peaked at an average multiple just shy of 16x earnings. Even in 2013, a year in which Apple’s earnings fell 11 percent, the shares still peaked at 14.2x earnings. Applying those two figures to the consensus expectation of $9.75 per share in earnings over the coming year derives a price target of $140-$150, or an upside of 29 percent at the midpoint.

Let’s remember, Apple is on a path to return cash to shareholders, in part with its quarterly $0.52 per share dividend payment as well as share repurchase program. While the current dividend yield is just below 2 percent, added to the $145 price target, the shares offer 30 percent upside from current levels.

On the downside, Apple shares have bottomed at 10.5x forward earnings on average over the last four-year, period which implies potential downside to $103 (which is close to where shares bounced on August 24) or roughly 8 percent from current levels. In more absolute terms, Apple shares bottomed at less than 10x earnings in 2012 and 2013, but counter balancing that today is Apple’s massive share repurchase plan. Apple has committed to returning $200 billion of cash through dividends and share repurchases over the August 2012- March 2017.  As of its June 2015 quarter, the company had more than $100 billion remaining under its current authorization. That’s a lot of dry powder to back stop the shares, and we’d note that since Apple embarked on its capital return program its share have bottomed closer to 11x earnings on average.

The Bottom Line on Apple

From several perspectives, the risk-to-reward ratio in Apple shares is compelling at a time when the company has one of its most pronounced new product cycles hitting, which will likely result in ratings upgrades and boosted earnings expectations. Ahead of that —and because of its now at the epicenter in our Connected Society thematic, we are adding Apple shares to our Tematica Select List. 


Playing Apple through an ETF

With our recent PayPal ([stock_quote symbol=”PYPL”]) recommendation, we included an ETF alternative for those that would prefer a more diversified approach. With Apple and it’s halo effect that touches many companies, including the Tematica Select List Skyworks Solutions ([stock_quote symbol=”SWKS”]), there are many ETFs involved. As we see it however, an ETF play would need to have meaningful exposure to Apple as well as several of its key suppliers in order to pack a meaningful punch.

Two such ETFs are the Technology Select Sector SPDR ETF ([stock_quote symbol=”XLK”]), which hold roughly 16 percent of its assets in Apple shares, and the other is iShares U.S. Technology ETF ([stock_quote symbol=”IYW”]) that holds more than 19% of its assets in Apple shares. Between the two we would favor XLK shares given the larger market capitalization as well as far greater average daily trading volume and higher dividend yield.

Keeping powder dry with some exceptions like PayPal

Keeping powder dry with some exceptions like PayPal

As we get through the current storm of uncertainty and into calmer waters, we’ll continue to build out our Tematica Select Investments List. We recognize the current choppiness will likely be with us until we move past the Fed FOMC meeting in a few weeks time, but we also know volatile times like this can offer entry points that come along sparingly.While we continue to stay in a holding pattern on higher beta thematic candidates like Netflix ([stock_quote symbol=”NFLX”]) for our Connected Society thematic, the 10% drop over the last month in mobile payment company PayPal ([stock_quote symbol=”PYPL”]) puts the shares in the buy zone for our Cashless Consumption thematic that focuses on the accelerating move by consumers around the globe away from cash and checks to other forms of payment such as credit and debit cards, online payments and increasingly mobile payments.Most of us in the developed world are using credit and debit cards, and MasterCard ([stock_quote symbol=”MA”])and Visa ([stock_quote symbol=”V”]) are very happy every time you swipe one of their cards. We’ve also seen some movement toward mobile payments with the Google Wallet from Google ([stock_quote symbol=”GOOGL”]), whileApple ([stock_quote symbol=”AAPL”]) introduced Apple Pay almost a year ago. According to Gallup’s analysis, the push worked, at least to create awareness of this new product: Nearly two-thirds (65%) of consumers are at least somewhat familiar with Apple Pay. Awareness among current digital wallet users jumps to 78% and is highest (89%) among current Apple Passbook users.

In 2014, PayPal moved $228 billion in 26 currencies across more than 190 nations, generating total revenue of $7.9 billion, and the company ended the year with 162 million active user accounts, up some 13% year over year. Flash forward six months and PayPal exited 2Q 2015 with 165 million active customer accounts in 203 markets handling more than 100 currencies across its payments ecosystem that allows consumers and businesses to transact with each other online, in stores and on mobile devices.

Over the last several years, PayPal has used acquisitions to enhance its product offering and improve its competitive position in the payments industry. Past acquisitions include Braintree, an online-payment gateway used by other companies; Paydiant, an online storefront that retailers can use; and Venmo, an e-mail buddy network aimed at Millennials.

More recently, PayPal acquired Xoom to participate in the giant “remittance economy”, which refers to folks, mainly immigrants, sending money across borders. In 2014, people sent $436 billion in remittances to developing countries according to the World Bank, which projects that by 2016 global remittances will rise to $681 billion, with remittances to developing countries landing at $516 billion. Despite that growth, JPMorgan Chase ([stock_quote symbol=”JPM”]), Citigroup ([stock_quote symbol=”C”]) and Bank of America ([stock_quote symbol=”BAC”]) have scrapped low-cost services that allowed immigrants to send money to their families across the border. Remaining competitors in the remittance arena include Western Union ([stock_quote symbol=”WU”]) and Moneygram International ([stock_quote symbol=”MGI”]).

As impressive as those figures are, we find the following figure to be far more interesting — PayPal Payment Services process 30% of U.S. e-commerce transactions. Now think of how consumers are shifting their buying from brick and mortar stores to online offering such as Amazon ([stock_quote symbol=”AMZN”]), Macy’s ([stock_quote symbol=”M”]) QVC, Zappos and other e-tailors as their shopping medium moves from walking the mall to pinching and scrolling on a tablet or smartphone.


How does PayPal make money?

Like Visa, MasterCard and other by bank-sponsored credit-card operators PayPal operates within the interchange network, which charges a merchant a “take rate” of about $2.80 per $100 transaction on average. Most of that take goes to the card issuer and the rest to processors such as PayPal for facilitating the transaction. On about 40% of its transactions, PayPal takes the full 2.8%, because customers have transferred the money directly from their bank accounts. In these cases, PayPal runs the payments through its own network, away from the card companies’. Last year, transactions of these types accounted for 89% of the company’s net revenues of $7.9 billion. The remaining revenue was derived from a variety of services, such as interest and fees on credit receivables, subscription fees, and revenue sharing.


Think about it: Every time a person upgrades to a newer iPhone model, that’s another potential Apple Pay user. And as Apple adds more banks to the program and expands around the globe, that should mean more Apple Pay users, too. The same holds for Uber, Airbnb and others that like Apple Pay utilize PayPal’s Braintree payment gateway to complete transactions. Just because we don’t see people paying with PayPal in stores doesn’t mean it’s not being used. This makes PayPal a bullet play on mobile payments guns like Apple Pay and others.

Much like Visa and MasterCard, this means dollars go to PayPal whenever a transaction crosses the company’s Braintree-powered platforms. To me, that makes PayPal far more interesting as a “Buy the Bullets, Not the Gun” play on the Cashless Consumption thematic than many other options.

Over the next several years, Forrester Research sees US mobile payments growing from $52 billion in 2014 to $142 billion by 2019, and with new entrants such as Facebook ([stock_quote symbol=”FB”])entering the fray, PayPal’s behind the scenes gateway opportunities look promising, particularly for mobile payments.

The combination of this rising tide and bullet position that could expand the number of merchant and retail relationships now that PayPal is freed from eBay bodes well for continued top and bottom lie growth.  Today PayPal services roughly 75 of the top 100 online merchants and closing that gap could add meaningfully to 2016 expectations and beyond.

PayPal shares are currently trading at 23.5x expected 2016 earnings of $1.49 per share (up 20% year over year), inline with similar multiples for MasterCard and Visa, the latter of which is only slated to grow its earnings 14% year over year in 2016. Applying a discounted price to earnings growth (PEG) ratio relative to those accorded to Visa and other competitors suggests upside to $45 for PayPal over the coming 12-18 months.

With only a limited trading history for PYPL shares, to assess the downside we’ve looked at trough multiples for Visa over the last seven quarters and applying those multiples implies potential downside to $32 for PayPal shares in the coming quarters. Given last night’s closing price of $35.07 and a risk-to-reward ratio skewed to the upside, we are adding PYPL shares to our Tematica Select Investments List as part of our Cashless Consumption thematic. In the expected market chop, the closer to $32 PYPL shares get, the more aggressive our recommendation becomes.


 IPAY is Our ETF Play on Cashless Consumption 

For those looking to place client funds in a more diversified play on the Cashless Consumption thematic, in lieu of PayPal shares we’d recommend PureFunds ISE Mobile Payments ETF ([stock_quote symbol=”IPAY”]), which debuted in mid-July, and counts Visa (V), MasterCard (MA), American Express (AXP), and PayPal among its top holdings. On a combined basis those four positions account for 24% of IPAY’s overall holdings.