Here at Tematica, one of the things we like more than anyone of our investing themes is when two or more of them intersect as it forms a super-theme of sorts. We’ve seen numerous examples over the last several quarters, but there are also times when the tailwind of one of our themes presents a headwind for another. We are seeing that unfold between the cashless consumption aspect of our Digital Lifestyle investing theme and our Middle Class Squeeze and Safety & Security ones.
There are benefits to be had with the move by business to digital commerce…
Some retailers are cutting out cash to speed up transactions, reduce the risk of theft and accommodate the increased use of credit and debit cards, as well as digital wallets like Apple Pay and Google Pay, to purchase services and products.
… and there are times when having to pay only by cash can be a hassle, especially if you’ve gotten used to paying with a swipe or a tap. There are also those folks that are tapping their credit cards harder than others as they look to make ends meet. According to the Federal Reserve Bank of New York’s latest Household Debt and Credit Report, consumer household debt balances have been on the rise for five years and quarterly increases continued on a consecutive basis, bringing the second quarter 2019 total to $192 billion.
But as the below excerpts note, not everyone in the entire population is able to participate in cashless consumption be it because they lack a debit or credit card. Others have those but are wary about leaving a digital trail that could be exploited by cyber attackers and compromise their privacy.
But with 6.5% of U.S. households in 2017 not having bank accounts, according to the FDIC, and 18.7% having accounts but also using financial services outside of insured institutions, some are pushing back on the trend
But it’s not just those without credit and debit cards who may balk at being told they can’t use cash. In an era when data breaches have occurred at institutions such as Capital One and credit rating agency Equifax, some consumers worry that cashless payments can infringe on their privacy.
“You do hear a good portion of people saying ‘Once we move to this cashless economy, there is a digital trail for every single one of my purchases, and I’m not entirely comfortable with that,’’’ Santana says. “And there’s a possibility there could be a data breach where your information gets compromised. The probability of a data breach happening is very low, but it is isn’t zero.”
Interestingly enough, despite these headwinds, the tailwind for cashless consumption continues to blow as evidenced by the continued decline in using cash.
Square Inc. found that four years ago, shoppers used cash for 46% of purchases that were less than $20. But this year, shoppers used cash for 37% of transactions in the same price range.
And while there may be some overlap in the user numbers, earlier this year Paypal’s (PYPL) Venmo reported 40 million users that completed one transaction in the prior 12 months, while Square reported 15 million Square (SQ) Cash App users for “monthly actives (at least one transaction in the past month).” While those numbers are larger than some digital user figures at banks — Bank of America (BAC) reported that its active base of digital users was 37 million in the March 2019 quarter and for the same period Wells Fargo & Co. (WFC) had 29.8 million active digital users – during the June 2019 quarter Apple (AAPL) Apple’s Apple Pay completed nearly 1 billion transactions per month, nearly transaction levels in the year-ago quarter.
What those figures tell us is in today’s increasingly connected world filled with more consumers embracing digital shopping and mobile ordering, for both convenience and in many cases better affordable prices, we will likely see a continued movement away from cash usage… but we may not see the use of cash disappear just yet. In thematic speak, two powerful tailwinds may be impeded by one headwind, but that will likely only slow the impact, not eliminate it.
As that shift away from cash continues, odds are we will see more companies embrace our Disruptive Innovators tailwind and bring new solutions to market. One such company is Tematica Select List resident USA Technologies (USAT) that is bringing mobile payments to vending machines and unattended retail.
Another is the cash to debit card ReadyStation kiosk found at the now cashless Mercedes Benz stadium in Atlanta. The kiosk by ReadyCard that converts cash to a prepaid debit card that can be used anywhere VISA is accepted. That is but one solution that could thwart regulatory headwinds, especially if like the ReadyStation kiosk the resulting debit card is fee free.
From Philadelphia to San Francisco, several cities and states have passed or are considering bills that prohibit retailers from refusing to accept cash, a policy they say shuts out the millions of Americans who don’t have a bank account, lack credit cards or don’t have photo identification.
Another reminder that where there is a pain point, solutions tend to result.
A look at the thematic outlook we can piece together from the flow of earnings reports we’ve received thus far.
On this episode of the Thematic Signals podcast, we find ourselves in the thick of earnings season and Tematica’s Chris Versace not only provides an overview for how all of these reports are coming together to form a larger picture, he shares a thematic look at what’s moving several stocks, including Amazon (AMZN), Apple (AAPL), International Airlines Group (ICAGY), IBM (IBM), Netflix (NFLX), Skyworks Solutions (SWKS) and the impact of spending on cybersecurity. In thematic speak, it’s the Digital Lifestyle, Digital Infrastructure, Disruptive Innovators, and the Safety & Security themes, with an added dash of privacy. Of particular note, Chris is really excited about one of the latest signals for Tematica’s Cleaner Living investing theme as Nestle SA has found a way to dramatically reduce the sugar content of its KitKat bar. Why? Because it and other food and beverage companies are under pressure from consumers and governments alike to make healthier products amid rising obesity and diabetes rates. If Nestle keeps this up maybe one day it could land in the Tematica Research Cleaner Living Index.
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Resources for this podcast:
In this week’s musings:
- Earnings Season Kicks Off
- Central Bankers’ New Clothes
- Debt Ceiling – I’m Baaack
- Trade Wars – The Gift that Keeps on Giving
- Domestic Economy – More Signs of Sputtering
- Stocks – What Does It All Mean
It’s Earnings Season
Next week banks unofficially kick off the June quarter earnings season with expectations set for a -2.6% drop in S&P 500 earnings, (according to FactSet) after a decline of -0.4% in the first quarter of 2019. If the actual earnings for the June quarter end up being a decline, it will be the first time the S&P 500 has experienced two quarters of declines, (an earnings recession) since 2016. Recently the estimates for the third quarter have fallen from +0.2% to -0.3%. Heading into the second quarter, 113 S&P 500 companies have issued guidance. Of these, 87 have issued negative guidance, with just 26 issuing positive guidance. If the number issuing negative guidance does not increase, it will be the second highest number since FactSet began tracking this data in 2006. So not a rosy picture.
Naturally, in the post-financial crisis bad-is-good-and-good-is-bad-world, the S&P 500 is up nearly 20% in the face of contracting earnings — potentially three quarters worth — and experienced the best first half of the year since 1997. In the past week, both the S&P 500 and the Dow Jones Industrial Average have closed at record highs as Federal Reserve Chairman Powell’s testimony before Congress gave the market comfort that cuts are on the way. This week’s stronger than expected CPI and PPI numbers are unlikely to alter their intentions. Welcome to the world of the Central Bankers’ New Clothes.
Central Bankers’ New Clothes
Here are a few interesting side-effects of those lovely stimulus-oriented threads worn in the hallowed halls of the world’s major central banks.
Yes, you read that right. Greece, the nation that was the very first to default on its debt back in 377BC and has been in default roughly 50% of the time since its independence in 1829, saw the yield on its 10-year drop below the yield on the 10-year US Treasury bond. But how can that be?
Back to those now rather stretchy stimulus suits worn by the world’s central bankers that allow for greater freedom of movement in all aspects of monetary policy. In recent weeks we’ve seen a waterfall of hints and downright promises to loosen up even more. The European Central Bank, the US Federal Reserve, the Bank of Canada have all gone seriously dovish. Over in Turkey, President Erdogan fired his central banker for not joining the party. Serbia, Australia, Dominican Republic, Iceland, Mozambique, Russia, Chile, Azerbaijan, India, Australia, Sri Lanka, Kyrgyzstan, Angola, Jamaica, Philippines, New Zealand, Malaysia, Rwanda, Malawi, Ukraine, Paraguay, Georgia, Egypt, Armenia, and Ghana have all cut rates so far this year, quite a few have done so multiple times. From September of 2018 through the end of 2018, there were 40 rate hikes by central banks around the world and just 3 cuts. Since the start of 2019, there have been 11 hikes and 38 cuts.
That’s a big shift, but why? Globally the economy is slowing and in the aftermath of the financial crisis, a slowing economy is far more dangerous than in years past. How’s that?
In the wake of the financial crisis, governments around the world set up barriers to protect large domestic companies. The central bankers aimed their bazookas at interest rates, which (mostly as an unintended consequence) ended up giving large but weak companies better access to cheap money than smaller but stronger companies. This resulted in increasing consolidation which in turn has been shrinking workers’ share of national income. For example, the US is currently shutting down established companies and generating new startups at the slowest rates in at least 50 years. Today much of the developed world faces highly consolidated industries with less competition and innovation (one of the reasons we believe our Disruptive Innovators investing theme is so powerful) and record levels of corporate debt. It took US corporations 50 years to accumulate $3 trillion in debt in the third quarter of 2003. In the first quarter of 2019, just over 15 years later, this figure had more than doubled to $6.4 trillion.
Along with the shrinking workers’ share of national income, we see a shrinking middle class in many of the developed nations – which we capitalize on in our Middle Class Squeeze investing theme. As one would expect, this results in the economy becoming more and more politicized – voters aren’t happy. Recessions, once considered a normal part of the economic cycle, have become something to be avoided at all costs. The following chart, (using data from the National Bureau of Economic Research) shows that since the mid-1850s, the average length of an economic cycle from trough to peak has been increasing from 26.6 months between 1854 and 1919 to 35 months between 1919 and 1945 to 58.4 months between 1945 and 2009. At the same time, the duration of the economic collapse from peak to trough has been shrinking. The current trough to (potential peak) is the longest on record at 121 months – great – but it is also the second weakest in terms of growth, beaten only by the 37-month expansion from October 1945 to November of 1948.
Why has it been so weak? One of the reasons has been the rise of the zombie corporation, those that don’t earn enough profit to cover their interest payments, surviving solely through refinancing – part of the reason we’ve seen ballooning corporate debt. The Bank for International Settlements estimates that zombie companies today account for 12% of all companies listed on stock exchanges around the world. In the United States zombies account for 16% of publicly listed companies, up from just 2% in the 1980s.
This is why central bankers around the world are so desperate for inflation and fear deflation. In a deflationary environment, the record level of debt would become more and more expensive, which would trigger delinquencies, defaults and downgrades, creating a deflationary cycle that feeds upon itself. Debtors love inflation, for as purchasing power falls, so does the current cost of that debt. But in a world of large zombie corporations, a slowing economy means the gap between profit and interest payments would continue to widen, making their survival ever more precarious. This economic reality is one of the reasons that nearly 20% of the global bond market has negative yield and 90% trade with a negative real yield (which takes inflation into account).
Debt Ceiling Debate – I’m baack!
While we are on the topic of bonds, the Bipartisan Policy Center recently reported that they believe there is a “significant risk” that the US will breach its debt limit in early September if Congress does not act quickly. Previously it was believed that the spending wall would not be hit until October or November. As the beltway gets more and more, shall we say raucous, this round could unnerve the markets.
Trade Wars – the gift that keeps on giving
Aside from the upcoming fun (sarcasm) of watching Congress and the President whack each other around over rising government debt, the trade war with China, which gave the equity markets a serious pop post G20 summit on the news that progress was being made, is once again looking less optimistic. China’s Commerce Minister Zhong Shan, who is considered a hardliner, has assumed new prominence in the talks, participating alongside Vice Premier Liu He (who has headed the Chinese team for over a year) in talks this week. The Chinese are obviously aware that with every passing month President Trump will feel more pressure to get something done before the 2020 elections and may be looking to see just how hard they can push.
Trade tensions between the US and Europe are back on the front page. This week, senators in France voted to pass a new tax that will impose a 3% charge on revenue for digital companies with revenues of more than €750m globally and €25m in France. This will hit roughly 30 companies, including Apple (AAPL), Facebook (FB), Amazon (AMZN) and Alphabet (GOOGL) as well as some companies from Germany, Spain, the UK and France. The Trump administration was not pleased and has launched a probe into the French tax to determine if it unfairly discriminates against US companies. This could lead to the US imposing punitive tariffs on French goods.
Not to be outdone, the UK is planning to pass a similar tax that would impose a 2% tax on revenues from search engine, social media and e-commerce platforms whose global revenues exceed £500m and whose UK revenue is over £25m. This tax, which so far appears to affect US companies disproportionately, is likely to raise additional ire at a time when the US-UK relationship is already on shaky ground over leaked cables from the UK’s ambassador that were less than complimentary about President Trump and his administration.
That’s just this week. Is it any wonder the DHL Global Trade Barometer is seeing a contraction in global trade? According to Morgan Stanley research, just under two thirds of countries have purchasing manager indices below 50, which is contraction territory and further warning signs of slowing global growth. This week also saw BASF SE (BASFY), the world’s largest chemical company, warn that the weakening global economy could cut its profits by 30% this year.
Domestic Economy – more signs of sputtering
The ISM Manufacturing index weakened again in June and has been declining now for 10 months. The New Orders component, which as its name would imply, is more forward-looking, is on the cusp of contracting. It has been declining since December 2017 and is at the lowest level since August 2016. Back in 2016 the US experienced a bit of an industrial sector mini-recession that was tempered in its severity by housing. Recall that back then we saw two consecutive quarters of decline in S&P 500 earnings. Today, overall Construction is in contraction with total construction spending down -2.3% year-over-year. Residential construction has been shrinking year-over-year for 8-months and in May was down -11.2% year-over-year. Commercial construction is even worse, down -13.7% year-over-year in May and has been steadily declining since December 2016. What helped back in 2016 is of no help today.
While the headlines over the employment data (excepting ADP’s report last week) have sounded rather solid, we have seen three consecutive downward revisions to employment figures in recent months. That’s the type of thing you see as the data is rolling over. The Challenger, Gray & Christmas job cuts report found that employer announced cuts YTD through May were 39% higher than the same period last year and we are heading into the 12thconsecutive month of year-over-year increases in job cuts – again that is indicative of a negative shift in employment.
Stocks – what does it all mean?
Currently, US stock prices, as measured by the price-to-sales ratio (because earnings are becoming less and less meaningful on a comparative basis thanks to all the share buybacks), exceed what we saw in the late 1999s and early 2000s. With all that central bank supplied liquidity, is it any wonder things are pricey?
On top of that, the S&P 500 share count has declined to a 20-year low as US companies spent over $800 million on buybacks in 2018 and are poised for a new record in 2019 based on Q1 activity. Overall the number of publicly-listed companies has fallen by 50% over the past 20 years and the accelerating pace of stock buybacks has made corporations the largest and only significant net buyer of stocks for the past 5 years! Central bank stimulus on top of fewer shares to purchase has overpowered fundamentals.
This week, some of the major indices once again reached record highs and given the accelerating trend in central bank easing, this is likely to continue for some time — but investors beware. Understand that these moves are not based on improving earnings, so it isn’t about the business fundamentals, (at least when we talk about equity markets in aggregate as there is always a growth story to be found somewhere regardless of the economy) but rather about the belief the central bank stimulus will continue to push share prices higher. Keep in mind that the typical Federal Reserve rate cut cycle amounts to cuts of on average 525 basis points. Today the Fed has only about half of that with which to work with before heading into negative rate territory.
The stimulus coming from most of the world’s major and many of the minor central banks likely will push the major averages higher until something shocks the market and it realizes, there really are no new clothes. What exactly that shock will be — possibly the upcoming debt ceiling debates, trade wars or intensifying geological tensions — is impossible to know with certainty today, but something that cannot go on forever, won’t.
As consumers continue to shift to digital shopping, a key stool in our Digital Lifestyle investing theme, we are not only seeing more companies embrace the direct to consumer (D2C) business model, but we are also seeing more digital shopping solutions for those companies come to market. Internet shopping platform company Shopify is doing just that as it expands its reach into our Digital Infrastructure investing theme by moving into distribution and fulfillment services. Interesting indeed, but what caught our eye is how they are using machine learning, an aspect of our Disruptive Innovators theme, to do so.
E-commerce technology company Shopify Inc. is extending into physical distribution, offering customers access to a network of dedicated U.S. fulfillment centers to store and ship consumer goods for online orders.
The aim is to speed up delivery for retailers racing to keep up with Amazon.com Inc. while keeping a lid on transport costs by placing inventory across a distributed network within easy reach of major population centers.
Ottawa-based Shopify provides internet shopping platforms and other services that help companies sell items online. It has also branched into payment technology and hardware for use at retail stores and pop-up locations as more online businesses open bricks-and-mortar locations. Its customers include Unilever PLC, Kylie Cosmetics and footwear maker Allbirds Inc.Shopify said Wednesday that its new service uses machine learning to forecast demand, allocate inventory and route orders to the closest fulfillment centers. The company is working with logistics providers and software companies in Nevada, California, Texas, Georgia, New Jersey, Ohio and Pennsylvania.
“Our aim is to make fast and inexpensive shipping the new standard on the internet,” said Shopify Chief Product Officer Craig Miller.
Shopify’s move into warehousing services puts it in competition with companies such as Belgian Post Group-owned Radial, which provides technology and e-commerce services for retailers such as Dick’s Sporting Goods Inc. at 21 fulfillment centers.
The services are part of a growing array of operations that startups and traditional shipping companies have launched to compete with Amazon’s expanding distribution system, including a Fulfillment by Amazon business that ties its online marketplace for third-party sellers to its burgeoning network of distribution centers and transportation options.
We continue to see the market expansion for CBD products, some of which tie into our Cleaner Living investing theme while other hemp-related derivatives fall into our Disruptive Innovators theme. There is little question that a CBD infused ice cream from former hippies Ben & Jerry would be part of our Guilty Pleasure investing theme. Candidly, we suspect we are only in the early innings of the cannabis wave, which is one that is likely to get only stronger as consumer acceptance builds and federal legalization is had.
Ben & Jerrys announced a new flavor Thursday, but it will only arrive on store shelves if the U.S. Food and Dug Administration approves it.The ice cream company says its new flavor will be infused with cannabidiol, or CBD. CBD is a component of hemp, part of the same family of plants as marijuana. Ingesting CBD won’t get you high. It generally has very little, or no, THC — the psychoactive component of pot.
“We’re doing this for our fans,” said Ben & Jerry’s CEO Matthew McCarthy. “We’ve listened and brought them everything from Non-Dairy indulgences to on-the-go portions with our Pint Slices. We aspire to love our fans more than they love us and we want to give them what they’re looking for in a fun, Ben & Jerry’s way.”
Key points inside this issue
- US-China trade takes the center stage… as expected
- What Trump’s restrictions on Huawei mean for our thematic positions
- Our price target on Apple (AAPL) shares remains $225
- Our price target on Universal Display (OLED) of $150 remains under review
- Our price target on Alphabet/Google (GOOGL) shares remains $1,300
- Our price target on Nokia Corp. (NOK) shares remains $8.50
US-China trade takes the center stage… as expected
As expected, the market last week and again this week is primarily driven by trade and geopolitical headlines first, and economic data second, followed by corporate earnings. Those headlines include not just the mounting trade war between the U.S. and China, but also U.S.-Iran tensions. We also now have the realization that after six weeks of talks we are no closer to a Brexit deal, with Prime Minister Theresa May set to depart during the first week of June.
Still, there was some trade relief as early on Friday President Trump said he would delay for six months tariffs on imports of cars and car parts from Europe and Japan.
While the market enjoyed some relief on that news, as we prepared for the weekend the focus was back on U.S.-China trade battle following comments from China that until the U.S., in its view, is sincere about negotiations, “it is meaningless for its officials to come to China and have trade talks.” Candidly, we here at Tematica find this fascinating given the news behind last weekend’s tariff move by President Trump, who stated it was in response to China, not the U.S., walking back trade progress.
The net effect led the market to see US-China trade talks as stalling, stoking the flames uncertainty in the process. While this could devolve into a game of “no, you first” commonly seen on schoolyard playgrounds, I will continue to watch for signs of progress ahead of the Group of Twenty economic meeting in Japan next month, where President Xi and Donald Trump are expected to meet. As a reminder, those two heads of state met in Argentina during December and were able to put trade negotiations back on track.
Hopefully, that will be the case again. If not, it means the investment community will have to factor the impact of the recent tariff hike and pending ones on growth expectations for the economy and corporate earnings. Barring signs of reprieve, the likely revision will be downward, and we’ve already seen plenty of that of late when it comes to June quarter earnings expectations for the S&P 500.
We’ve also seen GDP expectations for the June quarter come down hard vs. the 3.2% print for the March quarter. As I discussed before, one of the key drivers of that upside surprise was inventory growth. The thing is given the faster slowing pace denoted in the economy, odds are those inventories won’t be depleted in the near-term.
Following the disappointing April retail sales report and April industrial production numbers, the Atlanta Fed cut its GDPNow forecast for the current quarter to 1.2% from 1.6% 10 days ago. As it digested the data, the New York Fed’s NowCast reading for the quarter sank to 1.8%, from its 2.2% reading last week. However, with these revised GDP forecasts, it’s important to remember the reported economic data has yet to include the impact of President Trump’s upsized trade tariffs, or the China tariff response slated to begin June 1.
The net effect of the week, which we would characterize as a teeter totter of uncertainty, saw the major market indices trade off, adding to their move lower over the last month. That continued into the weekend as tensions with Iran rose further.
The question that will be coming to the forefront very soon
As we move into the second half of the current quarter, the Dow is down modestly quarter to date, the small-cap heavy Russell 2000 is essentially flat, while the S&P 500 and Nasdaq Composite Index are up modestly.
With 90% of the S&P 500 having reported March-quarter earnings, it’s looking like aggregate earnings for the 500 companies will wind up essentially flat year over year. That’s better than expected several weeks ago, but not as strong as the start of the earnings season suggested.
One question that will likely arise as we move further into the second half of the quarter will center on the confidence level of the consensus view for June-quarter earnings for the S&P 500 companies. Currently, those earnings are expected to grow 5% sequentially, but decline 1% year over year.
Again, as more economic data, the balance of corporate earnings, and tariffs, are factored into the forecast equation, we’re likely to see further movement in those expectations.
For 2019 in full, the S&P 500 is now slated to grow EPS by 4.1% — well below forecasted levels as we approached the end of 2018 — and at current levels, that has the S&P 500 trading at 17x 2019 earnings based on last Friday’s market close.
What to do now?
Given the confluence of uncertainty and the risk of downward economic and earnings growth expectations, we are likely to see the market trade sideways over the next few weeks. We’ve got our market hedging ProShares S&P 500 (SH) position in place at Tematica Investing, and we’ll continue to stick with the companies on the Thematic Leaderboard. Given the pullback in the market, as I cast about for new contenders for us, I’ll be on the hunt for defensively positioned companies that are growing their earnings faster than the S&P 500 and are also trading at a discount relative to the market multiple. Not exactly shooting fish in the barrel, but as I said, we’re on the hunt.
What Trump’s restrictions on Huawei mean for our thematic positions
Yesterday, we saw the fallout of the Trump administration’s restriction on Huawei as companies like Alphabet (GOOGL), Qualcomm (QCOM), Intel (INTC), Xilinx (XLNX) and others sever ties with the Chinese telecommunications and smartphone company. While this could be a tactic by President Trump to bring China back to the trade negotiating table, the restrictions are poised to deal a blow to companies that supply key technologies from software in the case of Google Android to chips to Huawei. Some estimates suggest Huawei, one the world’s biggest providers of telecom equipment, purchases some $20 billion of semiconductors each year.
From our perspective here at Tematica Investing, this blow to Huawei is a positive for our Nokia (NOK) and Apple (AAPL) shares, but a modest negative one for Universal Display (OLED) and to a lesser extent Alphabet shares. Recently Huawei passed Apple as the second largest smartphone vendor by market share, and these developments could crimp Huawei’s ability to supply not just smartphones, but also its ability to produce 5G capable ones without Qualcomm chipsets. We know the president has talked about 5G being a key competitive technology issue, and it comes
With Universal Display, Huawei was an expected adopter of organic light emitting diode displays and given its market size in the smartphone market any disruption could dial back expectations for that adoption. That said, Apple’s ability to regain smartphone market share could soften that blow. Longer-term we continue to see smartphone vendors adopting organic light emitting diode displays due to their superior color and image quality and more favorable battery consumption, something that will be a key factor as initial 5G handsets come to market. In recent weeks, we’ve signaled we would look to add to our OLED position at favorable prices and that has us watching the shares very closely in the near-term.
With regard to Alphabet/Google, I don’t see a major revenue impact primarily because Search & Advertising is such a large component of the company’s revenue and profit stream. In the March quarter, Google’s advertising revenue accounted for 85% of the quarter’s revenue, pretty much intact with the March 2018 quarter.
Perhaps the biggest beneficiary is Disruptive Innovator Thematic Leader Nokia Corp. The shares got some lift yesterday in response to the dilemma that Huawei will be in as key chip suppliers restrict their sales. While we’ll have to see how these restrictions play out in terms of duration, I’ve been sharing the rising tide of concern over reported backdoor access in Huawei’s equipment. This clearly kicks it to the next level and puts a major crimp in Huawei’s ability to service existing network infrastructure wins as well as those for 5G. Could we see some existing 5G contracts get put back out to bid? Certainly possible, and that is a potential opportunity for Nokia.
- Our price target on Apple (AAPL) shares remains $225
- Our price target on Universal Display (OLED) of $150 remains under review
- Our price target on Alphabet/Google (GOOGL) shares remains $1,300
- Our price target on Nokia Corp. (NOK) shares remains $8.50
A record 13.3 gigawatts of new capacity from wind producers came online in 2012, which no so coincidentally coincided with an expiring tax credit program for that year. This year, 2019, the projection is for 12.7 gigawatts of new capacity to come online. Obviously, consumer demand for alternative energy, part of our Cleaner Living investment theme, is a big driver behind this increase in construction, not to mention the efficiency improvements in the production and storage of wind energy that comes with our Disruptive Innovators theme. But regulation, the third leg of the thematic investing stool, is also providing a significant tailwind behind this construction boom:
Wind producers are eligible for a production tax credit that provides up to 2.3 cents per kilowatt hour of power for 10 years. The tax credit was scheduled to expire in 2012 but was renewed. Wind facilities that begin construction after Dec. 31 are not eligible for receive the credit.
Wind developers who want the full value of the tax credit must launch their wind-generating operations by the end of 2020, according to the Energy Department. Based on industry status reports, wind developers are rushing to finish by the end of this year with many new facilities – 5.7 gigawatts or 45 percent of the annual total – expected to come online in December.
As we have long said, thematic intersections can pave the way for pronounced transformation as two tailwinds change the existing landscape. As we continue to age and live longer, companies are examining new solutions to improve those aged lives. In the past, we’ve seen those take on a variety of forms, and now we are seeing it start with molecular biology. These dual waves that cross our Aging of the Population and Disruptive Innovators investing themes will be something to watch in the coming years.
Unity is among a small group of companies, including the Google health-care subsidiary Calico, that are attempting to harness advances in molecular biology to increase the human health span, the length of time that a person is healthy. The idea, David says, is not just to prolong life but to allow older people to live healthier lives. “We are not purely a senolysis company. We will also be exploring alternative mechanisms that can extend human health span,” he says.
The reaction from the pinstriped crowd in New York—which included analysts from Citigroup, Goldman Sachs, and Morgan Stanley—was respectful but muted. After all, only about 12 percent of drugs that enter clinical trials are successful, according to a 2018 report by the Tufts Center for the Study of Drug Development. And the science upon which Unity has based its approach is largely untested in humans; scientists have only recently begun to understand the links between senescence and the diseases associated with aging.
Osteoarthritis of the knee is a painful condition in which the cartilage between the bones wears away. In 2018 there were 725,000 knee replacements in the U.S. If successful, Unity’s drug for the condition could reduce the need for surgery while generating as much as $6.7 billion a year in revenue, according to a recent Goldman Sachs Group Inc. research note on the company.
News coming out of Bentonville, AR this week details a series of store enhancements and renovations to 500 Walmart stores in the coming years. As we read through the discount retailer’s plans, the “ding” buttons were going off in our heads as many of them directly touch upon our investment themes at Tematica Research. At a reported total cost of $11 billion, these plans are set to have a major impact on both store operations and the customer experience of shoppers. Here is a quick rundown of what we learned through an article on Digiday.com:
Middle-Class Squeeze: while Walmart’s rise can be directly attributed to the financial struggles of the middle class in the United States in recent years as families look to stretch their dollars as much as possible, some might view several of these store enhancements as only contributing to the cause by eliminating the need for many of their store employees:
The retailer said it’s doubling down on automation to make store operations more efficient, including the addition of 1,500 autonomous floor cleaners; 300 autonomous shelf scanners; 1,200 unloaders that scan and sort items unloaded from trucks; and 900 pickup towers, or vending machines that dispense online orders within stores. Read More
Digital Lifestyle: Much has been written about Walmart pivoting its business model to compete with the rise of Amazon.com. Many of those moves have been focused on the beefing up of its own online capabilities through the acquisition of jet.com, Shoebuy, Bonobos and other moves. But included in its upcoming store overhaul are several moves that focus on Walmart’s arrow into its quiver in the online battle — physical stores for quick delivery and returns:
By the end of the fiscal year, Walmart expects to have a total of 1,700 pickup towers, 3,100 grocery pickup locations and 1,600 grocery delivery locations. “We’re using the stores as that connector to be able to serve customers how and whenever they want,” said Walmart spokesperson Delia Garcia. “Customers can order online and use [in-store] pickup towers, and some customers want to browse and look for things, and we want it to be pleasant and convenient.”Read More
Digital Infrastructure / Disruptive Innovators: Obviously, all of these robots, automation tools and e-commerce solutions will also draw heavily from the Digital Infrastructure and Disruptive Innovators theme as they will demand significant amounts of bandwidth and robotics. Keep in mind, the $11 billion planned investment is to overhaul 500 Walmart stores — the company has over 5,000 stores worldwide. This investment is just the tip of the iceberg.
Aging of the Population: Almost as an aside, two enhancements that were mentioned that while not specifically tied to this theme, appear to be driven by a more senior population are “adding new signage” and “pharmacy department makeovers that will include private consultation rooms”. More details will have to be gathered but our guess is that Walmart is recognizing that its pharmacy departments are going to be under tremendous demand as more and more Baby Boomers head into their senior years. Also, as a nod back to the battle against Amazon and its acquisition of Pillpak, having physical pharmacies is to its advantage over online-only.