Ep. 95: Short Selling Anyone

Ep. 95: Short Selling Anyone

 

Stocks pop in January, but earnings continue to come down

On this episode of the Cocktail Investing Podcast, we close the books on one of the best Januaries in years for the stock market and trace back the reasons for its inflection point from a painful year-end 2018 for investors. While some issues that plagued the market have rolled back, one, in particular, hasn’t and it’s one investors use to not only value stocks but determine which ones they are willing to pay up for. That includes a brief discussion on earnings from Apple (AAPL), Amazon (AMZN), Facebook (FB) and others, but also prompts a conversation on short-selling.

We round out the podcast with a few Thematic Signals that confirm why Netflix (NFLX) is right to be worried about Fortnite; how consumer products companies like PepsiCo (PEP), Hershey (HSY), and Proctor & Gamble (PG) are embracing our Clean Living Investing theme; and why China is poised to become the largest retail market on the planet as our Living the Life, New Global Middle-Class and Middle-Class Squeeze investing themes intersect.

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

And don’t forget to subscribe to the Cocktail Investing Podcast on iTunes!

Resources for this podcast:

 

India’s Mobile Monsoon

India’s Mobile Monsoon

 

An article in this week’s Economist points out some phenomenal data that speaks to our Global Rise of the Middle Class investing theme. While the Middle Class in many developed nations is under pressure, part of our Middle-Class Squeeze investing theme, we are seeing technology help leapfrog infrastructure needs in many emerging markets. In India, mobile data is giving people access to the global economy in ways that was utterly impossible just a few years ago.

Just three years ago there were only about 125m broadband internet connections in India; by last November the number had reached 512m. New connections are growing at a rate of 16m per month, almost all on mobile phones. The average Indian phone user now consumes more mobile data than most Europeans.

Incredible economies of scale possible in the most populous nation on earth make for business models that are not feasible elsewhere.

So as not to limit the market to people who can afford smartphones, Jio also launched its own 4g feature-phone, the JioPhone, which it says is “effectively free”. Customers pay only a refundable deposit of 1,500 rupees ($21) for the device, with which they can use WhatsApp, watch YouTube and take pictures. As Mr Ambani said last year, for most users their Jio connection “is not only their pehla [first] phone but also their pehla radio and music player, pehla tv, pehla camera and pehla Internet”.

Which has lead to incredible adoption rates.

Data in India now cost less than in any other country. On average Jio’s users each download 11 gigabytes each month.

The opportunities here are staggering, but as we’ve seen pushback on globalization in much of the developed world, so too is India looking to protect is domestic companies from foreign competition. Draft rules revealed last July would require internet firms to store data exclusively in India. Another set of rules that went live last October require financial firms to store data locally, too. On December 26th India passed rules that hit hard at Amazon (AMZN) and Walmart (WMT), which dominate e-commerce there, preventing them from owning inventory in an attempt to protect local digital and traditional retailers.

Investors are well served to look beyond just the U.S. economy which is facing growth headwinds from slowing population growth, aging demographics and enormous debt loads with a mountain of unfunded liabilities across pensions and Social Security. In India, a country with a massive population that is relatively young and with productivity levels well below those of developed economies, small improvements can generate enormous returns for both its citizens and investors.

Source: Mukesh Ambani wants to be India’s first internet tycoon – India’s new Jiography

Retirement Plans Disappear When Parents And The Kids Return Home

Retirement Plans Disappear When Parents And The Kids Return Home

A recent Wall Street Journal article points out that the American dream is further out of reach for a growing number as plans for retirement go up in smoke thanks to the needs of aging parents and their adult children.

A 2014 study by the Pew Research Center found 52% of U.S. residents in their 60s—17.4 million people—are financially supporting either a parent or an adult child, up from 45% in 2005. Among them, about 1.2 million support both a parent and a child, more than double the number a decade earlier, according to an analysis of the Pew findings and census data.

Rather than enjoying the fruits of their decades of labor, many are finding that their household burdens are growing as they enter their sunset years.

More Americans find themselves housing two generations simultaneously, just when they thought they could kick back and retire. Instead, they face the strain of added expenses, constant caregiving and derailed dreams.

This pressure is coming as our Aging of the Population investment theme sees more senior citizens with inadequate savings and a healthcare system that is unable to provide the care they need at a price they can afford. On the other end of the spectrum, adult children are struggling with student debt levels the likes of which this country has never before seen and years of lackluster wage growth.

The squeeze is coming from both ends. With lifespans growing longer, the number of 60-somethings with living parents has more than doubled since 1998, to about 10 million, according to an Urban Institute analysis of University of Michigan data, and they are increasingly expensive to care for. At the same time, many boomers are helping their children deal with career or health problems, or are sharing the heavy burden of student loans.

This helps explain why discount retailers are expecting their customer base to continue to expand. Those companies that are able to help consumers push their dollars further [such as Amazon (AMZN), Costco (COST), Walmart (WMT)] have a growing set of tailwinds supporting them.

Source: ‘I Was Hoping to Be Retired’: The Cost of Supporting Parents and Adult Children – WSJ

EP 88 – Digital Shopping Reigns Supreme While Powell Fools the Market

EP 88 – Digital Shopping Reigns Supreme While Powell Fools the Market

 

 

On this week’s Cocktail Investing Podcast, Tematica’s Lenore Hawkins and Chris Versace center not only on the rash of holiday shopping data coming out of the Thanksgiving to Cyber Monday period but also discuss Fed Chairman Powell’s “near neutral” comment on interest rates. That comment led the stock market to rip higher, offering relief to beleaguered investors that saw the majority of 2018 gains for the domestic stock market wiped out in recent weeks. But… you knew there was a but coming… the reasons behind that shift in tone as well as other risks mean we are not out of the woods just yet.

On the podcast, Lenore and Chris explain all of this in further detail and share the confirming data points from the holiday shopping weekend that point to an acceleration in digital shopping that is a cornerstone of our Digital Lifestyle investing theme. It’s not just online shopping as mobile shopping scored big this year, smashing records in the process, with the two contributing meaningfully to brick and mortar retail traffic pressures. Who benefits and why brick & mortar retailers are likely to be worried about profitless sales this holiday season are shared on the podcast. Chris and Lenore also share the most popular shopping apps, some of which like eBates are in keeping with Tematica’s Middle-class Squeeze investing theme.

 

Companies mentioned in this podcast

  • Adobe (ADBE)
  • Amazon (AMZN)
  • Ebay (EBAY)
  • Kohl’s (KSS)
  • Macy’s (M)
  • National Retail Federation (NRF)
  • RetailNext
  • Target (TGT)
  • TJX Companies (TJX)
  • Walmart (WMT)

 

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

And don’t forget to subscribe to the Cocktail Investing Podcast on iTunes!

Resources for this podcast:

 

Is that a Robot on Isle 9?

Is that a Robot on Isle 9?

We’ve all heard endlessly about the death of brick and mortar, (we discuss how that death is overstated in our podcast with Katherine Cullen of the National Retail Federation next week) as online retailing continues to gain market share and is nearly equal that of brick and mortar as a percent of consumers’ spending. While online retailing has made enormous gains, brick and mortar is far from dead, but rather is evolving and disruptive technologies are part of that evolution, even in your local grocery store. A recent Wall Street Journal article revealed that an enormous amount of capital is being invested in improving the way the grocery industry operated, (emphasis mine).

Grocers are stocking their warehouses with robots and artificial intelligence to increase efficiency as competition for consumer spending on food picks up. Robots are relatively new to the food industry, where customer interaction is common and many goods like fruit are fragile and perishable. Startups are vying to sell supermarkets an array of robots that perform different tasks. Venture-capital firms have invested more than $1.2 billion in grocery technology this year, according to PitchBook, a financial-market data provider, double the total for 2017.

Online groceries retailing has been a relatively weak area for growth in online retail, despite the early efforts of now-defunct Webvan and HomeGrocer. But that looks like it will be changing as investments in disruptive technologies are increasing.

Altogether, spending on technology by many of the biggest U.S. food retailers could accelerate the adoption of online ordering for groceries. Deutsche Bank expects online orders to represent roughly 10% of the $800 billion grocery market by 2023, up from 3% today.

Learning from those who tried in the early dotcom era and failed, the WSJ article reports that according to Narayan Iyengar, senior vice president at Albertsons Cos., the second-biggest U.S. supermarket chain,

“We have to find a model where we can deliver groceries to customers’ homes and do it in a more profitable way,”

Beyond robotics, companies like Kroger are also getting into delivery.

Kroger also is testing a driverless grocery van with autonomous vehicle company Nuro Inc., and it entered the crowded meal-kit distribution market through a $700 million deal with startup Home Chef. The deals are expected to advance Kroger’s online prowess, but have hurt the company’s profits and weighed on recent earnings.

The bottom line is those disruptive technologies can and have upended all aspects of our lives. Our Disruptive Technology investing theme focuses on those companies providing the technologies that completely change the way we communicate, shop, eat, work, exercise and even play.

Source: Grocers Enlist Robots to Chase E-Commerce – WSJ

Ep 69: Trump, Putin, Amazon Prime Day and the importance of 2Q 2018 earnings season

Ep 69: Trump, Putin, Amazon Prime Day and the importance of 2Q 2018 earnings season

 

 

 

Before the 2Q 2018 earnings season kicks into high gear this week, Tematica mixologists Lenore Hawkins and Chris Versace talked about one of the largest self-created holidays known to man – Amazon’s Prime Day — as well as the competitive response that has emerged during this seasonally slow time of the year for retailers. On the global stage, Lenore takes us through the geo-political and trade happenings over the last few weeks and explains how this along with fresh data pointing to a global slowdown has ratcheted up uncertainty risk even as the US stock market continues to march higher.

Against that backdrop, Chris shares his concerns for the upcoming earnings season and how earnings from truck logistics company JB Hunt and slowing loan volume growth at JPMorgan Chase, Citigroup, Wells Fargo and PNC suggest a step down in the speed of the domestic economy is likely in the current quarter. It’s all about earnings reality matching up with earnings expectations, and if reality falls short it likely means a turbulent summer for stocks.

 

Companies mentioned on this podcast

  • Amazon (AMZN)
  • Citigroup (C)
  • Netflix (NFLX)
  • JB Hunt (JBHT)
  • JPMorgan Chase (JPM)
  • Kohl’s (KSS)
  • PNC (PNC)
  • Target (TGT)
  • Walmart (WMT)
  • Wells Fargo (WFC)

 

Resources for this podcast:

 

 

Ep. 59: Exposing the Supply Chain Security Nightmare

Ep. 59: Exposing the Supply Chain Security Nightmare

[podcast src=”https://html5-player.libsyn.com/embed/episode/id/6465452/height/90/theme/custom/autoplay/no/autonext/no/thumbnail/yes/preload/no/no_addthis/no/direction/forward/render-playlist/no/custom-color/75a81f/” height=”90″ width=”100%” placement=”top” theme=”custom”]

Download Episode

A Discussion with Interos Solutions CEO Jennifer Bisceglie

When most people think of the words “supply chain” they harken back to the class room definition — the sequence of steps and processes involved in the production and distribution of a commodity or product in a factory. While that’s true, over the last several decades the move toward low cost outsourcing has dramatically changed where companies source their components and finished products as well as the multitude of players that supply them. Factor in the rise of software and networks, and the downside of this operational focus is it has kicked the door wide open for bad actors to exploit the supply chain in the form of cyber and other attacks.

In today’s podcast, Tematica’s Chris Versace discusses all of this with Interos Solutions CEO and President Jennifer Bisceglie, who recently testified before the U.S.-China Economic and Security Review Commission Hearing on “China, the United States, and Next Generation Connectivity.” As Chris and Tematica’s Chief Macro Strategist, Lenore Hawkins have shared before, the migration deeper into our Connected Society investing theme opens the door for pain points associated with our Safety & Security investing theme. Jennifer not only reaffirms that view, but reveals several aspects that few have likely considered despite how widespread cyberattacks on the supply chain have become.

As Jennifer points out, along with the growing incidents of attacks and notable high-profile ones at Merck & Co. (MRK), FedEx (FDX), Renault SA and others following the NotPetya destructive ransomware attack in 2017, supply chain security and vendor risk management is escalating across the corporate landscape, becoming a focal point in the Board room. Simply put, digital supply chain vulnerability is impacting the physical supply chain via a range of risks from intellectual property theft, to counterfeit components, and even human trafficking. Jennifer explains why with 5G and the Internet of Things soon to become reality, companies should brace themselves for another layer of concern when it comes to their supply chain security and vendors.

The implications are simply staggering, ranging from companies losing their strategic advantages and having investments stolen, to the need to ramp up security spending and added aspects to M&A due diligence that could alter the terms of a deal if not scuttle it all together. Recall how last year Verizon (VZ) renegotiated its deal to acquire Yahoo by $350 million following the revelation of security breaches with the Verizon network.

Jennifer and Chris also talk about Facebook’s (FB) current challenges, which could be viewed as a breakdown in its supply, and why it’s a situation that Jennifer is “surprised at how surprised everyone is that it happened.” And lastly, because it wouldn’t be a podcast without some discussion on Bitcoin or the Blockchain, Chris asks Jennifer for her view on the Blockchain and gains some insights into why it isn’t the likely cure-all for supply chain security.

 

Resources for this podcast:

 

 

Ep 58: Why Boxed is a Takeout Candidate

Ep 58: Why Boxed is a Takeout Candidate

 

[podcast src=”https://html5-player.libsyn.com/embed/episode/id/6448617/height/90/theme/custom/autoplay/no/autonext/no/thumbnail/yes/preload/no/no_addthis/no/direction/forward/render-playlist/no/custom-color/75a81f/” height=”90″ width=”100%” placement=”top” theme=”custom”]

Download Episode

 

Amid the ups and downs of the stock market, it comes as little surprise to us here at Tematica that thematically well-positioned companies are M&A takeout candidates. We’ve seen it before, and odds are we will see it again. If you’ve been listening to CNBC or FOXBusiness, we are once again hearing that Boxed, a company that sits at the crosshairs of our Connected Society and Cash-Strapped Consumer investing themes, is once again in those crosshairs. Again, no surprise to us given we see Boxed as a cross between Amazon (AMZN) and Costco Wholesale (COST). With Walmart (WMT), Target (TGT), Kroger (KR) and others looking to catch Amazon, we see the logic.

For more on Boxed, here’s the conversation between Tematica’s resident mixologists, Lenore Hawkins and Chris Versace with Boxed CEO Chieh Huang. It’s a conversation filled with confirming data points as well as some movie references to keep it fun and one that will leave you understanding why any of those companies we mentioned above could benefit from the addition of Boxed.

 

 

Resources for this podcast:

Brookdale Senior Living: are its thematic tailwinds enough to earn a buy rating?

Brookdale Senior Living: are its thematic tailwinds enough to earn a buy rating?

The following article is an excerpt from Tematica Investing, our cornerstone research publication. Tematica Investing includes original investment ideas and strategies based upon our proprietary thematic investing framework developed by our Chief Investment Officer Chris Versace. Click here to read more about our Premium Tematica Research Membership offering.

One of the great things about thematic investing is there is no shortage of confirming data points to be had in and our daily lives. For example, with our Connected Society investing theme, we see more people getting more boxes delivered by United Parcel Service (UPS) from Amazon (AMZN) and a several trips to the mall, should you be so inclined, will reveal which retailers are struggling and which are thriving. If you do that you’re also likely to see more people eating at the mall than actually shopping; perhaps a good number of them are simply show rooming in advance of buying from Amazon or a branded apparel company like Nike (NKE) or another that is actively embracing the direct to consumer (D2C) business model.

While it may not be polite to say, the reality is if you look around you will also notice that the domestic population is greying. More specifically, we as a people are living longer lives, and when coupled with the Baby Boomers reaching retirement age, it has a number of implications and ramifications that are a part of our Aging of the Population investing theme.

There are certainly the obvious issues related to this demographic shift, such as whether or not folks have enough saved and invested well enough to support themselves through increasingly longer life spans. And then, of course, there is the need of having access to the right healthcare to deal with any and all issues that one might face. That is something that shouldn’t be taken for granted, given the national shortage of nurses and health care professionals we are currently experiencing, and the reason why one AMN Healthcare Services (AMN) has been on the Tematica Investing Select List in the past.

But our Aging of the Population theme doesn’t stop there. Again, much like looking around at what people are doing at the mall, all one has to do is sit back and assess the day-to-day life of a typical octogenarian and see that we are seeing:

  • A shift in demand for different types of housing as seniors give up on the homestead and move into easier to maintain condos and townhouses.
  • An even greater focus on online retailers that will deliver purchases directly to the home, rather than having to go out and carry purchases from the store to the car and then into the home. Also driving this shift will be younger children making purchases for their aging parents and having them shipped directly to their home.
  • Fountain of Youth goods and services will be in even higher demand as Baby Boomers will not let go of their youth easily.
  • And finally, technology and services that will help maintain independence— we’re talking about robots, digital assistants, monitoring equipment and even things such as the autonomous car.

According to data published by the OECD in 2013, the U.S. expectancy was 78.7 years old with women living longer than men (81 years vs. 76 years). Cross-checking that with data from the Census Bureau that says the number of Americans ages 65 and older is projected to more than double from 46 million today to 75.5 million by 2030, according to the U.S. Census Bureau. Other data reveals the number of older American afflicted with and the 65-and-older age group’s share of the total population will rise to nearly 25% from 15%. According to United States Census data, individuals age 75 and older is projected to be the fastest growing age cohort over the next twenty years.

As people age, especially past the age of 75, it becomes challenging for individuals to care for themselves, and this is something I am encountering with my dad who turns 86 on Friday. Now let’s consider that roughly 6 million Americans will have Alzheimer’s by 2020, up from 4.7 million in 2010, and heading to 8.4 million by 2030 according to the National Institute of Health. Not an easy subject, but as investors, we are to remain somewhat cold-blooded if we are going to sniff out opportunities.

What all of this means is we are likely to see a groundswell in demand over the coming years for assisted living facilities to house and care for the aging domestic population.

 

Is Brookdale Senior Living Positioned to Ride this Thematic Tailwind?

One company that is positioned to benefit from this tailwind is Brookdale Senior Living (BKD), which is one of the largest players in the “Independent Living, Assisted Living and Memory Care” market with over 1,000 communities in 46 states.

The company’s revenue stream is broken down into fives segments:

  • Retirement Centers (14% of 2017 revenue; 22% of 2017 operating profit) – are primarily designed for middle to upper-income seniors generally age 75 and older who desire an upscale residential environment providing the highest quality of service.
  • Assisted Living (47%; 60%) – offer housing and 24-hour assistance with activities of daily living to mid-acuity frail and elderly residents.
  • Continuing care retirement centers (10%; 8%) – are large communities that offer a variety of living arrangements and services to accommodate all levels of physical ability and health.
  • Brookdale Ancillary Services (9%; 4%) – provides home health, hospice and outpatient therapy services, as well as education and wellness programs
  • Management Services (20%; 6%) – various communities that are either owned by third parties.
  • In looking at the above breakdown, we see the core business to focus on is Assisted Living as it generated the bulk of the company’s operating profit stream. This, of course, cements the company’s position within the framework of Tematica’s Aging of the Population theme. However, as with all investment strategies, success with a thematic approach ultimately comes down to the underlying principle of investing: determining if a stock is mispriced or undervalued relative to the business opportunities ahead as a result of the sea change presenting itself through a theme.

And so with Brookdale, we must determine whether it is a Tematica Contender — a company that we need to wait for the risk to reward tradeoff to reach more appetizing levels -—  or is one for the Tematica Investing Select List to issue a Buy rating on now?

 

Changes afoot at Brookdale

During 2016 and 2017, both revenue and operating profit at Brookdale came under pressure given a variety of factors that included a more competitive industry landscape during which time Brookdale had an elevated number of new facility openings, which is expected to weigh on the company’s results throughout 2018. Also impacting profitability has been the growing number of state and local regulations for the assisted living sector as well as increasing employment costs.

With those stones on its back, throughout 2017, Brookdale surprised to the downside when reporting quarterly results, which led it to report an annual EPS loss of $3.41 per share for the year. As one might imagine this weighed heavily on the share price, which fell to a low near $6.85 in late February from a high near $19.50 roughly 23 months ago.

During this move lower in the share price, Brookdale the company was evaluating its strategic alternatives, which we all know means it was putting itself up on the block to be sold. On Feb. 22 of this year, the company rejected an all-cash $9 offer as the Board believed there was a greater value to be had for shareholders by running the company. Alongside that decision, there was a clearing of the management deck with the existing President & CEO as well as EVP and Chief Administrative Officer leaving, and CFO Cindy Baier being elevated to President and CEO from the CFO slot.

Usually, when we see a changing of the deck chairs like this, it likely means there will be more pain ahead before the underlying ship begins to change directions. To some extent, this is already reflected in 2018 expectations calling for falling revenue and continued bottomline losses.

Here’s the thing – those expectations were last updated about a month ago, which means the new management team hasn’t offered its own updated outlook. If the changing of the deck history holds, it likely means offering a guidance reset that includes just about everything short of the kitchen sink.

On top of it all, Brookdale has roughly $1.1 billion in long-term debt, capital and leasing obligations coming due this year. At the end of 2017, the company had no borrowings outstanding on its $400 million credit facility and $514 million in cash on its balance sheet. It would be shocking for the company to address its debt and lease obligations by wiping out its cash, which probably means the company will have to either refinance its debt, raise equity to repay the debt or a combination of the two. This could prove to be one of those overhangs that keeps a company’s shares under pressure until addressed. I’d point out that usually, transaction terms in situations like this are less than friendly.

 

The Bottomline on Brookdale Senior Living (BKD)

While I like the drivers of the underlying business, my recommendation is we sit on the sidelines with Brookdale until it addresses this balance sheet concern and begins to emerge from its new facility opening drag and digestion. Odds are we’ll be able to pick the shares up at lower levels.

This has me putting BKD shares on the Tematica Investing Contender List and we’ll revisit them for subscribers in the coming months.

The preceding article is an excerpt from Tematica Investing, our cornerstone research publication. Tematica Investing includes original investment ideas and strategies based upon our proprietary thematic investing framework developed by our Chief Investment Officer Chris Versace. Click here to read more about our Premium Tematica Research Membership offering.