Surprises From Market Breadth with Record Margin Debt

Surprises From Market Breadth with Record Margin Debt

As we discussed earlier, heading into the third quarter earnings season, we have above average level of positive guidance in terms of both top line sales and earnings as well as lower-than-average negative earnings guidance. We  pointed out yesterday, however, that an uncomfortable portion of that guidance is driven by gains from a weak dollar and we are seeing signs that may be reversing course.

 

In the last quarter, companies that delivered on or beat expectations didn’t get much of a reward for their efforts. We looked at the current market conditions to get a feel for what the earnings reactions could be this reporting season.

 

Margin Debt

Margin debt has reached $550.9 billion, a record high for the second consecutive month and the sixth record high in the past eight months.  Anyone who recalls just a tad bit of market history can see that rapidly rising margin debt has preceded the beginnings of both the March 2000 and July 2007 bear markets. However, nearly one in four monthly margin debt readings since 1959 have been record highs, so to assume that a pullback is imminent based on a record high is folly at best. Instead, we like to look at the rate of change over a 12-month period. Here we can see that the rate of change recently hasn’t been nearly as dramatic as the wild moves we saw around the 2000 and 2007 crashes. This metric does not indicate a market that has been wildly laying on the leverage, despite reaching yet another record high.

Market Breadth

Another measure of the health of the market is the Advance/Decline line which has been well above its 50-day and 200-day moving average. This indicator is showing a market that appears rather robust, but the value of this indicator may lessened by the rapidly rising use of ETFs. When an investor puts money into an ETF, those funds are used to buy all the companies in the ETF indiscriminately, which can give the appearance of greater robustness than would otherwise exist.

 

To further assess breadth, we look at the ratio of equal weight versus market cap weighted for the major market indices. What we found is the S&P 500 and the Russell 2000 equal weight indices underperformed their market cap weighted indices by a material amount year-to-date. This metric indicates that the indices upward moves have been driving by larger cap high-flyers, which indicates weaker breadth than we’d like to see.

 

High Fliers Losing Some Altitude

Amazon (AMZN) tried to carve out a head and shoulders pattern this week, down by over 2% during the week, but closed the week back in the black by Friday. If it moves below the neckline where it is currently perched rather precariously, the shorts will go for the jugular and this is one of those mega cap stock that has been helping to keep the indices up. Another high flier that has driven a good portion of the market’s gains, Apple (APPL), has dropped below both its 50-day and 100-day moving averages and is now down in 13 of the last 18 days as the new product line doesn’t exactly have consumers busting down the doors.

 

Facebook (FB) is also feeling the pain with all the bad press surrounding is ad platform that Ivan and his Russian buddies have been abusing to stir up domestic strife here in the U.S. Who knew Putin’s team may not play fair! The stock suffered its worst day this week since last November, falling over 5% at one point during the week and closing below its 50-day moving average for the first time since July 6th. By week’s end the shares had moved back to neutral territory in this Teflon market, but the warning flares have been fired. Netflix (NFLX) joined in falling as much as 5.5% this week to waver right arounds its 50-day moving average.

 

With the performance of the equal weight indices below that of the market cap weighted, weakness in the big guys are cause for concern. The end of the week saw a rebound in most, such as Alphabet (GOOGL) but we’ll be watching to see if the rebound holds.

 

Another Breadth Indicator

We then looked at the percent of companies above their 50-day moving average in the S&P 500, Nasdaq and the NYSE Composite. We found that the number of stocks trading above their 50-day moving averages has been rising, so from this metric, the markets are looking to have decent breadth, which limits the damage from those high fliers weakening.

 

When assessing either the markets or a stock we always want to find confirming or discordant data points to increase our confidence. While we have conflicting indicators here, our assessment leans more towards a bullish view based on this data for the near term.

 

Volatility

 

What about that wacky VIX that appears to be on a IV drip of some sort of powerful sedative? No matter what gets thrown at it, the index continues to be like Fonzi. The recent Commitments of Traders report from the CFTC revealed that the net speculative short position on the VIX has once again reached a new record high at 171,187 futures and options contractions, taking out the prior 158,114 peak in early August. This is a 63% increase! Talk about the calm before the storm. Yeah, we know, been saying that for a while. This has been a seriously impressive run!

 

Of all the days the VIX has been below 10 since its inception, 70% those have been in 2017. We can’t help but shake our heads, (and remember to stock up on Alka Seltzer) when we consider the likely impact on the markets when the reversion to the mean rule kicks in.

 

Given the lack of volatility, investors seem to be going all in. The last week’s Market Vane report found that the bullish share has reached the highest level in the current bull market. The last time it was this high was in June 2007.

 

The bottom line is while equities are clearly expensive at these levels, the market breadth looks decent and volatility is still hitting the snooze button. The disconnect between fundamentals, historical norms and the current market is likely to at some point result in some seriously dramatic moves.  However, we’ve all seen that expensive stocks can get even more expensive and for at least the near term, we are not seeing any clear catalyst for a pullback that would get the attention of this seemingly Teflon market.

WEEKLY ISSUE: Nike offers several points of confirmation; Boosting two price targets

WEEKLY ISSUE: Nike offers several points of confirmation; Boosting two price targets

Yesterday, we received the first of what is likely to be quite a bit on potential tax reform. If the efforts we’ve seen pertaining to repeal and replacing Obamacare are any indication, tax reform will take some time and call for reaching across the aisle. We’re cautiously optimistic such reform can take place in a lasting fashion as it would help give a boost to disposable incomes, which would be a boon to the consumer spending led U.S. economy. We’ll have more on this as it develops as well as implications of other happenings inside the Beltway, from more barbs with North Korea to President Trump’s regulatory reform overview to be shared next week.

 

Making some adjustments to the Tematica Investing Select LIst as we close the quarter

As the new tax policies are put forth and put under the microscope, we will soon close the books on September and 3Q 2017. With a few days left in the current quarter, the S&P 500 is up 3.3%, and we’ve had a number of positions ranging from AXT Inc. (AXTI), USA Technologies (USAT), International Flavors & Fragrances (IFF) and Facebook (FB) handily beat that index. Some of our more recently added positions, including this week’s Corning (GLW) and last week’s LSI Industries (LSI) have dipped along with the market these last few days, but our outlook for both remains undiminished.

We have seen some former stalwarts, like Amazon (AMZN) and Alphabet (GOOGL) underperform over the last few months, but we’re heading into the seasonally strongest time of the year for these two companies – we’ll continue to keep both on the Tematica Investing Select List. The same goes for Starbucks (SBUX) as it rolls out its pumpkin flavored beverages and its peppermint mocha alongside other seasonal favorites.

Our price targets remain as follows:

  • Alphabet (GOOGL) — $1,050
  • Amazon (AMZN) — $1,150
  • AXT Inc (AXTI) — $11
  • Corning (GLW) — $37
  • Facebook (FB) — $200
  • LSI Industries (LYTS) — $10

 

We are boosting our price targets this morning on International Flavors & Fragrances and USA Technologies as follows:

  • Raising our IFF price target to $150 from $145;
  • Increasing our USAT target to $6.50 from $6.00

 

These increases offer additional upside, but not enough to warrant subscribers committing new capital at this time. Rather subscribers should continue to own these positions to capture incremental upside and in the case of IFF its dividend stream.

 

Now let’s step back and take a wider view

Our position has been and remains that we are likely to see the recent bout of volatility continue as we close the books on the third quarter of 2017 and roll right into earnings season. That reporting activity will come to a head just as we get the bulk of economic data for the month of September, the proverbial icing on the 3Q 2017 GDP cake. Based on the hurricanes, odds are this data will be a bit wobbly, to say the least, and odds are we will see more GDP revisions for the three months ending in just a few days. While some may look through the economic data, the quarterly results from Darden Restaurants (DRI) earlier this week and the subsequent drop in its shares tell us the market has yet to fully price in the impact of the hurricanes.

Here’s the thing – this could lead to the stock market retrenching from current levels, and in our view letting some of the froth out of the market is a good thing. Candidly, with the market trading near 19x expected earnings – head and shoulders above the 5- and 10-year averages – it begs the question as to how much additional upside is to be had?  This is especially true for investors that are only now returning to the market.

Our strategy for the near-term will be to focus on those companies that have strong thematic tailwinds and whose shares have a more than favorable risk-to-reward tradeoff. This could be in new positions like the ones we’ve added over the last 10 days or it could be in existing ones that come under pressure this earnings season. We always like the former, but the latter is also welcome if it allows us to improve our cost basis for the long-term.

Now, let’s dig into what Nike said last night in its quarterly earnings results – the skinny is, it was reinforcing on several levels for our themes as well as our recent comments on the dollar. Here we go…

 

What’s Nike telling us this morning?

Last night athletic footwear and apparel company Nike reported better than expected quarterly results, but the shares are trading off this morning. Sifting through the results, we see the 3% decline in North American sales as offering credence to our Cash-Strapped Consumer theme, while the 9% growth year over year in China, as well as the 5% year on year improvement in Asia-Pac/Latin America for the company, reflects our Rise & Fall of the Middle-Class thematic. That mix brought Nike’s international business to more than 55% of its overall revenue, and yes during the earnings call last night the company conceded that it has indeed benefitted from the weakening dollar during the last several months.

When it offered its outlook, however, Nike quickly called out that its expected margin contraction with “FX continuing to be the single largest driver.” Yesterday we shared our view the rebounding dollar could present a renewed headwind as the investing herd adjusts it view to incorporate the Fed’s interest rate hike forecast and we see that comment by Nike as confirmation. In addition to the near-term post-hurricane economic slump, this is potentially another reason we could see earnings expectations get reset in the back half of 2017 in the coming weeks.

We’ll look for more confirmation today during Applied Material’s (AMAT) 2017 Analyst Day and tomorrow when McCormick & Co. (MKC) and reports its quarterly earnings. As a reminder, we expect Applied to deliver a favorable demand picture for both its semiconductor as well as display capital equipment businesses, with the former benefitting from ramping demand in China. With regard to McCormick, consensus expectations have the company delivering EPS of $1.05 on revenue of $1.18 billion for the August-ending quarter. As we’ve all seen of late, missing expectations by a penny or two these days is likely to lead to a 4%-8% drop in the share price, and should that happen with MKC shares we’re inclined to scale into the position near or below our original cost basis of $91.80 on the Tematica Investing Select List.

  • Our price target on Applied Materials (AMAT) shares remains $55
  • Our price target on McCormick & Co. (MKC) shares remains $110

The Impact of the Nike — Amazon Deal

Turning back to Nike’s earnings conference call, heading into it, one of the things we wanted was more color on was the company’s invigorated relationship with Amazon (AMZN). We were not disappointed. During the call, even we were somewhat surprised by how blunt Nike was about the pressures facing U.S. retail when it said:

“…a developed market like North America must embrace change to its legacy retail infrastructure. As the leader, we’re fully committed to energizing and growing the marketplace through both our own NIKE Direct businesses and with strategic wholesale partners… over the past 90 days, it has become increasingly evident to all that the North America marketplace is undergoing significant transformation. Several quarters ago, we said that the U.S. retail landscape was not in a steady state, but rather would continue to be disrupted by the accelerating consumer shift to digital and more personal brand experiences… those shifts are now profoundly impacting the more undifferentiated dimensions of retail, resulting in store closures, bankruptcies, and a promotional environment… We’ve proven, I think, through our ability to create some real great success with other consumer-oriented digital partners like Tmall and Zalando that there isn’t a real opportunity here, and we’re excited about where that can go with Amazon (AMZN).”

In our view, those comments sum up the impact on brick & mortar retail that is being had by our Connected Society investing theme. Odds are, Nike is only one of the initial branded apparel companies that will look to leverage Amazon’s logistics and related infrastructure, and this keeps up long-term bullish on AMZN shares.

  • Our long-term price target on Amazon (AMZN) shares remains $1,150.

We also clearly heard Nike is embracing several aspects of our Disruptive Technology theme when it said, “…we target doubling our direct connection to consumers, we are ramping up investment in digital capabilities ranging from data science and analytics to machine learning to augmented reality to image recognition and personalization.”

The only thing better than a company riding one of our investment tailwinds is when it is riding two or more. Over the last three months, NKE shares have underperformed the overall market falling nearly 2.5% vs. the S&P’s 3.3% climb. As the investing herd digests Nike’s comments and the shares drift lower, we’ll revisit the potential upside and downside to be had over the coming 12-18 months. If it’s compelling, we’ll be back with more on this Rise & Fall of the Middle-Class company that is looking to leverage our Connected Society and Disruptive Technology themes.

 

No Sleepy End of  Summer in Sight

No Sleepy End of  Summer in Sight

 

We’ve survived the eclipse, and while the display was a bit underwhelming outside of the Beltway, we hope you enjoyed this rare experience that pulled 10 percent of US viewers away from Netflix while it was happening. Rest assured the consumers of streaming content that help power our Connected Society investing theme were back on board soon thereafter propelling Marvel’s The Defenders to a binge viewing pop after dropping last Friday. From time to time we may see speed bumps for our Connected Society investing theme, but much like trying to put toothpaste back into the tube, we don’t see a reversal in this tailwind or any other of those associated with our investing themes anytime soon.

If anything, as we break down the monthly retail sales data, examine data points such as the box office take and maneuverings by companies like Target (TGT) and Wal-Mart (WMT), we see that Connected Society tailwind blowing even harder as we head into the 2017 holiday shopping season. This morning it was shared that Wal-Mart is teaming with Alphabet (GOOGL) to bring Wal-Mart products to people who shop on Google Express, Google’s online shopping mall. What’s significant about this news is that it marks the first time Wal-Mart has made its products available in the U.S. on a website other than its own. Also, too, Wal-Mart is embracing aspects of our Disruptive Technology theme as it makes it products available to customers via Google Home (Google’s answer to Amazon’s Echo) as well as Google Assistant, its artificial intelligence software assistant found in smartphones powered by Google’s Android software.

Clearly, Wal-Mart is shoring up its position and investing for where retail continues to head — a path that is increasingly chartered by the Connected Society. To us, this development, along with Nike’s (NKE) recent teaming with Amazon (AMZN), is a clear signal of what’s happening in retail. It also says that lines are being drawn between those partnered with Amazon and those that aren’t. We suspect many will see this as evidence of the “retail-megeddon” that is upending the retail industry. Here at Tematica, however, our view is Amazon and Wal-Mart are in the thematic sweet spot and are positioned to become the Coke and Pepsi of retail.

We also continue to see Costco Wholesale (COST) emerging as the bronze medal winner in retail. The company’s July retail sales metrics certainly showed it is gaining consumer wallet share as it rides our Cash-Strapped Consumerand Rise & Fall of the Middle-Class tailwinds. Plus, Costco’s business model is also based on collecting membership fees, which continue to grow, and thus insulates it somewhat from the struggles of brick & mortar retail. In our view, if Costco were to acquire Boxed.com, that transaction would be a game changer for Costco’s digital shopping business.

  • We continue to have Buy ratings on Amazon (AMZN), Alphabet (GOOGL), Costco Wholesale (COST) shares with price targets of $1,150,  $1,050 and $190, respectively. 

 

 

The No Man’s Land that is the last two weeks of August. 

As we shared in this week’s Monday Morning Kickoff, trading volumes are likely to be lower these next 10 days ahead of the Labor Day weekend.  Of course, while many try to get their last bit of R&R in at a nearby beach or lake, Washington is once again taking center stage. As you have probably guessed that means some back and forth political maneuvering will push the market around over the coming weeks as renewed hopes of U.S. tax reform contend with President Trump threatening a government shutdown if Congress didn’t present him with a spending bill for the next fiscal year that included funding for a border wall. Not exactly the tone we’d like to hear ahead of the debt ceiling negotiations.

While we ultimately think the debt ceiling will be raised, we’re not looking forward to the “deadline is approaching” drama that will likely unfold. Giving us some reassurance, during a public event on Monday in Kentucky with Treasury Secretary Steven Mnuchin, Senate Majority Leader Mitch McConnell said there was “zero chance — no chance” that Congress would fail to raise the debt ceiling. Of course, that doesn’t mean it’s going to be a walk in the park getting there.

As we watch those developments, we’ve started to get some hints as to what tax reform might look like. Early indications suggest capping the mortgage interest deduction for homeowners, scrapping people’s ability to deduct state and local taxes, eliminating businesses’ ability to deduct interest and allowing for the “repatriation” of corporate profits from overseas. As we’ve seen with the efforts to repeal and replace Obamacare, the devil will be in the details, and more solid ones should emerge in the coming weeks.

Finally, less than a week into NAFTA renegotiations, President Trump has cast doubt on the future of the trade agreement saying, “I think we’ll end up probably terminating NAFTA at some point.” Again, the devil will be in the details, and until those emerge we’re likely to see corporate American hem and haw as it faces several new obstacles that are fanning the flames of uncertainty.

In our view, this is points to a potentially tumultuous next few weeks, low volume end of August followed by September, historically one of the worst months for the stock market. From a Tematica Select List perspective, we’ve seen the recent volatility ding some of the positions, but we remain comfortable given the confirming data points that we are seeing.

For example, during his address Monday night, President Trump announced a new strategy that calls for sending more troops to Afghanistan. Trump provided few specifics about his policy and how much the U.S. military commitment in the region would increase as a result. The decision, however, to further commit rather than withdraw equates to a tailwind for defense spending that is a part of our Safety & Security investing theme. Also, this week, security researchers have discovered several apps on the Google Play store harboring malware, another reminder of the downside to our increasingly Connected Society that provides lift for the cyber security aspect of our Safety & Security investing theme. As we look for details on incremental defense spending, we’ll continue to recommend subscribers add PureFunds ISE Cyber Security ETF (HACK) shares to their holdings if they haven’t already done so.

  • We continue to have a buy on PureFunds ISE Cyber Security ETF (HACK) shares with a long-term price target of $35.

 

 

More Tailwinds for OLEDs

Last week, as it reported a solid earnings beat and raised its outlook for the balance of the year, Applied Materials (AMAT) had several bullish things to say on organic light-emitting diode display demand:

“Display is growing even faster than wafer fab equipment as customers make multi-year investments to address large inflections in both TV and mobile. In TV, a major push to new Gen 10.5 substrates is under way. These huge, 10- square-meters substrates are ideally suited for manufacturing larger-format screens, 60 inches and bigger. We now expect 30 new Gen 10.5 factories to be built over the next several years. At the same time, mobile organic light-emitting diode (OLED) display investment is getting stronger as customers prepare for broad adoption of OLED in smartphones. OLED enables new form factors that result in a larger display area for smartphone, further expanding the overall market.”

We could not have summed it up better ourselves, and that report keeps us bullish on both AMAT and Universal Display (OLED) shares despite the recent pullback both have experienced.

  • We continue to have Buy ratings on both Applied Materials (AMAT) and Universal Display (OLED) shares with prices targets of $55 and $135, respectively

 

USAT Beats Expectations and Offers Bullish Outlook

Yesterday, shares of Cashless Consumption company USA Technologies (USAT) popped in early trading following an earnings and revenue beat for the June quarter. More specifically, the company beat bottom line expectations by $0.01 per share and topped revenues with $34.3 million, $3.2 million ahead of consensus forecasts, and up more than 55% year over year. Ticking through the press release there were a number of positive connection and customer metrics shared by the company and as expected the company offering a bullish outlook for the coming quarters.

That’s the good news.

The less good news is the company fell short when it came to discussing the impact of its recent stock offering that was completed in late July. Yes, during the current quarter, and we find that somewhat disappointing. The company did say, however, that it plans to “to take advantage of opportunities both organic and inorganic that may present themselves in this rapidly evolving landscape” and that means an acquisition or more. When peppered on the earnings conference call, USAT shared that it would seek acquisitions to “enhancing our offering with additional value-added services or allowing us to expand into additional verticals or geographies to drive further growth.”

Not a bad development by any stretch, but it is one that raises some unknowns, particularly for a small company. As we’ve heard many a banker say, the headaches associated with small acquisitions are the same ones with big ones, the only difference is the size of the fee. Given the size of the business as well as the team, the question is will USAT undertake nip and tuck acquisitions that add to its capabilities and expand its footprint or would it look to make a bolder move, potentially swallowing a larger player? We’re fans of the former, while the latter tends to result in some of those headaches such as product, facility, technology and spending integration and rationalization, as well as layoffs.

Given the global proliferation of mobile payments and the first-hand experience I had in Singapore, we’re going to stick with USAT shares for the time being. Based on any potential acquisition, we’ll look to digest the implications and what it may mean for holding the shares.

  • Our price target on USA Technologies (USAT) shares remains $6.

 

 

Disruptive Voice Technology Continues to Take Hold

Last night we shared the news that Barclays (BRC) has enabled voice payments to be made using Apple’s (AAPL) Siri functionality. This is another step forward in the disruptive use of voice technology as an interface across smartphones, intelligent speakers and soon other applications. As more and more applications come to market, we continue to be bullish on shares of Nuance Communications (NUAN) despite the slow tumble they’ve experienced over the last several weeks. As a reminder, the company has inked technology deals with Apple as well as Facebook (FB) to power their respective messaging chat bots even as the use of voice technology proliferates.

  • We remain bullish on Nuance (NUAN) shares, and our price target stands at $21.

 

 

Even Though DY Remains in Radio-Silence, We Continue to Be Patient

Next week Dycom Industries (DY) will report its quarterly results on Wednesday morning (August 30). Despite the ever-increasing need to add incremental wireless capacity and build out next generation wireline networks, in part for wireless data backhaul, to keep up with data demand, DY shares have sunk some 28% over the last three months. This equates to a round trip in the position from a high of just over $110 back to our blended cost basis of $76.68 on the Tematica Select List.

Frustrating to say the least. That frustration is compounded by the lack of news to be had from the company. Its last communique was at the Stifel Industrials Conference back in June. We know network spending at its key customers — AT&T (T), Verizon (VZ) and Comcast (CMCSA) — remains on track as they look to bring incremental 4G and gigabit internet capacity on stream, while beta-ing 5G capacity. Comcast’s recent launch of Xfinity Wireless also likely means additional wireless capital spending will be had in the coming quarters.

  • We’ll continue to be patient with Dycom Industries (DY), which is hovering in oversold territory.
  • Should the shares retreat further into the mid-$60s, we’re inclined to once again scale into the position, improving our cost basis along the way. 

 

 

Markets Reach New Highs, But Why?

Markets Reach New Highs, But Why?

At Tematica, we separate our politics from our analysis to be able to provide objective assessments, which means that we need to call out an error we see in the prevailing narrative. Thursday the Dow hit its 7th straight record close, despite the news that Special Counsel Mueller has impaneled a grand jury in the Russia election tampering probe. While many are attributing the market’s gains to president Trump’s administration, this divergence calls that into question. As does the reality that President Trump’s approval rating has hit new lows with disapproval ratings reaching new highs while the market has continued to rise.

Apple (AAPL) and Boeing (BA) collectively have been responsible for 70 percent of the Dow’s gains the past 6 weeks while the FAANG stocks – Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Alphabet (GOOGL) – which account for just 11 percent of the S&P 500 market capitalization have generated 26 percent of year-to-date return. Juicing up those returns has been leverage, with margin debt up 20 percent on a year-over-year basis in each of the past 5 months and is today over 60 percent HIGHER than at the 2007 peak.

The reality is that in the past 6 weeks, the median stock price and median sector price haven’t actually moved. What has happened has been a falling U.S. dollar, which is on track for the weakest annual performance in 14 years. That’s really something in light of the prevailing narrative that assures us the U.S. economy is going like gangbusters. Ignore that recent ISM report which saw Services experience the biggest drop since November 2008 – same goes for the Composite Index. Amazing to have a falling dollar and the U.S. Treasury 10-year yield right around where it was during the depth of the Great Recession while the Fed is tightening and yet we are to believe the economy is firing away, hmmm.

The top three stocks in the Dow for foreign revenue, Apple (APPL), Boeing (BA) and McDonalds (MCD) account for 50 percent of the Dow’s year-to-date gains, hmmmm.

So what’s going on here?

Euro to US Dollar Exchange Rate Chart

Euro to US Dollar Exchange Rate data by YCharts

In euro terms, the S&P 500 is actually down 1.9 percent year-to-date. In Mexican peso terms it is down around 4 percent and even in the polish zloty it is down roughly 5 percent.

In fact, when President Trump was elected, the U.S. stock market capitalization represented 36 percent of total global market capitalization. That ratio rose to nearly 38.5 percent but has since fallen to 35 percent where it was all the way back in June 2015. On a relative basis, the U.S. stock market has significantly outperformed. What we are seeing here is more a function of a falling currency that a rising stock market reflecting a robust economy.

What could go wrong? The Intercontinental Exchange now has a net short position for the U.S. dollar for the first time since May 2014 and after that time the greenback gained 5 percent within 3 months. If the market has been rising on a falling dollar….

Then there is that debt ceiling debate that, when taking into account recent dynamics in D.C. between various members of Congress and the White House, could make Game of Thrones appear rather tame. This coming at a time when the tax reform debate is set to kick off. Oh and there are those November elections to really bring out the softer side of politics. With the Chargers no longer playing in San Diego this Fall, (What the hell?) I think I’ll have more than enough games to watch coming out of Washington.

WEEKLY ISSUE: Confirming Thematic Data Points Coming At Us In Spades

WEEKLY ISSUE: Confirming Thematic Data Points Coming At Us In Spades

In this Week’s Issue:

  • Thematic Data Points Revealed in Earnings Thus Far
  • What We Expect from Thematic Poster Child Company Amazon
  • Shifting USAT and BETR shares to Hold from Buy
  • Some Quick Tematica Select List Hits on AXTI, MGM, OLED, AMAT and DY

 

With all many plates spinning on sticks this week, thus far we’ve seen a mixed reaction from investors on the most recent developments coming out of Washington, D.C. amid the Affordable Care Act debate and the onslaught of earnings report. As those many details are digested, the market is also weighing what the Fed will say this week when it comes to the tone of the economy as it concludes its latest monetary policy meeting.

As we shared in this week’s Monday Morning Kickoff, we see a low to no probability of the Fed boosting rates near-term, especially given the pending September unwinding of its balance sheet – something we’ve never experienced before. Given that Fed Chairwoman probably doesn’t want to be the one to send the domestic economy into a tailspin, we strongly suspect she and the rest of the Fed heads will stand pat as they offer clues for what is to be had in the coming weeks.

 

Thematic Data Points Revealed in Earnings Thus Far

As we parse through the onslaught of quarterly earnings reports coming at us this week, we continue to find confirming data points for our investing themes. We saw those in spades yesterday as we reviewed Alphabet’s (GOOGL) 2Q 2017 earnings report. If you missed that commentary, you can find it here, but the skinny is Alphabet continues to ride the tailwinds of the Connected Society investment theme and the shares are a core holding on the Tematica Select List.

We expect the same to be true when Facebook (FB) reports its quarterly results after tonight’s market close. Over the last several quarters, Facebook has been incrementally expanding its monetization efforts across all its various platforms and we see more benefits ahead. Just last week the company announced it would be expanding its advertising platform to the company’s Messenger app for smartphones. We expect more details on this, as well as its pending foray into subscription services with newspapers, magazines, and other publishers during the company’s 2Q 2017 earnings conference call. Also on that conference call and earnings release, we’ll be scrutinizing subscriber metrics as well as average revenue per user figures. One of the keys to Facebook’s continued revenue and profit growth will be monetizing non-US users in the coming quarters. Consensus expectations for 2Q 2017 sit at EPS of $1.12 on revenue of $9.2 billion.

  • Even though FB shares have moved past our formal $160 price target, we’ll be putting it under the microscope to determine potential upside to be had based on 2Q 2017 results and the company’s outlook beyond the first half of 2017.
  • Those revisions may not lead to a table pounding “buy” conclusion, but Facebook’s position in our Connected Society investing theme, along with its growing monetization efforts, keep FB shares as a must own for the foreseeable future.

 

What We Expect from Thematic Poster Child Company Amazon

Also later this week, we’ll be getting earnings from the poster child company when it comes to thematic investing – Amazon (AMZN). If you missed our latest Thematic Signals posting that explains this, you can find it here.

Where do we begin with Amazon this week? First, there was the move by Sears (SHLD) to partner with Amazon with regard to selling Kenmore appliances online (including the smart-home ones that include Amazon Alexa). Then there was Amazon debuting its Amazon Pay Places feature, which allows users to utilize their Amazon account like a mobile wallet for a real world version of one-click shopping. Or perhaps you saw the launching of Spark, which allows Prime members to shop a feed of social media-inspired product suggestions. The key takeaway is Amazon continues to flex its muscles, many of which have solid thematic drivers behind them, and it is doing so at a blistering pace. As Tematica Chief Macro Strategy Lenore Hawkins chimed in on a recent episode of Cocktail Investing, “how much coffee does Jeff Bezos drink?”

While we are on the subject of Amazon, late last week, the Federal Trade Commission announced it is investigating Amazon’s discounting policies following a Consumer Watchdog complaint. Candidly, as Amazon continues to expand its footprint, we expect more of such complaints and suspect that will serve only as a distraction. Moreover, given its balance sheet, should any fines be awarded it has ample funds to comply. More sizzle than steak, as it were.

We do NOT expect Amazon to say much with regard to this FTC non-event event when it reports its earnings tomorrow night. Consensus expectations have the company delivering EPS of $1.42 on revenue of $37.18 billion.

We would call out one key concerns ahead of that quarterly report and usually tight-lipped conference call — it seems investors think Amazon can do no wrong and that mindset can lead to excessive whisper expectations. There we said it.

Our concern in the short term remains the potential for Wall Street to have underestimated Amazon’s investment spending in the near term. As we saw above, it has a number of initiatives under way, and given the accelerating shift to digital commerce and potential partnership to be had on top of those with Nike (NKE) and Sears, Amazon may step up its investment spending ahead of the year-end holiday shopping season, thus cutting into its EPS projections.

If we are right, we could see the shares have a cool post-earnings reception. From our perspective, we see that spending as a long-term investment to grow its services and geographic footprint. Any meaningful pullback in the stock would be an opportunity for investors to increase their foothold in the stock in our view.

  • We will remain patient investors with Amazon (AMZN), especially as we enter the holiday spending filled second-half of 2017.
  • Our price target remains $1,150.

 

Shifting USAT and BETR shares to Hold from Buy

Over the last few weeks, shares of Food with Integrity company Amplify Snacks (BETR) and Cashless Consumption play USA Technologies (USAT) have been melting higher.  Amplify Snacks, on the back of merger-and-acquisition interest focused on the “food that is good for you” space, and USAT, following its recent stock offering and bullish transaction volume commentary from Visa (V), JP Morgan (JPM) and others so far this earning season.

  • Those moves either have put BETR and USAT shares over and above or very close to our price targets.
  • We will be mindful of these targets ahead of respective earnings reports, but for now, we are downshifting them to Hold from Buy on the Tematica Select List.

And as a reminder, our Hold rating, it is literally just that, a recommendation for those that own the shares to hold them for the time being. For subscribers who missed these recommendations, we’d be more inclined to revisit this BETR shares below $9.50 given our $11 price target. With USAT shares and our $6 target, we are more inclined to revisit USAT shares at lower levels, and in this case, that means closer to $5.

As we move through this earnings season over the next two weeks, we continue to think we will see opportunities emerge that allow us to capture thematically well-positioned companies at better prices.

 

Some Quick Tematica Select List Hits

 

AXT Inc. (AXTI)

Following an upbeat report for key customer Skyworks (SWKS) last week, we expect solid results this week from Disruptive Technology company AXT Inc. (AXTI). On its earnings call, Skyworks shared it is still in the early innings of a data explosion that is expected to grow sevenfold over the 2016-2021 period, which should benefit wireless semiconductor demand. Connecting the dots, this bodes extremely well for AXT’s substrate business.

  • Consensus expectations for AXTI sit at EPS of $0.05 on revenue of $22.55 million
  • Our price target remains $9 for AXT shares.

 

MGM Resorts International (MGM)

We’re happy to share that Guilty Pleasure company MGM Resorts International (MGM) will be added to the S&P 500 when that index rebalances later today. That should spur incremental buying among mutual funds as well as exchange traded funds that are based on that index.

Getting back to earnings and expectations, the consensus for MGM is EPS of 0.30 on revenue of $2.67 billion. Data of late for gaming in both Las Vegas and Macau have been quite favorable and we view the company’s recent initiation of a quarterly dividend as underscoring management’s confidence in the business over the coming quarters.

  • Given favorable prospects over the medium term, we would look to use any pronounced weakness in MGM shares following the company’s earnings report to scale further into the shares.
  • Our price target remains $37.

 

Universal Display (OLED)

Many investors are focused on Apple’s (AAPL) adoption of organic light emitting diode (OLED) displays for its next iteration of the iPhone, but as subscribers know there is far greater adoption across other smartphone vendors as well as those for TVs, wearables and other applications. That adoption, which is resulting in companies that had previously invested in liquid crystal display technologies shifting their investments to organic light emitting diodes ones.

We’ve seen the ramping demand for OLED equipment at Applied Materials (AMAT), and this week we saw another layer added to the OLED demand/capacity profile when LG Display shared its plan to invest $13.5 billion to boost output of OLED screens over the next three years. Now let’s add that context we always talk about — the investment is roughly 25 percent more than LG Display’s annual capital spending, which likely means it intends to be an aggressive force in the OLED display market. Given that LG is one of Universal’s key customers, with the other being the OLED industry leader Samsung, we see LG’s upsized commitment to OLEDs as a strong tailwind for Universal’s chemical and high margin IP licensing business.

  • Our formal price target of $125 for Universal Display (OLED) shares is under review with a bias to moving it upwards.
  • The company will report its 2Q 2017 results on August 3 and we will adjust that target after that announcement.

 

 

Applied Materials (AMAT)            

The next catalysts for Applied Materials (AMAT) will be earnings from competitor Lam Research (LRCX) later today and Intel (INTC) tomorrow. Inside Lam’s results, we’ll be watching new orders, as well as backlog levels on both a product and geographic basis. In particular, we’ll look for confirmation of data coming out of the recent SemiCon West industry event that pointed to solid memory demand, which bodes well for additional semi-cap equipment demand.

With Intel’s results, we’ll be paying close attention to its capital spending plans for the back half of 2017. Also too, as we mentioned with Universal Display above, LG’s plan to spend $13.5 billion over the next 3 years to ramp its organic light emitting diode capacity bodes rather for Applied’s order book and back log levels over the coming quarters.

  • Our price target on AMAT shares remains $55, which offers ample upside from current levels.

 

 

Dycom Industries (DY)

This week and next will see several of Dycom’s key customers report their earnings, including AT&T (T), Verizon (VZ) and Comcast (CMCSA). Inside those reports, we’ll be looking at not only overall capital spending levels, but in particular, those targeted to mobile and wireline network capacity additions.

Given the continued adoption of streaming services, audio as well as video, we see commentary that networks capacity levels are running at exorbitantly high capacity utilization levels as being very good for Dycom. While we don’t expect any specifics on 5G timetables, we do expect to hear more about testing and beta launches. As Dycom’s key customers issue their quarterly reports, we’ll have much more to say on what it means for DY shares.

  • We continue to rate Dycom (DY) shares a Buy with a $115 price target.

 

 

 

Inflation waning while bonds dispute moves in stocks

Inflation waning while bonds dispute moves in stocks

Wednesday the Federal Reserve, as expected, raised rates, but even more importantly they release an outline of their plans to shrink the Fed’s balance sheet, which you can read here. We must also note that raising rates in a period of falling bond yields and where the 3-month change in core CPI is collapsing is unheard of, but then very little of U.S. monetary policy these days in within the bounds of normal.

Here are just a few reality checks to keep in mind.

Stocks are experiencing below average volatility and volume

  • On average, the S&P 500 experiences around 50 days where the market moves +/- 1 percent, but so far in 2017 we have experienced only 6 such days.
  • The 30-day NYSE average daily volume is down 16 percent from the post-election peak

Concentrated Gains

  • According to Barron’s, Facebook (FB), Apple (AAPL), Amazon (AMZN), Microsoft (MSFT) and Alphabet (GOOGL) collectively account for about 56 percent of the $1.16 trillion gain in the NASDAQ 100 market cap since the start of the year and are responsible for around 40 percent of the gain in the S&P 500 year-to-date: recall that back in 2000 Microsoft, Qualcomm (QCOM), Cisco (CSCO), Intel (INTC) and Oracle (ORCL) represented about 50 percent of the NASDAQ 100.
  • Collectively the FAANG trade trades at a P/E ratio of 39x, (versus 2017 EPS), which represents a 7-point expansion in 2017 alone.
  • 32 percent of actively managed funds are overweight the tech sector
  • 71 percent of actively managed funds are overweight FANG
  • The returns for the S&P 500 equal weight index is over 3 percent below the S&P 500 market cap weighted index year-to-date

Bonds are not telling a growth story

  • US 10-year Treasury yield has fallen from 2.6 percent in March to just over 2.1 percent today.
  • US 30-year Treasury yield has dropped from a peak of over 3.2 percent in the first quarter to less than 2.8 percent for the first time since November.
  • The Treasury curve, which has been flattening for some time, accelerated this trend this week, with the 10-year to 2-year spread falling below 80 basis points for this first time since last September.

10-2 Year Treasury Yield Spread Chart

The Bottom Line

  • Tops never look like tops until after they are well behind you.
  • They typically occur when investors are most confident.
  • They always occur before we are ready.
Apple’s WWDC17: An event lacking vision from a company without a visionary

Apple’s WWDC17: An event lacking vision from a company without a visionary

Yesterday, Apple (AAPL) held its annual World Wide Developer Conference (WWDC) at which CEO Tim Cook showcased a number of announcements. While we tend to be Apple devotees when it comes to the hardware and its ease of use, in taking a few steps back, our view is this year’s WWDC is it was one largely filled with refinements and incremental additions. Not entirely surprising, given the fact that Apple is now led by an expert operations manager, Tim Cook, and not a visionary like Steve Jobs. As we see it, Apple will either need to bring in some visionary expertise, or perhaps, and more likely, use it’s war chest of $250 billion to buy some vision in the form of acquisitions, but that’s another story.

We have not been buyers of Apple shares as of late — despite being avid fans, if not a lover of its products — given the transition-like nature of the product cycle that keeps Apple arguably reliant on the iPhone. Instead, for subscribers to our Tematica Research premium service, we’ve recognized the Apple-related opportunity from a different perspective – one that intersects with our tendency to “Buy the Bullets, Not the Guns” and several of our investing themes — Connected Society, Content is King, Cashless Consumption and Disruptive Technologies – with great success along the way. Examples include Universal Display (OLED), Nuance Communications (NUAN) and Applied Materials (AMAT), which are up more than 127 percent, 23 percent and 28 percent, respectively since being added to the Tematica Select List.

In our view, Apple is in a tough spot after setting the bar so high for so long. It too now has to compete with how it once wowed audiences and consumers as it updates existing products and tries to find its footing with new ones. Given its size, install base and the fact that its products are for the most part so simple to use, Apple isn’t likely to go the way of Kodak or Xerox anytime soon.

Getting back to the conference, on the smaller side, there were announcements like Amazon’s (AMZN) Prime Video coming to Apple TV and the upgrades to its Mac line. The real interest was in what the latest release of its mobile operating system iOS 11 brings, with a surprise in that this next iteration is likely to make the iPad a device to be embraced for both business as well as personal use. Perhaps the best worst kept secret heading into the event was Apple’s move into the connected speaker market, and yes Apple did take the wraps off HomePod, which looks to be Apple’s second if not a third potential hub in the home. The first two hubs being the iPhone and Apple TV, both of which connect with Apple’s HomeKit.

 

 

Interestingly, Apple is leading HomePod with music first and as a connected device with Siri second. Perhaps this is because if you’ve ever asked Siri the same questions as you might ask Amazon Alexa, one tends to realize that Siri isn’t the sharpest knife in the drawer, as it lacks the backing of Amazon’s Amazon Web Services and artificial intelligence. This strategy is also likely aiming to spur subscriptions to Apple’s Apple Music service; we can’t tell you how many times Apple shared it offers more than 40 million songs during the keynote presentations. Will this be a viable competitor to Sonos’s smart speakers when it comes to sound quality? Could the HomePod spur Amazon or Alphabet to acquire Sonos? Time will answer both of those questions.

Apple did tout Siri Intelligence several times during yesterday’s presentations, but this appears to be an area of continued investment as Apple catches up to Amazon and Google rather than leapfrogging them in the process and redefining the category. With Amazon’s strategy to make Alexa compatible with autos, the likes of Ford (F) and Volkswagen, as well as consumer appliance companies such as Whirlpool (WHR), it looks like the old OS war between Microsoft and Apple could be played out again in the voice digital assistant space. This raises several questions in our minds – Will Apple license Siri for use outside of Apple products? Will Amazon have the same issues Microsoft had with Windows and device compatibility? Fodder for thought and what it may mean for the future of these interfaces.

Yes, there was some cool new Apple stuff, like the Do Not Disturb While Driving feature, the ability to drag and drop with iOS 11, which in our view was sorely missing for the iPad and Apple’s foray into Virtual Reality (VR). But again, the head turning “wow” factor just wasn’t there. Even with HomePod, it will be interesting to see how it stacks up against Amazon’s Echo products as well as Alphabet’s (GOOGL) Google Home in the coming months. One would have to think these companies are prepping newer models, perhaps with better sound capabilities, ahead of the year-end holiday season.

The problem as we see it is Apple is trapped inside a near yearly refresh rate that makes it challenging to deliver breakthrough features each and every year. Even the new iOS name, iOS 11, is uninspiring.

Who has a blowout birthday when they turn 11?

Even the naming conventions for the new macOS and iMac were iterative in nature with Craig Federighi, Apple’s senior vice president of Software Engineering, getting a good nature laugh along the way.

Now with the WWDC keynote behind us, the next event to watch for Apple will be the unveiling of the much-discussed iPhone 8 model later this year. While Apple did sneak peek a few products yesterday, we heard nothing about the next iPhone model and as the news cycle turns away from WWDC we expect investor speculation to run rampant when it comes to this device later this summer. With 66 percent of Apple’s sales coming from the iPhone over the last two quarters, it’s the one product that Apple has to get right. Odds are it will, and that device will keep Apple as one of the key players in our Connected Society investing theme as its other initiatives – Virtual Reality, Apple Pay, Apple Watch and Apple TV – feel the lift of our Disruptive Technology, Cashless Consumption, Fountain of Youth and Content is King themes.

As these tailwinds blow, our Tematica Select List will surely continue to reap the benefits.

WEEKLY ISSUE: Deploying Several Defensive Measures to Protect Gains

WEEKLY ISSUE: Deploying Several Defensive Measures to Protect Gains

In this Week’s Issue:

  • Deploying Several Defensive Measures to Protect Our Gains
  • Alphabet (GOOGL), Asset-lite Business Models
  • Applied Materials (AMAT), Disruptive Technology
  • Universal Display (OLED), Disruptive Technology
  • Dycom Corp. (DY), Connected Society
  • Facebook (FB), Connected Society
  • USA Technologies (USAT), Cashless Consumption

 

Amid the market’s choppy behavior over the last week, the reality is it was little changed as measured by the performance of the S&P 500. In recent days, the market’s focus has once again turned to Washington, first with Treasury Secretary Steve Mnuchin testifying to the Senate Banking, Housing, and Urban Affairs Committee in which he reiterated that the Trump administration’s goal of 3 percent or better GDP is achievable provided “we make historic reforms to both taxes and regulation.” That was followed up this week with the release of President Trump’s 2018 budget, titled A New Foundation for American Greatness, which includes $639 billion slated for military spending that would allow the Pentagon to bolster its ranks by more than 56,000 troops, buy more helicopters and trucks for the Army, boost the Navy’s fleet and pay for more stealth warplanes for the Air Force.

From a thematic perspective that is shot in the arm for another aspect of our Safety & Security investing theme following last week’s high profile WannaCry ransomware attack. While we have PureFunds ISE Cyber Security ETF (HACK) on the Tematica Select List, we’ll look to uncover well-positioned “bullets” for the Select List in the coming days to round out our exposure to this spending tailwind.

Speaking of our Safety & Security investing theme, if you missed last week’s Cocktail Investing Podcast in which Tematica’s Chief Macro Strategist, Lenore Hawkins and I discussed the WannaCry attack, ransomware and cyber spending with Yong-Gon Chon, CEO of cyber security company Focal Point, click here to download it on iTunes. My advice would be to subscribe on iTunes so you get every podcast each and every week, and remember they are absolutely free.


Deploying Several Defensive Measures to Protect Our Gains

As the stock market has moved higher and higher, it’s not lost on us that a number of holdings on the Tematica Select List have been inching up week after week, closing the gap on our respective price targets — that’s a nice problem to have, isn’t it?

Obviously, we’re not really going to complain about positions like Dycom (DY)or Universal Display (OLED) outperforming the market so far in 2017, but we will look at remaining upside to our price targets with an eye to protect subscribers from piling in at levels that don’t afford sufficient upside to warrant taking on potential risk. Yes, it’s the RISK and REWARD that we look at when assessing whether a position makes the cut onto the Select List.

With less than 10 percent upside to respective price targets, we are downgrading several stocks to “Hold” from “Buy.” Unlike Wall Street traders, our Hold rating is just that – maintain the position to capture additional upside, not “Hold means Sell.” For example, even though there is just 8 percent upside to our Alphabet (GOOGL) price target, there are enough tailwinds blowing that could lead to us to revise our price target upward over the coming months. With that mind, we are now rating shares of Alphabet, CalAmp (CAMP), International Flavors & Fragrances (IFF), and Facebook (FB) as Holds. As we do this, we’ll be mindful of pullbacks in the market that offer buying opportunities as well as potential upside to existing price targets.

We’re also making some prudent changes with regard to stop losses, and with that in mind we will make the following adjustments:

  • Boost our stop loss on IFF shares to $125 from $115, which will lock in a nice profit given our $120ish entry price.
  • Raise the stop loss on our PowerShares Exchange-Traded Fund Trust (PNQI) shares to $98 from $90, which cements at least a 17 percent return in the shares.
  • Increase our stop loss on Universal Display (OLED) shares to $85 from $70, which will ensure a minimum return of 60 percent given our $53 entry point.
  • Finally, with our GOOGL shares, we’re stepping the stop loss up to $900 from $800, which will give us a minimum return of just over 22 percent in the shares.

One last item of note, during the past week our position in AMN Healthcare (AMN) was stopped out when the shares crossed below our $37 stop loss level leaving us with a modest profit. Despite that happening, the drivers that led us to initially add the shares to the Tematica Select List – the intersection of the current nursing shortage and the demand for healthcare workers that is a part of our Aging of the Population investing theme – remain intact. As such, we’ll add AMN shares to the Tematica Contender List while we look for a favorable re-entry price.


 Updates Updates Updates

Below are some happenings for those companies on the Tematica Select List that we found noteworthy over the last week. As 1Q 2017 earnings season finally begins to die down, we expect to resume our quest to find new positions for the Select List or at least the thematic bullpen that we affection call the Tematica Contenders List. Two companies that I’m starting to roll my sleeves up on include MGM Resorts International (MGM) as part of our Guilty Pleasure investing theme and CSX (CSX), which falls under our Economic Acceleration/ Deceleration investing theme.


Alphabet (GOOGL), Asset-lite Business Models

GOOGL shares were largely unchanged this past week on the heels of its annual Google I/O event. There were several notable announcements there, including new hardware and augmented reality (AR) developments, as well as the news that Google Home will be available in more countries outside the U.S. over the coming months.

Earlier in the week Alphabet announced its Waymo division would team up with Lyft to commercialize its driverless technology, which increases the potential for Waymo to go from investment mode to perhaps revenue generating over the next several quarters. Should that happen, Alphabet could either redeploy those investments to other projects and if not we could see a reason to contemplate upside to EPS in 2019-2020.

Getting back to the here and now or at least the nearer term, we continue to see Alphabet as extremely well positioned for the continued acceleration in our increasingly connected society toward digital search (desktop and mobile), advertising dollars shifting to digital platforms (Google, YouTube) and consumer appetite for streaming content. At the same time, the company continues to exhibit a more focused view on delivering profits, something we appreciate as shareholders.

  • Our price target is $1,050, which offers roughly 8% upside from current levels.
  • Even as GOOGL shares approach our target, much like we say with Amazon (AMZN) shares, GOOGL shares are ones to own, not trade.

 


 

Applied Materials (AMAT), Disruptive Technology

Last week Applied Materials (AMAT) reported better-than- expected earnings on in-line revenue due primarily to robust margin expansion versus year-ago levels. Furthermore, given prospects for continued margin improvement and underlying order strength, the company guided the current quarter above consensus expectations. Per the quarterly report, Semiconductor Systems sales rose more than 50 percent year over year, benefiting from the ongoing digitization that has chips becoming the new “fabric” of lives — Connected Car, Connected Home, the Internet of Things (IoT) and wearables. Applied is also benefiting from rising semiconductor capacity in China as well as strong demand for organic light emitting diode displays that led its display equipment sales to spike more than 100 percent in the quarter.

  • On the underlying strength in the current demand up-cycle and prospects for further margin improvement, we are boosting our price target to $55 from $47, which offers upside of 22 percent from current levels.
  • We continue to rate AMAT shares a Buy

 


 

Universal Display (OLED), Disruptive Technology

You probably noticed in our Applied Materials comments earlier that one of the drivers to its strong quarter was robust demand from the currently capacity constrained organic light emitting diode market, or OLED’s for short and not to be confused with Universal Display’s ticker symbol, which is also OLED. If you didn’t feel free to scroll back up and re-read them.

During AMAT’s earnings conference call, the management team gave a rather bullish endorsement for our position in OLED shares when it said, “we see investment in mobile OLED getting stronger as confidence in the adoption rates of OLED technology increases. Recent forecasts indicate that two-thirds of new smartphones could have OLED displays by 2021 and screen manufacturers are accelerating their investment plans accordingly.”

With more applications — ranging from smartphones to TVs and wearables — embracing OLEDs in the coming quarters and ramping industry capacity to meet that demand, the outlook for Universal’s chemicals and licensing business looks very bright.

  • We are reassessing our current $125 price target with an upward bias.

 


 

Dycom Corp. (DY), Connected Society

This morning, our shares of Dycom Corp. (DY) are getting hard hit following the company’s mixed quarterly earnings report. The good news is for the April quarter, Dycom crushed expectations with $1.30 per share in earnings on revenue of $786.3 million compared to consensus expectations of $1.19 and $736.2 million, respectively. Organic revenue nearly 15 percent year on year, while business acquired in the last year contributed $23 million. While details in the pre-earnings conference call press release were scant, we see the year over year growth speaking to the continued build out of next generation networks at core customers like Verizon (VZ), Comcast (CMCSA) and our own AT&T (T).

Now for the less than good news that is pressuring the DY shares  – the company’s outlook for the current quarter. Dycom is forecasting contract revenue to be in the range of $780-$810 with EPS between $1.35-$1.50, which falls short of consensus expectations that were looking for revenue $845-$850 million with EPS in the range of $1.76-$1.79. As we suspected, the culprit given the nature of the company’s business is the timing of projects, and in this case, the mild winter led to some pull forward, hence the part of the better than expected April quarter revenue. The other driver for the April quarter revenue beat was one industry participant has begun to invest in the wireline infrastructure required to enable fully converged wireless-wireline networks. As we’ve seen before, this tends to result in copy-cat spending by competitors, which in our view bodes well for Dycom in the coming quarters.

Stepping back, we see both cable and mobile operators expanding existing network capacity and launching new, next-generation networks to meet need the near unquenchable demand for data. On this morning’s earnings call, Dycom shared that it is seeing a broadening set of customer opportunities that are in the initial stages of planning, engineering and design and deployment. While this has helped temper near-term spending expectations, the company is continuing to win contracts as customers continue to improve their network capabilities and performance. This brings us back to timing, and that means keeps tabs on Dycom’s customer base and respective network capacity additions and new technology deployments, such as fiber to the home and business as well as 5G backhaul. We expect the Wall Street community will trim back near-term revenue expectations, but given the 18 percent drop in DY shares this morning, we would argue those cuts are largely factored into the stock price.

Keeping one eye on the medium to longer-term view as these networks get built out over the next few years (not quarters), we’re inclined to use the pullback in the shares to round out the portfolio’s position size as the shares settle down provided our suspicion over the guidance miss is on point.

  • Given the initial purchase prices on the Tematica Select List at $72.89 and $80.47, we’re going to be patient with this position.
  • For those subscribers that missed the initial run in DY shares, we see this as an excellent jumping on point.

 


 

Facebook (FB), Connected Society

In the last few days, Facebook (FB) was fined by the European Commission just over $100 million on its acquisition of WhatsApp. That’s nothing to sneeze at, but there was far bigger news concerning the social media giant this week.

First, Facebook is expanding its video offering, inking a deal to broadcast a live Major League Baseball game each Friday for the rest of the season. All in all, that’s a 20-game package that begins tonight.

Second, Facebook’s “Order Food” option on both the web and mobile is now in beta testing. This initiative is an expansion of a deal from late last year with Delivery.com and Slice in which users could place orders with supported restaurants from their own Facebook pages. In our view, this speaks to the monetization across Facebook’s multi-platform offering that is benefiting from ongoing feature upgrades.

In the coming months, we’ll look to see if the slowdown in digital advertising, cited on Facebook’s earnings call, is occurring or if the shift to mobile advertising continues to be robust.

  • Our price target remains $160.
  • For now, we would suggest subscribers look to add to FB positions below $145.

 


 

USA Technologies (USAT), Cashless Consumption

Last week, USAT shares rose more than 2 percent during a quiet news week for the company. Despite the relative silence, comments from Alphabet (GOOGL) at its annual I/O developer conference revealed Android Pay was expanding into new markets: Brazil, Canada, Russia, Spain, and Taiwan. As mobile payments expand across the globe, much the way credit and debit cards have, we see an expanding target market for USA’s payment solutions.

  • We intend to be patient investors and hold USAT shares as mobile-payment adoption grows.
  • Our price target remains $6 and the shares are a Buy at current levels.

 

 

 

 

 

WEEKLY ISSUE: “WannaCry” cyber attack impact on our Safety & Security investment theme

WEEKLY ISSUE: “WannaCry” cyber attack impact on our Safety & Security investment theme

In this Week’s Issue:

  • Checking the data, the economic data that is
  • WannaCry makes HACK shares jump for joy
  • Disney (DIS) held movie hostage?
  • Alphabet (GOOGL) and Lyft team to commercialize self-driving cars
  • Amazon’s (AMZN) at it again, this time with furniture
  • Getting ready for earnings from Applied Materials (AMAT) and what it means for Universal Display (OLED)

 

It’s been a much welcomed slower week of economic data and corporate earnings, but Mother Nature sensing we might like the lull after the last few weeks, many across the globe had to contend with the WannaCry ransom ware cyber attack – more on that below and what it means for our Safety & Securityinvestment theme position in PureFunds ISE Cyber Security ETF (HACK) shares. We’ve also got a number of updates to share, so away we go…

 

Checking the data, the economic data that is

Before we dish on WannaCry, let’s recap the economic data received this week, which included the May reading on manufacturing under the purview of the NY Fed, as well as April data for Housing Starts and Industrial Production. Let’s start with the good news, which was manufacturing activity per the April Industrial Production report ticked higher month over month, but even though this took a bite out of excess manufacturing capacity, manufacturing capacity remains underutilized. Moving over the April Housing Starts, single-family homes were flat month over month, while multifamily units fell more than 9 percent compared to March.

 

On the back of that data, the Atlanta Fed boosted its 2Q 2017 GDP reading to 4.1 percent from the prior 3.6 percent reading. Then we received the Empire Manufacturing Index for May, which clocked in at -1.0, well below the expected 7.5 reading and down compared to April’s 5.2 showing. Not exactly supportive of the Atlanta Fed’s revised forecast, and candidly more in line with the slowing evidenced in the majority of the economic data.

 

 

Tomorrow (Thursday), we’ll get the Philly Fed Index and we’ll be matching the May figure against 22.0 in April and consensus forecast of 18.5 for May. As we digest that data point, we’ll be looking for the next 2Q 2017 GDP update from the NY Fed and its Nowcasting model. As a reminder the most recent Nowcasting reading pegged 2Q 2017 GDP at 1.9 percent, down from 2.9 percent at the end of March.
 

WannaCry makes HACK shares jump for joy

Over the last five days, shares of the PureFunds ISE Cyber Security ETF (HACK)rose more than 2 percent bringing the position return to more than 6 percent since being added to the Tematica Select List in early February. As we saw over the last few days, we are seeing a pronounced pick-up in cyber attacks, which include WannaCry and the more than 300,000 computers across over 150 countries that it violated as well as other attacks on hospitals and even clothing retailer Brooks Brothers.

From time to time, we tend to settle in following a headline-worthy cyber attack and complacency returns. We’ve seen this several times, and it tends to result in a demand spike for cyber security stocks, only to see them level off over the coming months. By comparison, we continue to see a growing frequency of cyber attacks both large, medium and small, which is fueling demand and driving revenue for cyber security companies. If one were to postulate, this demand is one downside to our Connected Society investing theme. We would agree, as one company’s tailwind can be another’s headwind, and that pain point can create an opportunity for others. Pretty much what we see here, and it keeps us bullish on HACK shares given our $35 price target.

We’ll be doing a deeper dive on this week’s Cocktail Investing Podcast when Tematica’s Chief Macro Strategist, Lenore Hawkins, and I talk with Yong-Gon (“Young Gun”) Chon, the CEO of Focal Point Data — consulting firm that advises CEOs and Boards on cyber risk.  Be sure the check the website for when the podcast is posted, or subscribe on iTunes to automatically receive each and every episode. While the Cocktail Investing podcast is free – it is, unfortunately, a “BYOB” event.

 

 

Disney (DIS) held movie hostage?

During a town hall meeting with employees, Bob Iger CEO of The Walt Disney Co (DIS) shared “hackers have claimed to have stolen a movie and are threatening to release it in segments until their demands, which include a pirate-like ransom paid with Bitcoin, are met.” While Iger did not identify the would-be stolen film, chatter suggests it to be the new “Pirates of the Caribbean” sequel, which is set to open on May 26. This is the latest film in a franchise that has grossed grossing nearly $3.73 billion worldwide. Disney is currently working with federal authorities to investigate the attack, and we’ll continue to monitor developments and what they may means for the company’s film business in the near-term.

  • The recent post-earnings pullback offers 16 percent upside to our $125 price target at current levels.
  • With a robust movie slate, declining capital spending and a super-sized $10 billion buyback program, we continue to favor the House of Mouse.

 

 

Alphabet (GOOGL) and Lyft team to commercialize self-driving cars

Amid its skirmish with Uber over self-driving technology that it is developing at Waymo, this week Alphabet’s (GOOGL) partnership with ride-hailing startup Lyft took a new turn as they agreed to work together to develop products and technology for autonomous autos. While terms and other details of the arrangement were not disclosed, there are several thoughts on what this could mean for Alphabet’s Waymo. The most obvious of which is a path to commercialization. Even Warren Buffett commented on the threat that driverless cars and trucks pose to several of Berkshire Hathaway’s businesses at the annual shareholder meeting this year, couching his remarks with “at some point.”

As we see it, the arrangement with Lyft has the potential to bring Waymo’s driverless technology to commercialization as it leverages Lyft’s network of taxis operating in more than 300 cities across the United States. What’s Lyft’s motivation in this? Reducing its largest cost, which are the drivers that get as much as 80 percent of fares, not to mention cash subsidies to retain those drivers. With other companies ranging from Apple (AAPL) to Mobileye (MBLY)vying for a slot in the driverless car market, we’ll continue to watch developments.

  • Our price target on GOOGL shares remains $1,050, which offers just under 10 percent upside from current levels.
  • With the market trading at stretched valuations, we would hold off adding to GOOGL positions at current levels.
  • That said, GOOGL shares are ones to own as we move deeper into the Connected Society.

 

 

Amazon’s (AMZN) at it again, this time with furniture

Turning to Amazon, there were two announcements that caught our eye – the first deals with Amazon’s expanding into furniture, while the other is the dismal brick & mortar retail landscapes. We commented on the later in last week’s Roundup, but we’re seeing reminders of retail-megaddon this week in TJX Companies (TJX) dismal earnings report. Our view remains Amazon is net share gainer as it expands its product and geographic footprint. That brings us back to our first point, the expansion of its furniture offering. While Amazon has sold furniture online for years, much like apparel, it is it stepping up its game as it offers a wider variety of selection — Ashley Furniture sofas and chairs and Jonathan Adler home decor. What Amazon is looking to do is tap into the growth prospects for online furniture sales, which eMarketer sees growing to more than $55 billion by 2020, up from $36 billion this year.

  • Our AMZN price target remains $1,100, which offers just under 14 percent upside from current levels. As with GOOGL shares.
  • AMZN shares are one to buy and hold, and that’s exactly what we aim to do.

 

 

Getting ready for earnings from Applied Materials (AMAT) and what it means for Universal Display (OLED)

Applied Materials (AMAT) will report its quarterly earnings after Thursday’s (May 18) market close. Heading into the weekend consensus expectations call for the company to deliver EPS of $0.76 on revenue of $3.54 billion. As we digest the company’s earnings, we’ll be focusing on bookings and backlog with an eye for potential upside to our price target. With that report, we’ll get another take on ramping OLED industry demand. All signs point to rising capacity, and we’ll be listening to Applied’s comments not only for incremental capacity additions but the timing for those new facilities going from beta to commercial production. With more applications ranging from smartphones to TVs and wearables embracing OLEDs in the coming quarters and ramping industry capacity to meet that demand, the outlook for Universal Display’s (OLED)chemicals and licensing business looks very bright.

We’d note the price moves in these two shares have been strong, and both have continued to encroach on our respective price targets. While we anticipate an upbeat quarter and outlook from Applied, we also think expectations are running high into the earnings report. In our view, to justify the Buy ratings on both stocks, we would need to see upside to $52 for AMAT shares and near $135 for OLED shares, respectively, from current levels. We’ll dial into AMAT’s quarterly report and make our next move based on those findings. With OLED shares, we suspect we’re likely to see a series of rising price targets over the coming months as we wait for the initial sales data on Apple’s next iPhone. Odds are Apple will once again under-produce relative to demand, resulting in the headlines touting yet again another new iPhone selling out. Up over 120 percent as of last evening’s close, we will continue to hang onto our OLED shares for the ride that is to come.

 

 

 

 

 

WEEKLY ISSUE: Several stocks capitalizing on strong thematic tailwinds

WEEKLY ISSUE: Several stocks capitalizing on strong thematic tailwinds

In this Week’s Issue:

  • Disney Delivers an EPS Beat, But Reaffirms 2017 is a “Transitional” Year
  • Amplify Snacks Serves Up a Healthy Quarter
  • USA Technologies: Riding the Cashless Consumption Wave
  • March JOLTS Report Confirms Our Stance on AMN Healthcare (AMN) Shares

 

As we noted in the Monday Morning Kickoff a few days ago, this week was going to be yet another barn burner in terms of activity, with yet another 1,000 companies reporting earnings. We’ve gotten some incremental economic data points, but the main ones for the week – the April reports for PPI, CPI and Retail Sales – all come later in the week.

As we sifted through hundreds of earnings reports over the last two days, we also saw further downward revisions by both the Atlanta Fed and the New York Fed for their respective 2Q 2017 GDP forecasts. Hardly surprising, given the readings from ISM and Markit Economics as well as the April data supplied by regional Fed banks, but once again here we are. What made headlines yesterday was the comments from Commerce Secretary Wilbur Ross that the US economy “won’t achieve the Trump administration’s 3 percent growth goal this year and not until all of its tax, regulatory, trade and energy policies are fully in place.”

Given Ross’s comments that the growth target “ultimately could be achieved in the year after all of President Donald Trump’s business-friendly policies are implemented” but that “delays were possible if the push for tax cuts was slowed down in Congress,” odds are there is some DC-style politicking going on. Even so, the reality is without a jolt to the system odds are the US economy will remain in low gear.

As we’ve shared previously, the economy is facing several headwinds associated with our Aging of the Population and Cash-strapped Consumer investing themes that are likely to keep it’s growth range bound. As such, we continue to see current GDP expectations as somewhat aggressive for the coming quarters, and the same holds true for S&P 500 earnings expectations. That said, we are not buyers of the stock market, but rather those companies that are well suited to capitalize on the tailwinds associated with our investing themes. You’ll see confirmation of that in our comments below on Disney (DIS), Amplify Snacks (BETR), USA Technologies (USAT) and AMN Healthcare (AMN), as well as Amazon (AMZN) and Alphabet (GOOGL) in the next paragraph.

As a quick reminder, later this week we’ll get the April Retail Sales Report, which could see favorable comparisons year over year given the late Easter holiday. As usual, we’ll be digging in below the headlines to get a better sense of consumer spending for not only what they are buying, but where. We once again suspect the report will confirm the accelerating shift toward digital commerce that is power our Amazon (AMZN) and Alphabet (GOOGL) shares. We continue to rate both Buy with $1,100 and $1,050 price targets, respectively.

Now let’s dig into the earnings reports for several positions on the Tematica Select List…

 

 

 

Disney delivers an EPS beat, but reaffirms 2017 is a “transitional” year.

Last night Disney (DIS) reported March 2017 results, which included better than expected EPS, revenue that came in a tad shy of expectations and sober forward guidance, which reminded investors that 2017 is a transitional year for the company as it targets better growth in 2018. EPS for the quarter came in at $1.50, $0.09 ahead of consensus expectations as revenue rose 2.8 percent compared to the year-ago quarter hitting $13.34 billion, shy of the $13.44 billion that was expected.

Heading into 2017, we noted the first half of the year would likely be a more subdued one and so far that is proving to be exactly the case. As we enter the company’s fiscal second half of 2017, Disney has a far stronger movie lineup, which should continue into 2018 and beyond. Higher costs at ESPN and investments in new park attractions, however, are likely to be gating factors over the next few quarters. We see Disney as investing today to leverage its vast array of characters and tentpole films that will drive incremental business at its parks, for its merchandise and other businesses in the coming quarters.

Our price target remains $125, but we’ll continue to revisit that target based on box office strength in the coming months. Odds are the quarter’s results will take some of the wind out of Disney’s sails, but with the company set to continue to leverage its Content is King strategies, we’re inclined to be patient.

Breaking down the company’s segment results from the March quarter we find:

  • Cable Networks revenues for the quarter increased 3 percent to $4.1 billion and operating income decreased 3 percent to $1.8 billion. The decrease in operating income was due to a decrease at ESPN due to higher programming costs because of the timing between College Football Playoff (CFP) bowl games and NBA programming, which was partially offset by increases at the Disney Channels and Freeform. Programming costs are expected to be 8 percent higher this year due in part to the new NBA contract.
  • On a positive note, Disney continues to make progress in transitioning ESPN by expanding its reach into streaming services like those from Sling TV, Sony’s (SNE) PlayStation Vue, YouTube TV (GOOGL), Hulu and DirecTV Now from AT&T (T). While Disney is seeing favorable momentum, it’s still not enough to totally offset the slide it is seeing in cable subscriptions. As we discussed recent, Disney is focusing on live mobile content, which should help drive incremental viewing compared to the 23 million unique users who collectively spent 5.2 billion minutes engaging with ESPN on its mobile platforms in the March quarter.
  • Parks and Resorts revenues for the quarter increased 9 percent to $4.3 billion and segment operating income increased 20 percent to $750 million. We’d note that segment benefited from price increases taken in prior months, but this was offset by the later than usual Easter holiday this year.
  • As expected construction is underway on Star Wars attractions at both Disney World and Disney Land, a great example of how the company’s film content will drive park attendance and merchandise sales. Management commented that in a few days the 10 millionth guest will pass through Shanghai Disney and the park is tracking to break even this year as Disney downshifts investing in the park compared to year-ago levels.
  • Studio Entertainment revenues for the quarter decreased 1 percent to $2.0 billion and segment operating income increased 21 percent to $656 million. Despite having two films that grossed more than $1 billion each during the quarter – Rouge One from the Star Wars franchise and remake of Beauty and the Beast – the quarter faced stiff year over year comparisons given the success of last year’s Star Wars: The Force Awakens and Zootopia and in essence making them a victim of their own success. On the earnings call, as expected management talked up Friday’s Guardians of the Galaxy 2 release, which took the top spot at the box office and raked in more than two times the first installment of the Guardians franchise. Disney reminded investors it has four Marvel films coming over the next 14 months, as well as the next installment of the Pirates of the Caribbean franchise and Cars 2 dropping in the next few months before The Last Jedi lands in December. Longer-term, there will be more Marvel, Pixar and Lucasfilm tentpole properties, but on the call Disney shared that Frozen 2 will be released in 2019.
  • Broadcasting revenues for the quarter increased 3 percent to $1.9 billion and operating income increased 14% to $344 million led by greater sales of Marvel TV programming content to Netflix (NFLX) and others.
  • Consumer Products & Interactive Media revenues for the quarter decreased 11% to $1.1 billion and segment operating income increased 3 percent to $367 million.

On the housekeeping front, during the March quarter, Disney repurchased about 18.6 million shares for about $2 billion. Over the last two quarters (better known as the company’s fiscal year-to-date), its repurchased 41.5 million shares for approximately $4.4 billion. Citing lower than expected capital spending needs and improved operating cash flow, Disney once again increased its share repurchase target by $2 billion to $9 billion to $10 billion for the year. As the company chews through this program, it should help improve year over year EPS comparisons, but we’ll still be monitoring both operating profit as well as net income growth when contemplating how to best value the shares.

The bottom line on DIS shares:

  • Given the appreciation in the shares price over the last five months, we would not add to positions in the Walt Disney Co (DIS) at current levels and thus are changing our rating to a Hold at this point in time.
  • Rather, we would look to commit fresh capital to DIS shares between $100-$105 if the shares pull back in the coming days, while over the longer term we still maintain a price target of $125 for the shares.

 

 

Amplify Snacks Serves Up a Healthy Quarter

After last night’s market close, Foods with Integrity theme company Amplify Snacks (BETR) reported 1Q 2017 results that included EPS of $0.06 vs. the expected $0.06 on revenue of $87.2 million vs. the consensus expectation of $87.6 million and up more than 60% compared to $54.3 million in the year-ago quarter. The one wrinkle in the quarter was the company’s gross margin line that contracted year over year, which we attribute to short-term initiatives to grow the company’s business further. For example, during the quarter the company launched its SkinnyPop Ready-to-Eat popcorn in the U.K., carried a full quarter of both the Oatmega and Tyreell acquisitions, and introduced new SkinnyPop product extensions (popcorn cakes, popcorn mini-cakes and microwave popcorn).

As these initiatives bear fruit over the coming months and longer term as Amplify brings Tyrrell chip products to the US in the back half of 2017 and 2018, the good news is the company continues to expand its distribution. Exiting the quarter, its ACV (a widely recognized distribution measure) hit 81 points up from 73 in the same period last year. The year over year improvement reflects new distribution across grocery, mass and convenience channels as those companies embrace our Foods with Integrity investing theme and expand their healthy snacking alternatives.

Given stronger prospects for the domestic business, Amplify amended its tax guidance which has led to a modestly higher tax rate than previously expected. This, in turn, has led the company to ever so so slightly trim its 2017 EPS outlook to $0.42-0.50 versus our prior expectation of $0.43-0.51., which in our view is a very minor change relative to the growth prospects to be had over the coming quarters.

  • Exiting the company’s quarterly earnings report, we continue to rate BETR shares a Buy with a $10.50 price target.

 

  

USA Technologies: Riding the Cashless Consumption Wave

Yesterday, USA Technologies (USAT) reported inline EPS expectations for the March quarter on better than expected revenue. USA Technologies 1Q 2017 revenue rose 30 percent year over year as the company continued to grow the number of connected to its ePort services, up 26 percent to 504,000 connections. As the adoption of mobile payments continues to spread, USA expanded its customer base by another 500 to reach 12,400 exiting the quarter, a 15 percent increase year over year. The company also issued a more upbeat outlook calling for 2017 revenue of $95-$100 million, a tad higher than the $95-$97 consensus expectation derived from the three Wall Street analysts following the shares.

On the earnings call, the company shared a number of confirming data points for investment thesis on USAT shares including:

  • USAT is working with Ingenico to provide customers with more hardware options and where Ingenico will be able to leverage USA’s quick connect service as well as ePort Connect platform for use with its NFC/contactless unattended payment solutions. As way of background, Ingenico was the first international multi-billion-dollar mainstream payments hardware company that have entered the unattended retail market.
  • During the quarter, USA also launched an alliance with vending company Gimme Vending as also announced a stand-alone loyalty program that integrates with Apple’s (AAPL) Apple Pay.
  • Digging into 1Q 2017 revenue, the company had 105 million total transactions representing 203 million in transaction volume increases of 28% and 34% respectively from last year.
  • License and transaction fees rose 19% year over year to $17.5 million compared to $14.7 million last year. We call this out because the segment includes recurring monthly service as well as transaction processing fees, which offer good visibility and predictability. As the percentage revenue derived from license and transaction continues to climb from 66% of total revenue in 1Q 2017, the company’s visibility should similarly improve.

With the continued migration toward a cashless society, we continue to rate USAT shares a Buy with a $6.00 price target.

 

 

March JOLTS Report Confirms Our Stance on AMN Healthcare (AMN) Shares

Yesterday we received the March Job Openings and Labor Turnover Survey and once again it showed not only a strong year over year increase in healthcare job openings, but also the number of open healthcare jobs significantly outweighs the number of positions filled. Granted the data lags by a month, but given the April jobs data, we rather doubt there has been any meaningful change in the metrics over the last month. We continue to see the far greater number of healthcare job openings compared to the available talent pool as driving demand for AMN Healthcare’s (AMN) healthcare workforce solutions.

  • With more than 20% upside to our $47 price target, we continue to rate AMN shares a Buy.