Category Archives: Guilty Pleasures

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.

 

 

Weekly Issue: Odds are high market volatility will continue day to day

Weekly Issue: Odds are high market volatility will continue day to day

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)
  • Given prospects for wide swings in the market near term, we are holding off adding a new position in Tematica Options+ this week.
  • We were stopped out of the USA Technologies (USAT) March 2017 7.50 calls (USAT190315C00007500) last Friday.
  • We’ll continue to hold the Del Frisco’s Restaurant Group (DFRG) June 2019 10.00 (DFRG190621C00010000) calls as the company’s Board continues to evaluate strategic alternatives.

 

 

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.

 

Tematica Options+

Yesterday,  domestic stock markets are giving back some of the month to date ground today amid fresh earnings warnings from Stanley Black & Decker (SWK) and Johnson & Johnson (JNJ) as well as renewed concerns over global growth following another round of GDP forecast cuts from the International Monetary Fund and China posting one of the worst years for its economy in 28 years.

My view continues to be that in the near-term, the stock market will be driven by in the very near-term by the day’s news. With a significant ramp in corporate reporting over the next week and prospects for uncertain progress on the US-China trade front given intellectual property and related issues, odds are high the market will continue to swing day to day. This makes for a challenging proposition for both call and put options positions as wide swings like we saw last Friday and yesterday can lead to quick stop outs. I’d rather not squander subscriber capital by making a trade just to say we are doing so. There are no checkboxes to be had, and a contrived trade just to have one is usually met with disaster in my experience.

Therefore, we will hold off adding a new position in Tematica Options+ this week even though our USA Technologies (USAT) March 2017 7.50 calls (USAT190315C00007500) were stopped out last Friday. I’ll look to revisit another position in that company given what I shared above as we move through the current earnings season.

We’ll continue to hold the Del Frisco’s Restaurant Group (DFRG) June 2019 10.00 (DFRG190621C00010000) calls as the company’s Board continues to evaluate strategic alternatives.

 

Alcohol consumption in the US falls for the 3rd consecutive year

Alcohol consumption in the US falls for the 3rd consecutive year

One would think that with the explosion of the craft beer market would have driven overall beer consumption higher. Nope, that’s not what the data is showing us as wine consumption continued to its impressive string of more than 20 years of consecutive growth while beer consumption fell.

What we are seeing is a change in consumer preferences and it is altering the playing field in our Guilty Pleasure investing theme. In a Signal last week, Lenore Hawkins shared how “the world’s biggest brewers and liquor companies are having to push beyond their traditional fare and roll out teas, energy drinks, and nonalcoholic spirits.”  These same brewers are also scrambling to figure out ways to lure consumer back to their core product or attract new ones. In the past, we’ve seen them leverage product extensions under existing brand names (anyone remember Bud Light Lime?), but now with the increasing legalization of cannabis in the US, some of them have started R&D work on cannabis-infused beverages. Odds are they are doing their homework for if and when cannabis is legalized at the federal level in the US, which is a likely inevitability just not one that is going to happen during the current government shutdown.

Total cases of beer, wine and spirits consumed in the U.S. dropped 0.8 percent to nearly 3.35 billion in 2018, the third consecutive year of declining volumes, according to a report from IWSR, which studies the beverage market.

The main culprit is the beer slump, with consumption down 1.5 percent last year as more drinkers gravitated to spirits and wine. It was the 24th straight year that wine gained volume in the U.S. according to IWSR, with prosecco a standout. Mezcal, meanwhile, drove growth in spirits.

“It’s clear that Americans are drinking less overall, which is likely a result of the continued trend toward health and wellness,” Brandy Rand, IWSR’s U.S. president and global chief marketing officer, said in a statement. “We’ve also seen for some time now that consumers aren’t necessarily loyal to just one category.”

Source: How Much Alcohol Do Americans Drink? – Bloomberg

As the Market Bounces Off Oversold Conditions, is this the Start of Another Bull Run?

As the Market Bounces Off Oversold Conditions, is this the Start of Another Bull Run?

Market Reversal

So far in 2019, we are seeing a reversal of the heavily oversold conditions from the end of 2018. Those stocks that were hit the hardest in 2018 are materially outperforming the broader market in 2019. For example, through the close on January 16, 62% of stocks in the Financial sector were above their 50-day moving average, the highest of any sector, versus 44% for the S&P 500 overall. To put that into perspective, Financials have not been the top performer for this metric in 273 trading days, the second-longest such streak since 2001 and only the fourth streak ever of more than 200 trading days. It isn’t just financials as the Energy sector, which was the worst performing sector in 2018, has the third highest percent of stocks above their 50-day in 2019.

While impressive looking, this shift doesn’t necessarily bode well for the Financial sector, nor for the broader market according to data compiled by Bespoke Investment Group.

 

Stock Performance After Streaks Ended

 

 

This recent outperformance by Financials in 2019 is particularly fascinating when I talk to my colleagues at various major financial institutions. Here are a few of the comments I’ve been hearing, paraphrased and without attribution for obvious reasons:

“This deal is way too small for you guys, but I wanted to let you know that our team is working on it.” –  (M&A consultant)

Send it over.We are so late in the cycle that we are looking at damn near anything.” –  (Partner at one of the largest global private equity firms)

“What can we do to better serve your company? We are making a major push this year into better serving companies of this size.” –  (Partner at one of biggest investment banks to a very surprised member of the Board of Directors of a recently IPO’d company whose market cap would have normally left it well below the bank’s radar. After some investigation, many other board members for companies of a similar size in the sector have been getting the same phone calls from this bank.)

The big financial institutions are having to work their way downstream to find things to work on – that’s a major peak cycle indicator and does not bode well for margins. It also doesn’t bode well for the small and medium-sized institutions that will likely need to become more price competitive to win deals in this new more competitive playing field.

We have also seen some wild moves in a few of our favorites such as Thematic Leader Netflix (NFLX), which reported its earnings after the close on January 17th. Netflix sits at the intersection of our Digital Lifestyle and Disruptive Innovators investing themes and has seen its share price fall over 40% from the July 2018 all-time highs to bottom out on December 24th. Since then, as of market’s close on January 17, shares gained nearly 50% – in around all of 100 trading hours! While about 10% of that can be attributed to the recent price increase that will amount to about $2 or so per month for subscribers, there are greater forces at work for a move of such magnitude. No one can argue that either direction was based on fundamentals, but rather a market that is experiencing major changes.

One of the most important leading indicators as we start the Q4 earnings seasons was the miss by FedEx (FDX) and the negative guidance the company provided for the upcoming quarters. FedEx’s competitor United Parcel Service (UPS) is part of our Digital Lifestyle investing theme – how are all those online and mobile purchases going to get to you? Both FedEx and UPS are critical leading indicator because they touch all aspects of the economy and transportation services, in general, have been posting some weak numbers lately in terms of both jobs and latest price data.

In what could be reflective of both our Middle Class Squeeze investing theme, Vail Resorts (MTN) also gave a negative pre-announcement, stating that its pre-holiday period saw much lower volumes than anticipated despite good weather conditions and more open trains. The sour end of the year in the investment markets and the weakness we’ve seen in markets around the world may have led many decided to forgo some fun in the snow. We’ll be keeping a close eye on consumer spending patterns, particularly by income level in the months to come.

Investor Sentiment Slips

According to the American Association of Individual Investors, bearish investor sentiment peaked at 50.3% on December 26, right after the market bottomed. Bullish sentiment over the past month rose from 20.9% to 38.5% but then stalled this week, falling back to 33.5% as the markets reached resistance levels. Bullish sentiment is now back below the historic average but still well above the December lows. Bearish sentiment, on the other hand, is on the rise, up to 36.3% from last week’s 29.4%. This is just further indication that much of what we’ve seen so far in 2019 is a recovery from the earlier oversold conditions.

As we look at the unusual pace at which the major indices lost ground in the latter part of 2018 and the sharp reversal in recent weeks, I can’t help but think of one of the many aspects of our Aging of the Population investment theme. A large portion of the most powerful demographic of asset owners is either in or shortly moving into retirement. Many already had their retirement materially postponed by the losses incurred during the financial crisis. They are now 10+ years older, which means they have less time to recover from any losses and have not forgotten the damage done in the last market correction. I suspect that we are likely to see more unusual market movements in the years to come than we have since the Boomer generation entered into the asset gathering phase of life back in the 60s and 70s. Today this group has a shorter investment horizon and cannot afford the kinds of losses they could 20+ years ago.

The Shutdown and the Fed

Aside from a rebound against the oversold conditions, another dynamic that has the market in a more optimistic mood, at least for the near term, is the narrative that the government shutdown is good news for interest rates as it will likely keep the Federal Reserve on hold. Given that estimates are this shutdown will cost the economy roughly 0.5% of GDP per month, it would be reasonable for the Fed to stay its hand.

Inflation certainly isn’t putting pressure on the Fed. US Producer Prices fell -0.2% last month versus expectations for a -0.1% decline. The bigger surprise came from core ex-food and ex-energy index which fell -0.1% versus expectations for an increase of +0.2%. Keep in mind that core PPI declines less than 15% of the time, so this is meaningful and gives Powell and the rest of the FOMC ample cover to hold off on any hikes at the next meeting.

US import prices fell -1% month-over-month in December after a -1.9% decline in November, putting the year-over-year trend at -0.6%. That’s the first negative year-over-year print since August 2014. Yet another sign that inflation is rolling over.

 

Economy Flashing Warning Signs

Despite all the hoopla earlier this month over the December’s job’s report, this month’s Job Openings and Labor Turnover Survey (JOLTS) report showed that for the first time since the end of 2017 and just the 6thtime in this business cycle, hirings, job openings and voluntary quits fell while layoffs increased in November.

By digging further into the details of the Household survey as well we see that people holding onto more than one job rose +117k in December, accounting for over 80% of the total employment gain. On top of that, the number of unincorporated self-employed rose +126k. These two are things we normally see when times are tough, not when the economy is firing on all cylinders. Not to be a Negative Nancy or Debbie Downer here, but the prime-working-age (25-54) employment shrunk -11k in December on top of 48k the month before. This was before things started to get really scary for many workers with the government shutdown. Imagine how many more are now looking for a second job to make ends meet while they wait for those inside the beltway to work this mess out.

We also got a materially weak New York Empire Manufacturing survey report this week that saw New Orders decline for the second consecutive month and a sharp drop in the 6-month expectation index. The New York Federal Reserve’s recession risk model is now placing odds of a recession by the end of 2019 at over 21%, having more than doubled since this time last year and having reached the highest level in 10 years. Powell and his team at the Fed have plenty of reasons to hold off on hikes. I wouldn’t be surprised if their next move is actually to cut.

 

NY Fed Recession Probability

 

Risks, what risks, we don’t see no stinking risks

US economy isn’t as strong as the headlines would make you think. The political dialogue going back and forth while on the one hand entertaining in a reality TV I-cannot-believe-he/she-just-said-that kind of way isn’t so funny when we look at the severity of problems that need to be addressed – excessive debt loads, a bankrupt social security program, a mess of a healthcare sector – just to name a few. The market today isn’t pricing much of this in, and based on the year to date move in the major market indices, particularly not the potential economic damage the government shutdown if the situation worsens.

If we look outside the US, the market’s indifference is impressive. UK Prime Minister Theresa May’s Brexit plan suffered a blistering defeat in Parliament, the largest such defeat on record for over 100 years, leaving the entire Brexit question more uncertain than ever and it is scheduled to occur just over two months away. In the two days post the Brexit vote back in 2016 the Dow lost 870 points and the CBOE Volatility Index (VIX) rose 49%. This time around the equity markets were utterly disinterested and the VIX actually fell 3.5% – go figure. A messy Brexit has the potential to have a material impact on global trade and yet we basically just got a yawn from the stock market.

Over in Europe flat is the new up with Germany’s GDP expected to come in every so slightly positive and this is a nation that accounts for around one-third of all output in the euro area – with China a major customer. Overall, Eurozone imports and exports fell -2% in November.

The other major exporter, Japan, just saw its machinery orders fall -18.3% in December after falling -17% in November. Japan already had a negative GDP quarter in Q3 and the latest data we’ve seen on income and spending aren’t giving us much to be positive about for the nation.

The Trade War continues with some lip service on either side occasionally giving the markets brief moments to cheer on some potential (rather than actual) signs of progress. The overall global slowing coupled with the trade wars is having an effect. China’s exports for December were far worse than expected, -4.4% from year-ago levels vs expectations for +2%. Last week Reuters reported that China has lowered its GDP target for 2019 to a range of 6% to 6.5%, which is well below the 6.6% reported output gain widely expected last year which itself is the weakest figure since 1990. Retail sales growth has fallen to a 15-year low as auto sales contracted 4.1% in 2018, the first annual decline in 28 years. With a massive level of leverage in its economy, banking assets of $39.1 trillion as of Sept. 30, and nearly half of the $80.7 trillion 2017 world GDP, (according to the World Bank) waning economic growth could be a very big problem and not just for China. We’ll be watching this as it develops given our Rise of the New Middle-class and Living the Life investing themes.

The bottom line is we’ve been seeing the markets bounce off seriously oversold conditions after a breathtakingly rapid descent. The fundamentals both domestically and internationally are not giving us reason to think that this bounce is the start of another major bull run. With all the uncertainty out there, despite the market’s recent “feel good” attitude, we expect to see rising volatility in the months to come as these problems are not going to be easily sorted out.

 

Domino’s taps four investment themes to double revenue in 6 years

Domino’s taps four investment themes to double revenue in 6 years

Earlier this week, we discussed how Pizza Hut will be digging deeper into our Guilty Pleasure tailwind by expanding its offering to include the delivery of beer. Today, we have Domino’s Pizza sharing that it looks to deliver significant growth as it expands its footprint. The details are below, but with expansion in India and other emerging markets, Domino’s is clearly tapping into our Rise of the New Middle-class investing theme and using our Digital Lifestyle to do so.

While many think of it as a pizza company, with some 65% of its US business digital in nature we have to wonder how long until Domino’s formally removes “Pizza” from its name the way Apple did with “Computer” and Starbucks did with “Coffee.” Those name changes signaled a major shift in those business models, and Domino’s is already feeling some lift from our Clean Living investing theme with its gluten-free crust here in the US. that signals flexibility on the company’s part when it comes to catering to changing food preferences. Odds are that Domino’s will be serving up more than just pizza as it looks to crack the various emerging markets.

Domino’s Pizza, Inc. unveiled ambitious growth goals during its 2019 Investor Relations Day on Thursday. The Ann Arbor, Mich.-based pizza chain — which currently includes 15,300 stores globally — expects to grow by nearly 60 percent over the next six years, with a target goal of 9,700 new stores by 2025. That goal would nearly double the company’s growth rate of 5,260 stores over the past six years. Domino’s is also projecting $25 billion in annual sales globally by 2025 — a number that doubles the pizza chain’s fiscal 2017 sales of $12.25 billion

Fortressing. Domino’s execs spoke a lot about “fortressing” — increasing the number of restaurants in the same market — as a strategy for strengthening dominance. The company cited a fortressing attempt in India where they forced out a competitor. In response to concerns that Domino’s would be competing with itself and therefore same-store sales would suffer, the company said “order count requires capacity,” meaning that they are looking to the long-term effects of fortressing.

· Technology. As a technology leader, Domino’s is not planning on slowing down anytime soon.

“[The company] is now more than 65 percent digital in our U.S. business,” Allison said. Domino’s will be creating a “Tech Garage” in Ann Arbor that will serve as a technology innovation laboratory, where team members will work on and roll out customer-facing and back-of-the-house technology, including a next-generation point-of-sales system.

· International growth. Domino’s sees growth potential of 2,000 stores in the U.S. over the next six years. But even more growth will occur abroad, with unit expansion potential of 6,500-plus locations in the company’s largest international markets alone by the end of 2025.

Source: Domino’s plans to grow in size by 60 percent in next six years

Weekly Issue: Thematic M&A and Adding Back a Digital Infrastructure Position

Weekly Issue: Thematic M&A and Adding Back a Digital Infrastructure Position

Key points inside this issue

  • Despite the stock market’s year to date gains, concerns remain for December quarter earnings season
  • Thematic M&A was rampant in 2018
  • Our price targets on AMN Healthcare (AMN), Chipotle Mexican Grill (CMG) and Netflix (NFLX) remain $75, $550 and $500, respectively.
  • Putting shares of Guilty Pleasure thematic leader Altria (MO) on watch
  • We are issuing a Buy on and adding back shares of Digital Infrastructure company, USA Technologies (USAT), to the Tematica Select List with a price target of $10.

 

Despite the stock market’s year to date gains, concerns remain for December quarter earnings season

Over the last week, stocks continued to move higher placing all the major domestic stock market averages higher. Quite the turn from what we saw in much of the December quarter that evaporated all of 2018’s gains. Part of the rebound reflects the harsh beating that many stocks received as investors came to grips with the various factors that I’ve been discussing here over the last two months. The down and dirty summation of those factors is this: the global economy continues to slow and it is raising questions over not only GDP prospects for the coming year but also earnings.

Stoking those earnings growth concerns were negative pre-announcements from Apple (AAPL), Samsung, LG, Macy’s (M), Target (TGT) and Kohl’s (KSS) over the last two weeks. That combination points to slower smartphone demand, but I continue to see it picking up in the coming quarters as the Disruptive Innovation that is 5G ripples its way across our Digital Infrastructure and Digital Lifestyle investing themes.  This week we can add Delta Airlines (DAL), Dialog Semiconductor (DLGNF), Nordstrom (JWN), Electronics for Imaging (EFII), Sherwin Williams (SHW) and Ford Motor Company (F) to that list as well as earnings misses from Wells Fargo (WFC), BlackRock (BLK) and others. Not exactly a vote of confidence for the December quarter earnings season.

Adding fuel to the uncertainty, this morning rail company Genesee & Wyoming (GWR) reported traffic volumes for December fell 4.8% year over year. That piles on the limited data we are getting, which included the January reading for the Empire State Manufacturing Survey General Business Conditions Index that fell to 3.9 from 11.5 in December. That drop was led by a deceleration in new orders, inventories, and the number of employees. The survey’s six-month outlook also dropped, falling to 17.8 from 30.6 last month. These data points fit the view that there is a slowdown in manufacturing activity, which has piqued concerns about a broader slowdown in economic activity unfolding in 2019.

On top of that, yesterday Sen. Chuck Grassley said U.S. Trade Representative Robert Lighthizer saw little progress on “structural issues” in last week’s talks with China. These issues include intellectual property, stealing trade secrets, and putting pressure on corporations to share information with the Chinese government and industries. These issues are the very ones I was concerned about in terms of the trade negotiations. With China cutting its growth forecast some days ago to 6% from 6.5% and more data pointing to that economy cooling, there is likely room for the trade talks to include those issues, but my concern remains the ticking timeline until tariffs jump further. If that comes to pass, it would be another headwind to the global economy and corporate earnings for the coming quarters.

Given all of that, I remain concerned with the December quarter earnings season that will kick into gear next week and what it could do for the stock market’s recent rebound. We’ll continue to keep the long position in ProShares Short S&P 500 (SH) in play as we watch and listen to the thematic signals we see. One great thematic signal this week for our Guilty Pleasures investing theme is that Pizza Hut, owned by Yum Brands (YUM) is expanding beer delivery to 300 restaurants across seven states later this month. Amazing to think that only now Pizza Hut is realizing one of the great culinary pairings of Pizza and beer as it looks to offer customer one-stop shopping as well as capture that incremental revenue and profits. Odds are there will be some element of our Digital Lifestyle theme at play, given the push toward mobile orders we are seeing across the restaurant industry. Now to see what beer they offer… hopefully, it will be more than just the big brand beers like Budweiser.

Another signal that points to the bleeding over of our Digital Lifestyle, Disruptive Innovators and Aging of the Population themes is the partnering between Walgreens Boots Alliance (WBA) and Microsoft (MSFT). Over the next several years, the two will research and develop new methods of delivering healthcare services through digital devices, including virtually connecting people with Walgreens stores.

We at Tematica see thematic signals for our 10 investing themes practically everywhere… and that means we will continue using them to build and refine our investing mosaic in the days, weeks and months ahead. As we navigate the next few weeks, we may have a change or two on the Thematic Leaders and a few companies that make it onto the Contender List for when the stock market finds its footing.

 

Thematic M&A was rampant in 2018

Over the last two weeks, we here at Tematica have been reviewing the thematic database of more than 2,400 stocks that we’ve ranked based on their exposure to our 10 investment themes. That was no small project let me tell you, and it was a key initiative for 2018. In looking back over that body of work, I noticed more than a dozen companies that were in the database at the start of last year had been acquired during the second half of 2018. Here’s a short list of what I’m talking about:

As you can see, the acquisition activity was spread across a number of our themes and included both strategic and financial buyers. In each case, the buyer looked to fill a competitive hole be it a product, market or technology. That’s the classic finance take on it, but we know those buyers were looking to solidify their exposure to the thematic tailwinds that are powering their businesses or in some cases expose themselves to another one.

Are we likely to see more thematically based M&A in the coming months?

My view is yes, particularly as the global economy slows and companies look to deliver top and bottom line growth be it on an organic or acquired basis.

Adding back shares of Digital Infrastructure company USA Technologies

Today I am calling shares of mobile payments company, USA Technologies (USAT),  back onto the Tematica Select List following news earlier this week about the results of an internal investigation into its accounting practices. You may recall that last year, USAT shares were a high flyer for the Select List. However, upon learning that the USAT board would conduct an internal investigation into the accounting of certain of its present and past contractual arrangements and its financial reporting controls and would miss filing the company’s 10-K, we smartly jettisoned the shares near $10.25 last September.

We had been trimming the position at higher levels near $14 in the preceding months, but in light of those developments we “got out of Dodge”, so to speak, and did not stick around for the free fall to $3.44 by early December. While we continued to see growing adoption of mobile payments, especially at USAT’s core market of vending machines and unattended retail, we also saw the stock price pain associated with these investigations and potential financial restatements. “No thanks” was my thinking.

The company on Monday announced both the findings of its internal investigation and remedial actions to be implemented by the board. It also shared that it is working to file its 10-K as soon as possible and disclosed the departures of both its chief financial officer (CFO) and chief services officer (CSO). In tandem with those announcements, USAT also shared it is in negotiations for a new CFO.

In terms of the investigation and the planned responses, the company’s Audit Committee found that, for certain transactions, USAT had prematurely recognized revenue and, in some cases, the reported number of connections associated with the transactions under review. The committee went on to recommend the company enhance its internal controls and its compliance and legal functions; expand its public disclosures; and consider appropriate employment actions related to certain employees as well as splitting the roles of chairman and CEO.

These measures, along with the departure of the CFO and CSO, are not surprising, but they do put USAT on the path to restoring investor confidence in its reporting. While this investigation was happening the market for mobile payments continued to be on a tear as companies such as PepsiCo (PEP) inked a new five-year agreement with USAT.

Clearly, there is more work to be completed, and there is the risk that we are re-entering these shares on the early side. However, as we have seen in the past, as these clouds lift investors will focus on the tailwinds of the business, which in this case are centered on mobile payments and are improving. Therefore, we will resume ownership of USAT shares and look to scale on potential stock price weakness when the company formally restates its revenue and other key metrics. Better a bit early than too late is my thinking on this one.

Our previous price target on USAT shares was $16. However, we should prudently assume that several of the underlying financial metrics will be restated lower. Consequently, I’m taking a haircut relative to our prior target and putting out a new price target of $10. As the company releases its updated financials, I’ll look to fine-tune that price target as needed

  • We are issuing a Buy on and adding back shares of Digital Infrastructure company, USA Technologies (USAT), to the Tematica Select List with a price target of $10.

 

The Thematic Leaders

As the stock market moved higher week over week as of last night’s close, we saw several Thematic Leaders move higher. These included Aging of the Population leader AMN Healthcare (AMN), and Clean Living leader Chipotle Mexican Grill (CMG) as well as Thematic King Amazon (AMZN). The big winner, however, was Digital Lifestyle leader Netflix (NFLX), which yesterday announced it would boost prices for its monthly memberships by 13% to 18%. This marks the company’s biggest price increase and I suspect was well thought out by the management team, given the increasingly competitive playing field. That price increase should drive Wall Street’s revenue expectations higher and improve its ability to not only spend on proprietary content but also its ability to service its quarterly debt costs.

  • Our price targets on AMN Healthcare (AMN), Chipotle Mexican Grill (CMG) and Netflix (NFLX) remain $75, $550 and $500, respectively.

 

Putting Altria shares on watch

Even though we’re just a few weeks into 2019, shares of Guilty Pleasure leader Altria have been underperforming on both an absolute basis and a relative one compared to the S&P 500. Weighing the shares down are questions over its ability to recoup the $12.8 billion investment for a 35% stake, in e-vapor market leader Juul Labs (JUUL). While this is part of the company’s efforts to reposition itself, given prospects for continued declines in its core tobacco market, complicating things is the FDA’s move to stub out youth access to e-vapor and flavored cigarettes.

Odds are this will take several years to come about but it raises questions as to whether Altria is trading one shrinking market for another. Candidly, I would have preferred Altria take that $12.5 billion and spread it across several cannabis investments. I’ll continue to be patient for now with this thematic leader, however, I’ll be looking at several in the coming days that could offer a far better risk to return tradeoff.

 

Pizza Hut expands beer delivery to seven states

Pizza Hut expands beer delivery to seven states

There are several food items that are hallmarks of American culture – hamburgers, hot dogs, and the combination of pizza and beer. Guilty Pleasures one and all, and in what can only be described as a sea change moment, Pizza Hut, which is owned by Yum Brands (YUM), is embracing (finally) the delivery of pizza and beer. If you’ve experienced Domino’s Pizza, Papa Johns or even Pizza Hut you know it used to be two very different tasks — order the pizza and make sure you have enough beer to go along with it (as well as some wine as well beverages for the under drinking age folk).

Perhaps it has to do with its revenue being pressured, but Pizza Hut is grabbing our Guilty Pleasure investing theme by the horns and doubling down, partially combining those two tasks to capture incremental revenue dollars by offering beer convenience. For some of us here at Tematica, that is a step in the right direction, but others would like to see them include wine as well. Baby steps is what I have to say. Now to see what the beer selection is…

More than a year after first testing beer delivery in Arizona, Pizza Hut said Monday it will expand the pilot program to 300 restaurants in seven states by mid-January.

“As the official Pizza Sponsor of the NFL, we’ve been celebrating football fans all season long, so it only makes sense for us to bring more customers the beloved combo of pizza and beer ahead of the Super Bowl,” chief brand officer Marianne Radley said in a statement. “We are proud to be pioneers of beer delivery and are well-poised to take on more markets in the coming year.”

Customers will be required to prove they are of legal drinking age at the time of delivery by showing a valid form of identification and completing a form for the restaurant’s records, the company said. Online orders that include beer will feature a pop-up prompting users to confirm they are of legal age.

In May, when beer delivery expanded in California and Arizona, the prices ranged between $3 and $4.50 for two packs and $5.99 and $10.99 for six packs.

Over the past year, Pizza Hut has worked to revitalize the brand through value promotions and a focus on growing delivery and carryout-focused restaurants.

Source: Pizza Hut expands beer delivery to seven states

Weekly Issue: Investor anxiety continues

Weekly Issue: Investor anxiety continues

Key points inside this issue

  • As the investors grapple with anxiety over trade as well as the speed of economic and earnings growth, we’ll continue to hold ProShares Short S&P 500 (SH) shares.
  • Our price target on the shares of Guilty Pleasure Thematic Leader Del Frisco’s Restaurant Group (DFRG) remains $14.
  • Our price target on Middle-Class Squeeze Thematic Leader Costco Wholesale (COST) shares remains $250.
  • Our price target on Amazon (AMZN) shares remains $2,250

 

The stock market experienced another painful set of days in last week as it digested the latest set of economic data, and what it all means for the speed of the domestic and global economy. Investors also grappled with determining where the U.S. is with regard to the China trade war as well as the prospects for a deal by the end of March that would prevent the next round of tariffs on China from escalating.

There remain a number of unresolved issues between the U.S. and China, some of which have been long-standing in nature, which suggests a fix in the next 100+ days is somewhat questionable. This combination induced a fresh round of anxiety in the market, leading it to ultimately finish the week lower as the major indices sagged further quarter to date. In turn, that pushed all the major market indices into the red as of Friday’s close, most notably the small-cap heavy Russell 2000, which finished Friday down 5.7% year to date. For those keeping score, that equates to the Russell 2000 falling just under 15% quarter to date.

Last week we added downside protection to our holdings in the form of ProShares Short S&P 500 (SH) shares, and we’ll continue to hold them until signs of more stable footing for the overall market emerge. As we do this, I’ll continue to evaluate not only the thematic signals that are in and around us day-in, day-out, but also examine the potential opportunities on a risk to reward basis the market pain is creating.

 

Shares of Del Frisco’s get some activist attention

Late last week, our shares of Guilty Pleasure Thematic Leader Del Frisco’s Restaurant Group (DFRG) bucked the overall move lower in the domestic stock market following the revelation that activist hedge fund Engaged Capital has acquired a nearly 10% in the company with a plan to push the company to sell itself according to The Wall Street Journal. Given the sharp drop in DFRG shares thus far in 2018, down 52%, it’s not surprising to see this happen, and when we added the shares to our holdings, we shared the view that at some point it could be a takeout candidate as the restaurant industry continues to consolidate. In particular, Del Frisco’s presence in the higher end dining category and its efforts over the last few months to become a more focused company help explain the interest by Engaged.

In response, Del Frisco’s issued the following statement:

“Del Frisco’s is committed to maximizing long-term value for all shareholders. While we do not agree with certain characterizations of events or of our business and operations contained in the letter that we received from Engaged Capital, the Company values constructive input toward the goal of enhancing shareholder value. “

Compared to other Board responses this one is rather tame and suggests Del Frisco’s will indeed have a dialog with Engaged. Given the year to date performance in DFRG shares, odds are there are several on the Board that are frustrated either with the rate of change in the business or how that change is being viewed in the marketplace.

In terms of who might be interested in Del Frisco’s, we’ve seen a number of going private transactions in recent years led by private equity investors that re-tool a company’s strategy and execution or combine it with other entities. We’ve also seen several restaurant M&A transactions as well. Let’s remember too how on Del Frisco’s September quarter earnings conference call, the management team went out of its way to explain how the business performed during the last recession. That better than industry performance may add to the desirability of Del Frisco’s inside a platform, multi-branded restaurant company.

As much as we may agree with the logic behind Del Frisco’s being taken out, we’d remind subscribers that buying a company on takeout speculation can be dicey. In the case of Del Frisco’s, we continue to see a solid fundamental story. We are seeing deflation in food prices that bode well for Del Frisco’s margins and bottom line EPS. Over the last quarter we’ve seen prices in the protein complex – beef, pork, and chicken – move lower across the board. According to the United Nation’s Food and Agriculture Organisation’s (FAO) food price index, world food prices declined during the month of November to their lowest level in more than two years. We’re also seeing favorable restaurant spending per recent monthly Retail Sales reports, which should only improve amid year-end holiday dinners eaten by corporate diners and individuals.

We’ll continue to hold DFRG for the fundamentals, but we won’t fight any smart, strategic transaction that may emerge.

  • Our price target on the shares of Del Frisco’s Restaurant Group (DFRG) remains $14.

 

What to watch in the week ahead

As we move into the second week of the last month of the quarter, I’ll continue to examine the oncoming data to determine the vector and velocity of the domestic as well as global economy. Following Friday’s November Employment Report that saw weaker than expected job creation for the month, but year over year wage gains of 3.1% the Atlanta Fed continued to reduce its GDP forecast for the current quarter. That forecast now sits at 2.4%, down from 3.0% at the end of October.

With the sharp drove in oil prices has consumers feeling a little holiday cheer at the gas pump, odds are next week’s November inflation reports will be tame. The fact that world food prices per the Food and Agriculture Organization’s (FAO) food price index hit the lowest level since May 2016 also bodes well for a benign set of inflation data this week. Later in the week, we’ll get the November Retail Sales report, which should be very confirming for our holiday facing positions – Amazon (AMZN), United Parcel Service (UPS), McCormick & Co. (MKC) and Costco Wholesale (COST) – that given the kickoff of “seasons eatings” with Thanksgiving and the start of the holiday shopping season that clearly shifted to digital shopping.

That report will once again provide context for this shift as well as more than likely confirm yet again that Costco Wholesale (COST) continues to take consumer wallet share. Speaking of Costco, the company will report its quarterly results this  Thursday. Quarter to date, the company’s monthly same store sales reports are firm evidence it is winning consumer wallet share, and we expect it did so again in November, especially with its growing fresh foods business that keeps luring club members back. Aside from its top and bottom line results, I’ll be focused once again on its pace of new warehouse openings, a harbinger of the crucial membership fee income to be had in coming quarters.

  • Our price target on Middle-Class Squeeze Thematic Leader Costco Wholesale (COST) shares remains $250.

We’ll end the economic data stream this week with the November Industrial Production report. Given the sharp fall in heavy truck orders in November, I’ll be digging into this report with a particular eye for what it says about the domestic manufacturing economy.

As discussed above, this week Costco will report its results and joining it in that activity will be several other retailers such as Ascena Retail (ASNA), DWS (DWS), American Eagle (AEO) and Vera Bradley (VRA). Inside their comments and guidance, which will include the holiday shopping season, I’ll be assessing the degree to which they are embracing our Digital Lifestyle investing theme. We’ll also see Adobe Systems (ADBE) report its quarterly result and I’ll be digesting what it has to say about cloud adoption, pricing and prospects for 2019. As we know, that is a core driver of Amazon Web Services, one of the key profit and cash flow drivers at Amazon (AMZN).

  • Our price target on Amazon (AMZN) shares remains $2,250

 

The Disruptive Tech in Down Dog

The Disruptive Tech in Down Dog

I’ve written a few times this week here and here about how disruptive technologies can upend industries, quickly tossing leading companies into the back of the pack. Given that it is Friday afternoon where I am in Genova, Italy and we’ve had a week of horrendous storms, I’m looking forward to a relaxing weekend that will see me spending a decent amount of time curled on the couch working through my required weekly reading. That brings me to the subject of this post, the disruptive technology of yoga pants.

Yoga pants? Seriously? Yep. I just read an article in Bloomberg entitled How America Became a Nation of Yoga Pants.

I personally think that all clothing ought to have at least some sort of stretch so yoga pants are right up my alley for everything from down dog to walking the dog to lounging when I’m dog tired and loving some doggone good wine. But I digress. How can yoga pants possibly reflect disruptive tech you ask? Bloomberg answers.

In 2014, teenagers began to prefer leggings over jeans. Then people started wearing athletic clothing (or athleisure, but it’s mostly just yoga pants) to run errands. Now they’re wearing yoga pants to the office. U.S. imports of women’s elastic knit pants last year surpassed those of jeans for the first time ever, according to the U.S. Census Bureau.

To be fair, this preference for “elastic knit pants” may have some correlation to the health challenges of the American public resulting in expanding waistbands. But part of the shift in preferences is also reflective of our Clean Living (focusing on living a healthier lifestyle) and Guilty Pleasures investing themes. If you’ve seen the price of Lululemon Athletica (LULU) clothing you understand the guilt.  Bloomberg reports that,

Yoga pants have similarly managed to plunge denim into an existential crisis, threatening Levi Strauss & Co. so deeply that it had to scramble to adapt. The company added stretch and contouring to its jeans while hoping to retain some of their rugged essence.

So where is the disruptive tech involved?

“Consumers expect a lot more,” said Sun Choe, chief product officer at Lululemon. “They’re washing their garments more and more, and from a quality standpoint, it needs to stand up. They’re expecting some versatility in their product. They expect to be able to wear that pant or tight to Whole Foods or brunch.”

Ok, so that doesn’t sound terribly impressive, but then there is this.

Now there are fabric labs, especially in the athletic-wear space. Lululemon’s research arm does motion-capture testing and uses pressure sensors that allow researchers to test how garments work as they move. The team can even test “hand feel” to help it figure out how to “engineer sensations” for that critical commercial moment when you feel the fabric for the first time, said Plante.

 

Those labs have a large customer base to impress.

What was once a simple stretchy legging, it seems, has become an engineering marvel. Not too surprising, though, when you realize that about $48 billion is being spent on activewear in the U.S. every year.

Those yoga pants account for a large portion of that spend.

Active bottoms and leggings are now a $1 billion industry, according to NPD Group analyst Marshal Cohen.

With a phenomenal range of available options.

These days, there are more than 11,000 kinds of yoga-specific pants available at retailers worldwide, according to data from retail research firm Edited, across both men’s and women’s apparel.

The bottom line is that no industry, business model or product is immune from the threat of disruptive technology.

Source: How America Became a Nation of Yoga Pants – Bloomberg