Category Archives: Guilty Pleasures

Consumers turn to chocolate and candy during the pandemic #Shocker

Consumers turn to chocolate and candy during the pandemic #Shocker

New data from the National Confectioners Association (NCA) has revealed sales of chocolate and candy in United States have increased during the coronavirus pandemic no doubt as folks looks to have at least a brief respite from things. This speaks to the heart of Tematica’s Guilty Pleasures investing theme while the NCA’s findings solidify the Thematic Leader Status for The Hershey Company (HSY) for that theme.

 

Overall sales of chocolate and candy have increased 3.8% with chocolate (+5.5%) and premium chocolate (+12.5%) outpacing the rest of the category, NCA data reveals, based on its analysis of sales performance from March 15, 2020 to August 9, 2020.

The grocery channel has become a key driver for chocolate and candy sales growth as consumer behaviors continue to evolve during the pandemic and more people shop at grocery stores. In the grocery channel alone, chocolate and candy sales are up 16.6% with chocolate (+17.9%), premium chocolate (+21.4%) and non-chocolate (+13.5%) all performing very well.

Source: Chocolate and candy soothe COVID-19 trauma, NCA reveals

7-Eleven offers delivery of alcohol and pizzas via its app

7-Eleven offers delivery of alcohol and pizzas via its app

“Desperate times call for desperate measures” is a famous saying and given the weeks of COVID-19 led lockdown, it’s not surprising to see businesses being hit by sagging sales are getting creative. This creativity includes leveraging Tematica’s Digital Lifestyle investing theme and in the case of 7 Eleven, it also means tapping into our Guilty Pleasures one as well. Who can blame the company, but the question lingering in our collective Tematica brains is if this is a sustainable shift in consumer consumption habits or is it just a short-term fix while bars and restaurants are closed? Time will certainly tell.

 

7-Eleven customers can now use the 7NOW delivery app to order wine, beer or liquor anytime in participating markets, as well as hot or ready-to-bake whole pizzas on weekends. The convenience store chain is running a promotion on pizzas each Friday, Saturday and Sunday until May 17, according to an announcement.

Sales of wine, beer and liquor for off-premise consumption are also seeing increases, as most bars and sit-down eateries are now closed. Alcoholic beverages were up 22 percent in the week concluding March 28, per one study cited in the announcement, which claimed that 7-Eleven “is one of the top retailers of cold beer and other canned alcoholic beverages in the U.S.”

The 7NOW delivery app is available in about 400 cites, providing more than 35 million U.S. households with access to more than 3,000 products they might require during the pandemic. Merchandise includes hot and fresh foods, groceries and over-the-counter medicine, among other products.

 

Source: 7-Eleven Delivers Alcohol, Whole Pizzas Via App | PYMNTS.com

G20 summit will determine what the Fed does next

G20 summit will determine what the Fed does next

Welcome to the Thematic Signals podcast, where we look to distill everyday noise into clear investing signals using our thematic lens and our 10 investing themes. 



On this episode, host Chris Versace discusses the sharp June rebound in the stock market that is being fueled by “bad news is good news” with return of Fed related hopium for a rate cut. Recently Federal Reserve Chairman Powell confirmed the Fed is closely watching trade and tariff developments and “will act as appropriate to sustain the expansion.” As Chris explains, given the timing of the G20 meeting vs. the next Fed monetary policy meeting, those hoping for a June rate cut are likely to be very disappointed. Also on the podcast, several ripped from the headlines signals for a number of our investing themes, including Cleaner Living, Middle-Class Squeeze, Guilty Pleasures and Safety & Security

Have a topic or a conversation you think we should tackle on the podcast, email me at cversace@tematicaresearch.com

And don’t forget to subscribe to the Thematic Signals Podcast on iTunes!

Resources for this podcast:

Pizza is America’s favorite food, but…

Pizza is America’s favorite food, but…

Let’s get this out of the way before we get started with this signal by saying that we here at Tematica love pizza. We may be part of the herd on this one, but what can we say – we love it. And it seems we are far from alone, given that it seems pizza is America’s favorite food as well. Per the data, 350 slices of pizza are consumed every second – whoah!

But… and yes there is a but… as consumers embrace our Cleaner Living theme, what will become of this Guilty Pleasure staple?

We’ve seen gluten-free based pizzas come to market, and more recently they’ve been joined by cauliflower based crust ones (trust me, they are better than you might think). Odds are healthier friendly alternatives are on the way as evidenced by even Little Caesar offering a pie topped with plant-based Impossible Sausage.

We have yet to see any movement on the plant-based meat alternatives by industry heavies Pizza Hut, Domino’s, or Papa Johns, but we’re keeping our eyes peeled and our taste buds ready.

Do we think traditional pizza will fall by the wayside? No, but it just may be reserved for moments people truly want to indulge. The same is likely true for burgers and while that may fly in the face of all the headlines for Beyond Meat, the reality is a tasty burger, just like an incredible slice of pizza, will never go out of fashion.

According to a survey conducted last year by The Harris Poll for the California Pizza Kitchen chain, some 21% of the 2,000-plus American diners questioned named pizza as the food they’d pick if they could only eat one thing for the rest of their lives. Pizza beat out steak (16%), burgers (13%), both tacos and pasta (11% each) — though strangely enough, only one pizza operation made our recent list of America’s favorite regional fast food chains: Seattle-based MOD Pizza, which is also the fastest-growing fast-food chain in America.

Every man, woman, and child in the nation eats an average of 23 pounds of pizza annually — that translates to around 46 slices — adding up to a total of about 3 billion pies. To break the pie chart down another way, about 350 slices get consumed every second of the day.

A lot of that pizza — 59%, according to one recent estimate — gets eaten at home, and while some ambitious cooks doubtless make their own from scratch (or with a premade crust), it’s safe to say that a large portion comes out of the supermarket freezer case. (Americans spend about $4.4 billion on frozen pizza annually, and it’s said that two out of three households consume it regularly.)

Source: America’s 25 Favorite Pizza Joints – 24/7 Wall St.

Family Dollar expands its plan to sell alcohol

Family Dollar expands its plan to sell alcohol

When times get tough, companies look to tap into the goods and services with inelastic qualities. In other words, things people will buy no matter what the speed of the economy. Many of these can be found in our Guilty Pleasures investing theme including the one that Middle-Class Squeeze company Dollar Tree is embracing – alcohol.

For Family Dollar, the added benefit is that alcohol, at least in our experience, is a consumable product that needs periodic replacement depending on one’s drinking habits. This portends to recurring trips on which Family Dollar likely hopes to capture additional spending.

Dollar Tree, the company that purchased Family Dollar in 2015, this week announced plans to sell alcohol in 1,000 select stores across the country.

Family Dollar, which serves low- and middle-income neighborhoodsand has more than 8,000 stores nationwide, introduced sales of adult beverages at 45 stores in the first quarter, it said in a news release.

The plans are part of a larger company “store optimization” to improve performance that also includes expanding freezers and coolers in 400 Family Dollar stores and rebranding 200 Family Dollar stores to the Dollar Tree brand.

“We are simply providing customers with a convenient option to purchase adult beverage product while shopping for everyday needs at their neighborhood store,” Kayleigh Painter, investor and media relations manager for Dollar Tree, said.

Source: Family Dollar Plans to Sell Alcohol at 1,000 Stores – The New York Times

Ben & Jerry’s introduces CBD-infused ice cream… but the FDA needs to approve it

Ben & Jerry’s introduces CBD-infused ice cream… but the FDA needs to approve it

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.”

Source: Ben & Jerry’s introduces CBD-infused ice cream — but the FDA has to approve it first

Impossible Foods Debuts Meatless Sausage with Little Caesars Pizza

Impossible Foods Debuts Meatless Sausage with Little Caesars Pizza

We’re pretty sure that almost everyone would agree that from the crust to the sauce, the cheese and the toppings pizza is a Guilty Pleasure, largely because it tastes so good. Yes, there can be bad pizza but that tends to be far and few between. Yet even the pizza market is looking to tap into our Cleaner Living investment theme as evidenced by Little Caesars Pizza teaming with Impossible Foods as it launches the Impossible Sausage.

Little Caesars will be taking the plunge, and while taste will be a key factor of adoption, we have to wonder how much of the Impossible Sausage will be glossed over by the mushrooms, green peppers, caramelized onions, sauce and cheese on the Impossible Supreme Pizza. Potentially a tasty baby step for Little Caesars, but a much bigger one for Impossible Foods.

For the first time since Impossible Foods introduced its game-changing meatless burger in 2016, the plant-based food purveyor is launching a new product: The Impossible Sausage.

The vegan, halal, and kosher-friendly sausage is making its exclusive debut today as a topping on Little Caesars’ $12 Impossible Supreme Pizza, alongside mushrooms, green peppers, and caramelized onions.

The Detroit-based chain’s leaning into the meatless craze is a new tactic. It’s better known for meat toppings and such culinary stunts as wrapping pepperoni pizzas in 3.5 feet of bacon. Just last month, its senior vice president of global marketing, Ed Gleich, declared American consumers “want more meat,” when announcing the return of a pie packed with pepperoni, bacon, sausage, beef, and ham.

To get a slice, you’ll have to go to Yakima, Wash., Ft. Meyers, Fla., or Albuquerque, N.M.

Source: Impossible Foods Debuts Meatless Sausage Atop Little Caesars Pizza | Fortune

Dunkin’ and Harpoon Brewery team up for a Guilty Pleasure coffee pale ale

Dunkin’ and Harpoon Brewery team up for a Guilty Pleasure coffee pale ale

With spring in the air across more of the US, it will soon be time for outdoor yard work and lounging by the pool, river, lake or ocean. In our view here at Tematica, nothing goes better with those activities than a cold one, and yes we are talking about beer. For those both under and over the legal drinking age, that adult beverage and several others fall under our Guilty Pleasure investing theme.

We’ve talked before about the rise of craft and other designer beers, and once again Dunkin’ and Harpoon Brewery are at it again. If you’re a stout beer fan like Tematica’s Chief Economist Lenore Hawkins, you may want to give a try to their latest coffee infused beer. It’s not exactly a new combination, but one that is becoming increasingly popular although it seems more like a Fall beverage than a summer one in our view.

From the team Tematica perspective, it’s two aspects of our Guilty Pleasure theme coming together… not too unlike chocolate and peanut butter. Now to see what it tastes like. Cheers!

With the return to high temperatures this spring, people may be clamoring for a cool beverage. A sweet iced coffee or a chilled beer might help to satisfy one’s yearning to cool down on a warm spring day.

Luckily, for fans of both iced coffee and beer, Dunkin’ is not making you decide between the two.

The quick service restaurant is teaming up with Harpoon Brewery again this year to serve up the Harpoon Dunkin’ Summer Coffee Pale Ale, a coffee-inspired beer. The beverage has 5% ABV and combines the flavors of Dunkin’s Original Blend with a bright pale ale.

This marks the second collaboration between Dunkin’ and the Boston-based Harpoon. In October of last year, the two combined to release Harpoon Dunkin’ Coffee Porter.

The companies’ newest beverage will be available from now until the end of the summer.

Source: Dunkin’ and Harpoon Brewery team up on second beer, a coffee pale ale

Weekly Issue: As earnings season continues, the market catches a positive breather

Weekly Issue: As earnings season continues, the market catches a positive breather

Key points in this issue:

  • As expected, more negative earnings revisions roll in
  • Verizon says “We’re heading into the 5G era”
  • Nokia gets several boosts ahead of its earnings report
  • USA Technologies gets an “interim” CFO

 

As expected, more negative earnings revisions roll in

In full, last week was one in which the domestic stock market indices were largely unchanged and we saw that reflected in many of our Thematic Leaders. Late Friday, a deal was reached to potentially only temporarily reopen the federal government should Congress fail to reach a deal on immigration. Given the subsequent bluster that we’ve seen from President Trump, it’s likely this deal could go either way. Perhaps, we’ll hear more on this during his next address, scheduled ahead of this weekend’s Super Bowl.

Yesterday, the Fed began its latest monetary policy meeting. It’s not expected to boost interest rates, but Fed watchers will be looking to see if there is any change to its plan to unwind its balance sheet. As the Fed’s meeting winds down, the next phase of US-China trade talks will be underway.

Last week I talked about the downward revisions to earnings expectations for the S&P 500 and warned that we were likely to see more of the same. So far this week, a number of high-profile earnings reports from the likes of Caterpillar (CAT), Whirlpool (WHR), Crane Co. (CR), AK Steel (AKS), 3M (MMM) and Pfizer (PFE) have revealed December-quarter misses and guidance for the near-term below consensus expectations. More of that same downward earnings pressure for the S&P 500 indeed. And yes, those misses and revisions reflect issues we have been discussing the last several months that are still playing out. At least for now, there doesn’t appear to be any significant reversal of those factors, which likely means those negative revisions are poised to continue over the next few weeks.

 

Tematica Investing

With the market essentially treading water over the last several days, so too did the Thematic Leaders.  Apple’s (AAPL) highly anticipated earnings report last night edged out consensus EPS expectations with guidance that was essentially in line. To be clear, the only reason the company’s EPS beat expectations was because of its lower tax rate year over year and the impact of its share buyback program. If we look at its operating profit year over year — our preferred metric here at Tematica — we find profits were down 11% year over year.

With today’s issue already running on the long side, we’ll dig deeper into that Apple report in a stand-alone post on TematicaResearch.com later today or tomorrow, but suffice it to say the market greeted the news from Apple with some relief that it wasn’t worse. That will drive the market higher today, but let’s remember we have several hundred companies yet to report and those along with the Fed’s comments later today and US-China trade comments later this week will determine where the stock market will go in the near-term.

As we wait for that sense of direction, I’ll continue to roll up my sleeves to fill the Guilty Pleasure void we have on the Thematic Leaders since we kicked Altria to the curb last week. Stay tuned!

 

Verizon says “We’re heading into the 5G era”

Yesterday and early this morning, both Verizon (VZ) and AT&T (T) reported their respective December quarter results and shared their outlook. Tucked inside those comments, there was a multitude of 5G related mentions, which perked our thematic ears up as it relates to our Disruptive Innovators investing theme.

As Verizon succinctly said, “…we’re heading to the 5G era and the beginning of what many see as the fourth industrial revolution.” No wonder it mentioned 5G 42 times during its earnings call yesterday and shared the majority of its $17-$18 billion in capital spending over the coming year will be spent on 5G. Verizon did stop short of sharing exactly when it would roll out its commercial 5G network, but did close out the earnings conference call with “…We’re going to see much more of 5G commercial, both mobility, and home during 2019.”

While we wait for AT&T’s 5G-related comments on its upcoming earnings conference call, odds are we will hear it spout favorably about 5G as well. Historically other mobile carriers have piled on once one has blazed the trail on technology, services or price. I strongly suspect 5G will fall into that camp as well, which means in the coming months we will begin to hear much more on the disruptive nature of 5G.

 

Nokia gets several boosts ahead of its earnings report

Friday morning one of Disruptive Innovator Leader Nokia’s (NOK) mobile network infrastructure competitors, Ericsson (ERIC), reported its December-quarter results. ERIC shares are trading up following the report, which showed the company’s revenue grew by 10% year over year due primarily to growth at its core Networks business. That strength was largely due to 5G activity in the North American market as mobile operators such as AT&T (T), Verizon (VZ) and others prepare to launch their 5G commercial networks later this year. And for anyone wondering how important 5G is to Ericsson, it was mentioned 26 times in the company’s earnings press release.

In short, I see Ericsson’s earnings report as extremely positive and confirming for our Nokia and 5G investment thesis.

One other item to mention is the growing consideration for the continued banning of Huawei mobile infrastructure equipment by countries around the world. Currently, those products and services are excluded in the U.S., but the U.K. and other countries in Europe are voicing concerns over Huawei as they look to confirm their national telecommunications infrastructure is secure.

Last week, one of the world’s largest mobile carriers, Vodafone (VOD) announced it would halt buying Huawei gear. BT Group, the British telecom giant, has plans to rip out part of Huawei’s existing network. Last year, Australia banned the use of equipment from Huawei and ZTE, another Chinese supplier of mobile infrastructure and smartphones.

In Monday’s New York Times, there was an article that speaks to the coming deployment of 5G networks both in the U.S. and around the globe, comparing the changes they will bring. Quoting Chris Lane, a telecom analyst with Sanford C. Bernstein in Hong Kong it says:

“This will be almost more important than electricity… Everything will be connected, and the central nervous system of these smart cities will be your 5G network.”

That sentiment certainly underscores why 5G technology is housed inside our Disruptive Innovators investing theme. One of the growing concerns following the arrest of two Huawei employees for espionage in Poland is cybersecurity. As the New York Times article points out:

“American and British officials had already grown concerned about Huawei’s abilities after cybersecurity experts, combing through the company’s source code to look for back doors, determined that Huawei could remotely access and control some networks from the company’s Shenzhen headquarters.”

From our perspective, this raises many questions when it comes to Huawei. As companies look to bring 5G networks to market, they are not inclined to wait for answers when other suppliers of 5G equipment stand at the ready, including Nokia.

Nokia will report its quarterly results this Thursday (Jan. 31) and as I write this, consensus expectations call for EPS of $0.14 on revenue of $7.6 billion. Given Ericsson’s quarterly results, I expect an upbeat report. Should that not come to pass, I’m inclined to be patient and hold the shares for some time as commercial 5G networks launches make their way around the globe. If the shares were to fall below our blended buy-in price of $5.55, I’d be inclined to once again scale into them.

  • Our long-term price target for NOK shares remains $8.50.

 

USA Technologies gets an “interim” CFO

Earlier this week, Digital Lifestyle company USA Technologies (USAT) announced it has appointed interim Chief Financial Officer (CFO) Glen Goold. According to LinkedIn, among Goold’s experience, he was CFO at private company Sutron Corp. from Nov 2012 to Feb 2018, an Associate Vice President at Carlyle Group from July 2005 to February 2012, and a Tax Manager at Ernst & Young between 1997-2005. We would say he has the background to be a solid CFO and should be able to clean up the accounting mess that was uncovered at USAT several months ago.

That said, we are intrigued by the “interim” aspect of Mr. Goold’s title — and to be frank, his lack of public company CFO experience. We suspect the “interim” title could fuel speculation that the company is cleaning itself up to be sold, something we touched on last week. As I have said before, we focus on fundamentals, not takeout speculation, but if a deal were to emerge, particularly at a favorable share price, we aren’t ones to fight it.

  • Our price target on USA Technologies (USAT) shares remains $10.

 

 

 

Weekly Issue: Earnings expectations take a dive

Weekly Issue: Earnings expectations take a dive

Key Points Inside This Issue

  • Earnings expectations for the first half of 2019 get revised lower
  • We are removing Altria (MO) shares from the Thematic Leaders.
  • Takeout speculation for USA Technologies (USAT)

 

 

Earnings expectations for the first half of 2019 get revised lower

Stocks surged last week, with all four major domestic stock market indices finishing up in low single digits compared to the prior week. This move was inspired by a number of factors, including a dovish-sounding Fed Beige Book report as more Fed districts have become less optimistic about the economy. Aside from the hard economic data, as we shared last week, rail company Genesee & Wyoming (GWR) reported traffic volumes for December that fell 4.8% year over year, and we saw sharp declines in the January reading for the Empire State Manufacturing Survey General Business Conditions Index.

This and the other data in the last several weeks led John Williams, president of the New York Federal Reserve and a voting member on the Federal Open Market Committee, to say in a speech Friday that the Federal Reserve should be cautious about hiking interest rates further after a year that saw four quarter-point increases. This reiterated the “data dependent” and patient view Fed Chair Powell exuded recently and signals a rate hike in the next few months is likely off the table.

Another powerful factor that led the market to finish the week on a high note was potentially positive progress on the U.S.-China trade front. On Thursday, The Wall Street Journal reported that Treasury Secretary Steven Mnuchin had floated the idea of easing tariffs on Chinese goods as the two countries continue to negotiate on trade. CNBC reported China offered a six-year increase in U.S. imports during recent trade talks and the potential deal could reduce the annual U.S. deficit to zero by 2024. These would be welcome developments ahead of the next round of trade talk in Washington on Jan. 30-31. Given the economic data emanating from China that shows declining factory sentiment, deflation and falling exports that have prompted China to add new stimulative measures for its economy, we are hopeful for more concrete and positive progress as we enter February.

There were also more developments on border security and the government shutdown, which still persists. This now longest government shutdown is increasingly expected to act as a headwind for the economy with some estimates putting the impact at 0.1-0.2% to GDP for each week of the shutdown. We will continue to watch the situation, potential discussions and any pending votes in Congress for what it means for the government shutdown as well as an incremental tailwind for our Safety & Security investing theme.

The government shutdown aside, potential progress on U.S.-China trade talks and more dovish talk by the Fed is helping the stock market grasp at that footing that we’ve been looking for. Granted it is tenuous at best, particularly on the trade front for any deal will hinge on the details. We are also still in the relatively early innings of the December-quarter earnings season, but this could very well help investors look through the growing list of companies that have served up disappointing earnings or guided below expectations. Notable misses last week were by JPMorgan Chase (JPM), BlackRock (BLK), Morgan Stanley (MS), JB Hunt Transport Services (JBHT), and Signet Jewelers (SIG), which was the latest victim of weak holiday sales.

But that was last week, and this shortened week for the market started off on a very different note. Given the growing signs of the slowing global economy, The International Monetary Fund (IMF) cuts its forecasts for world economic growth in 2019 to 3.5%, down from 3.7% forecast in October and 3.9% expected in July as it concedes the “global expansion has weakened.” While we here at home are focused on the potential impact of the government shutdown, the IMF’s forecast was  revised lower primarily due to Europe:

  • Germany’s growth forecast for 2019 was cut 0.6 percentage points due to weak consumption and industrial production data;
  • Italy was cut by 0.4 points due to weak domestic demand and high government borrowing costs,
  • and France was cut by 0.1 points due to the impact of ongoing street protests.

This view of slowing growth is making its way into the c-suite as evidenced by the latest edition of consulting firm PwC’s annual survey of CEOs. That findings of that survey of hundreds of corporate leaders showed 30% of respondents the hundreds of corporate leaders feel growth will decline this year. That’s a six-fold increase from a year earlier — when 57% were optimistic. That optimism was likely due to the impact of tax reform and as we know came before tariffs associated with the US-China trade war.

According to PwC, one of the clear messages from the new survey is “confidence is waning” amid rising trade tensions and protectionism. The survey found a 41-percentage point drop in CEOs choosing the U.S. as a top market for growth, and optimism among North American executives dropped the most sharply — from 63% to 37%. To me, that adds to the concern over corporate guidance to be issued during the current December quarter earnings season that I’ve been sharing over the last few weeks. Let’s remember too that we still have yet to see firm details emerge regarding Brexit and US-China trade talks, which are set for another round next week in DC.

As we’ve seen over the last several few weeks, a growing number of companies are issuing weaker than expected outlooks for the near-term. Over the last three months, this has led Wall Street to cut its earnings estimates for companies in the S&P 500 for the first half of 2019 to $81.73 from $85.56. That’s a hefty chop compared to the average trimming for the first half of the year earnings expectations that averaged 2.4% over the last 15 years.

The question we will continue to work toward answering as the current earnings season progresses is what are S&P 500 earnings looking like for 2019? That determination will shape what investors see as the appropriate market multiple based on the vector and velocity of the global economy and where we are in the business cycle. As those answers are determined, we here at Tematica will continue to look for companies that are poised to grow their earnings faster than the S&P 500, which historically has translated into a premium valuation relative to the market multiple. We aim to accomplish that identification process by leaning on our 10 investment themes and the signposts that are Thematic Signals.

 

Tematica Investing

To many a seasoned investor, we recognize that week to week stock prices can drift higher or lower, but it’s the longer trend in the share price that matters. Well, week over week we saw several of the Thematic Leaders move higher – AMN Healthcare (AMN), Chipotle Mexican Grill (CMG), Dycom (DY), Amazon (AMZN), and Axon Enterprises (AAXN) – while Netflix (NFLX), Del Frisco’s Restaurant Group (DFRG), Costco Wholesale (COST) and Alibaba (BABA) gave up some ground. Year to date, however, nearly all of the Thematic Leaders are in positive territory with quite a few outperforming the S&P 500 and its 5.0% gain so far this year.

The one underperforming leader is tobacco company Altria and that is leading us to…

 

Stubbing out Altria shares

In last week’s issue I shared that I was putting shares of Guilty Pleasure company Altria (MO) on watch, and today we are closing out that position and removing it from the Thematic Leaders. Despite the enviable dividend yield, the shares are down some 9% thus far in 2019, which has brought the return over the four months or so to -24%. I’m opting to cut bait on this position to limit losses. As I shared last week, questions are growing as to how Altria can generate sufficient returns on its significant investment in Juul Labs (JUUL) while its core tobacco business continues to come under increasing pressure and the cannabis legalization at the federal level has yet to emerge in the US.

As we bid adieu to Altria, I’ll be examining our thematic database for a new Guilty Pleasure Thematic Leader.

  • We are removing Altria (MO) shares from the Thematic Leaders.

 

Takeout speculation for USA Technologies

While all the major market indices gave back a portion of last week’s gains, shares of mobile payment company USA Technologies (USAT) that resides on the Tematica Select List bucked that trend to eke out a modest move higher. The reason for that relative outperformance was a note from Barrington Research that argues the best option for the company is for it to be sold. In other words, it is calling for either a larger mobile payment or payment company or perhaps private equity to acquire USA Technologies. The thought process in the Barrington note cites USA’s internal investigation as well as the ensuing credibility gap, both of which are amply reflected in the shares. Barrington puts the takeout price on USAT shares between $10-$15.

What do I think?

Last week we added the shares back on the prospects for the company to deliver its internal investigation findings and delayed 10-K filing, changes in key personnel that should help restore management credibility, and the positive fundamentals in the core mobile payments business. In our view, that risk-to-reward tradeoff justified adding the shares back to the portfolio with a revised price target of $10. That target is subject to revision based on what we learn when the company provides any and all financial restatements.

Would USA Technologies make for sense for a buyer?

Yes, it would particularly as current share price levels that would allow either a strategic or financial buyer to scoop the business up on the cheap. A larger entity would also look to address the credibility issues that have arisen but would also have greater resources to grow the business. That said, in our experience buying shares in a company because it MAY be acquired is tricky at best. We’ll continue to focus on the fundamentals, which in this case are benefitting from the positive tailwinds associated with mobile payment adoption that is part of our Digital Lifestyle and Digital Infrastructure investment themes.

And for what it’s worth, Amsterdam based Oakland Hill BV just boosted its ownership stake in USAT shares to 6.13%, up from 5.58% this past September. While I don’t know Oakland, my thought is they too see what we do in USAT shares at current levels.