Ahead of the 4th of July weekend, we want to wish you and yours a happy and fun holiday that reminds of our young country’s fight for freedom. Be sure to indulge, within reason, in certain aspects of our Fattening of the Population and Guilty Pleasure investing themes. When we return, we’ll be getting the usual start of the month data, but this time around it will be the last part for 2Q 2017. We’ve been talking about the need for expectations to be reset, and we suspect this upcoming set of data will spur things along.

Before we close out June and get ready for July, we’re scaling into our Costco Wholesale (COST) calls, and recapping a number of our other positions. Now for the goods!

 

Doubling Down on Costco Wholesale

Last week we added Costco Wholesale (COST) shares and calls across the various Tematica products. Has anything changed to our thesis in the last week? The short answer is “no” and yesterday we used the incremental weakness in COST shares to improve our cost basis on the Tematica Select List. As we did that, a funny thing happened, we’ve started to see Wall Street sit up and take notice of what’s happened to COST shares vs. the underlying business, which is heavily driven by membership fee growth. As a quick reminder, we will only start to see the positive impact of the company’s June membership fee increase when it reports its next quarterly earnings.

As those analysts have crunched the numbers, we’ve started to see Costco shares get more support over the last few days, including bullish comments from Raymond James, Stifel Financial and Northcoast Research. We expect more of such commentary once we’re back from the July 4^th holiday, we’ll just patiently wait to read it.

As we know leverage, relative to underlying share price movements, cuts both ways and it’s far from pleasant on the downside. That’s what we’ve experienced over the last week with our Costco Wholesale (COST) October 2017 173 calls (COST171020C00173000) calls that closed last night at 2.18, down 30 percent from our 3.10 purchase price. As you’ll recall we warned we could see additional downside in the short-term and we would use that to our advantage.

We are doing that today as we scale into the Costco Wholesale (COST) October 2017 173 calls (COST171020C00173000) calls at current levels, which will serve to improve our average cost basis. The next catalyst will be the company’s June sales report, which will likely be had after the July 4^th holiday.

• We are doubling down on Costco Wholesale (COST) October 2017 173 calls (COST171020C00173000) calls at current levels.
• Even though we are scaling into this positon and improving our cost basis, we will hold off setting a stop loss at this time. 

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General Motors Trims Auto Outlook

In yesterday’s edition of Tematica Investing we shared the news that General Motors (GM) cut its auto outlook for 2017. Were we surprised here at Tematica Pro? Not at all, given our short position in the shares. We always like it when the company we are negatively biased on comes around to our way of thinking.

While GM and other auto companies have yet to release their June sales figures, contained in GM’s trimmed outlook it shared that its US inventory reached 110 days in June, up 10 days since May. Rather staggering, and we suspect it means the company is once again pulling out the stops when it comes to incentives.

As we’ve shared before, those incentives are going to eat into margins and EPS. Even though GM revised its industry outlook lower, it didn’t offer any update on its earnings outlook, but we expect analysts will be sharpening their pencils when we get the June auto sales figures next week. That’s likely to cause some downward pressure in GM shares, but we believe the real shoe to drop will be when the company reports its 2Q 2017 earnings on July 25 and updates its outlook for the second half of 2017.

• Ahead of the June auto sales data, we are holding steady with our short position in General Motors (GM) shares and our price target remains $30. Our buy-stop level remains at $40.

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MGM – Las Vegas and Macau Gaming Data Ahead

Our MGM Resort (MGM) July 2017 $33 calls (MGM170721C00033000)continued to inch higher week over week, and closed last night at 1.12, leaving the position up more than 23 percent from our early June purchase. As we close the books on June, we will soon get the all-important monthly gaming data from both Las Vegas and Macau, the latter of which caters to high rollers.

As we shared when we added the positon to both Tematica Investing and Tematica Pro, we’ve seen a pronounced rebound in Macau gaming and early channel checks on June pointed toward another pick up. This expectation is most likely baked into both the MGM shares as well as calls, and a disappointing print is likely to hit both. To minimize potential downside, we’re instilling a stop loss at 0.90, which will result in a slight loss if triggered.

• We continue to rate the MGM Resorts International (MGM) July 2017 $33 calls (MGM170721C00033000) a Buy at current levels. We would be buyers up to 1.20.
• Our protective stop loss is now set at 0.90 for these calls.

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Housekeeping on SPG Shares as well as AXTI and DY Calls

With yesterday’s added move higher in Simon Property Group (SPG) shares, our $163 buy stop was triggered, closing out the positon in the process. In mid-May we trimmed this short positon back, booking a 16 percent gain in the process, and yesterday’s stop-add returned 10 percent on the remaining lot of shares. On a combined basis, we netted just over 13 percent for the overall SPG short position, compared to a 2.5 percent gain for the S&P 500 over the same time frame.

We find it rather ironic that SPG shares rose today, given the rather bearish article on the mall industry in yesterday’s Wall Street Journal, the gist of which have we built our last big mall? We think the answer is “yes”, and we’ll put SPG shares on the Contender list with a negative bias as we see retail in the early innings of Connected Society investment theme creative destruction.

 

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Bullish Stance on AXTI and DY Remains Strong

With little in the way of new news for both AXT Inc. (AXTI) and Dycom Industries (DY) shares this week, we wanted to remind subscribers that we remain bullish on both of these building block positions as we get ready to head into the second half of 2017. Our bullish stance was reinforced recently when Scott Mair, SVP of Technology Planning & Engineering at AT&T presented at the Wells Fargo Securities 5G Forum Broker’s Conference. Mair reminded investors of the robust spectrum position at AT&T as well as the importance of fiber at the company across its businesses and 5G initiatives. Mair also confirmed AT&T is trialing a number of services with speeds ranging from 10-14 gigabits per second. The commercial 5G timetable has been moved up to late 2018-2019, a year sooner than expected this time last year, with Internet of Things being a focus in late 2019.

As we move into the second half of 2017, we expect there to be far more dialog not only 5G and fiber launches from AT&T, but also those at Verizon (VZ),Comcast (CMCSA) and others.

• DY calls closed last night at 7.90, up 49 percent from our initial purchase. Given the move, we rate Dycom Industries (DY) September 2017 $90 calls (DY170915C00090000) a Hold at current levels.
• Given the position’s gain, we are setting a stop loss at 6.50, which would help lock in a gain of at least 22 percent. As the calls trend higher, we’ll look to establish a protective stop loss to lock in position gains.
• Even though the AXT Inc. (AXTI) November 17, 2017 calls (AXTI171117C00007500) closed at 0.60 last night, modestly expanding the position’s return, we continue to rate the calls a Buy at current levels.
• We would add the calls up to 1.00, and given the thin volume that is likely to make the calls volatile from time to time, we are not employing a stop loss at this time.