WEEKLY ISSUE: Uncertainty is back, but we’re thematically prepared

WEEKLY ISSUE: Uncertainty is back, but we’re thematically prepared

Key points inside this issue:

  • The Fed, Trump, tariffs and the data bring uncertainty back to the market
  • What it means for investors
  • We will continue to hold Disney (DIS), Apple (AAPL), Amazon (AMZN) and AT&T (T) shares.
  • What to watch this week

The Fed, Trump, tariffs and the data bring uncertainty back to the market

Between the number of S&P 500 companies reporting last week to the Fed’s FOMC meeting and the pieces of economic data coming at us, we knew it was going to be a busy and potentially volatile week. What few saw coming was the attempt by Fed Chairman Powell to give the market the 25 basis point rate cut it was expecting and regain the position of the market not knowing exactly what the Fed’s next move might be. But then we received the July ISM Manufacturing Index and the July IHS PMI data for the four global economic horsemen (China, Japan, the eurozone and the US). In aggregate those data points signaled the continued slowdown in the global manufacturing economy.  

Granted, the sequential pick up in the July ADP Employment Report fostered the view the domestic economy hasn’t frozen over just yet, but Friday’s July Employment Report reveled slower job creation month over month. 

Normally, economic data like we’ve received in the back half of last week would be enough to ignite the market doves and stoke the view that another rate cut by the Fed was more likely before we exit 2019. And it was that view that led the major market indices higher on Thursday, that was until President Trump did something that arguably next to no one saw coming – announced another layer of tariffs on China that would go into effect on September 1. The implications of that move, which would likely lead to yet another trimming of forecasts for both the economy and earnings, pulled the market lower on Thursday afternoon. 

And on Friday morning, China responded by saying while it does not want a trade war, its not afraid to fight one. Soon thereafter, President Trump is “open to delaying or halting the 10% tariff on September 1” if China were to take action between now and then. Remember, we shared our concern that trade talks could devolve into playground taunting and fighting. Well, we are there and sticking with the analogy, it’s likely going to keep the stock market on the uncertainty teeter totter for the next few weeks. 

If some were hoping for a more normal August for stocks following this week’s Fed meeting, we’re sorry to say that’s not likely to happen. In the past we’ve shared several analogies about investing – it’s not crock pot cooking, you can’t fix it and forget it or investing is not a like a photo, i.e. snapshot in time, but much like a good film it’s an evolving story. As this latest chapter begins to unfold, it will be mean assessing and re-assessing expectations as new developments are had and their ripple effects determined.

What it means for investors

Odds are this will uncertainty will result in the usual back and forth for the market in the coming weeks, which will also see the usual end of summer low trading volumes. While a good chunk of Wall Street is at the beach, I’ll remain vigilant and continue to leverage our thematic lens.

More than likely, we will see the herd once again focus on domestically focused as well as inelastic business models as it looks for ports of safety. We’ve have a number of these among the Thematic Leaders and the Tematica Select ListChipotle Mexican Grill (CMG), Dycom Industries (DY), Costco Wholesale (COST), Axon Enterprises (AAXN), AT&T (T), and USA Technologies (USAT). Unlike the shoot from the hip go to choice of the herd that tends to zero in on electric utilities that group of six have the added benefit of thematic tailwinds propelling their respective businesses.

As August drips by, I’ll continue to look for thematically well positioned companies that offer favorable risk to reward tradeoffs in terms of share prices as I look to position us for what lies ahead. In the meantime, I would recommend subscribers catch the August 5, 2019 issue of Bloomberg Businessweek as the cover story focuses the coming streaming video war that I’ve talked about both here and on the Thematic Signals podcast. The author likens it to “The Hunger Games”, and in many respects I can see why that is a good comparison.

While we were recently stopped out of Netflix (NFLX), I’ll remind you that among the Thematic Leaders and Tematica Select List we have several companies — Disney (DIS), Apple (AAPL), Amazon (AMZN), and AT&T in particular – that are focusing on this market. Each brings their own particular set of strengths ranging from content to addressable customer base, but all three have other businesses besides streaming video to drive profits and cash flow that can fund their respective streaming businesses.

  • We will continue to hold Disney (DIS), Apple (AAPL), Amazon (AMZN) and AT&T (T) shares.

What to watch this week

After all the happenings for last week that I described above, this week looks to be yet another frenetic one for corporate earnings with more than 1,100 reports to be had, but the pace of June quarter earnings begins to slow and we face a lighter economic data schedule as well. And to be clear, even though we will face a plethora of June quarter reports, let’s remember that exiting this week roughly 78% of the S&P 500 has reported and next week another 13% of that group will be doing so. What this means is the vast majority of reports next will have far less of an impact on the market. This doesn’t diminish them from an ownership of data and information perspective, but rather a smaller impact is likely on earnings revisions and trading ranges. 

Corporate earnings to watch

In terms of which reports I’ll be focusing on this week, it should come as little surprise that they are the ones touching our various investment themes. Here’s my short list:

  • Monday, August 5: Tyson Foods (TSN), International Flavors & Fragrances (IFF), Insulet (PODD) and ShakeShak (SHAK). 
  • Tuesday, August 6: Tenneco (TEN), ADT (ADT), AMN Healthcare (AMN), Comscore (SCOR), LendingClub (LC), Disney (DIS), 
  • Wednesday, August 7: CVS Health (CVS:NYSE), CyberArk (CYBR), Physicians Realty Trust (DOC), Darling Ingredients (DAR), Skyworks (SWKS), Tivity Health (TVTY), 
  • Thursday, August 8: Activision-Blizzard (ATVI:), Alarm.com (ARLM), Dropbox (DBX), Synaptics (SYNA:Nasdaq), Uber (UBER) 
  • Friday, August 9: US Concrete (USCR)

Economic data to watch

Before we tackle the coming week’s economic data, I’ll mention GDP expectations from the Atlanta Fed and New York Fed started last week off between 2.0%-2.2% and as we exited the week those expectations sat at 1.6%-1.9%. As I touched on above, the employment data we received last week pointed to a still growing economy but the take on the manufacturing economy per the July ISM Manufacturing Index and the July US IHS Markit PMI data pointed to a slowing domestic manufacturing one. 

We have only a handful of meaningful economic data coming at us this week in the form of the July inflation reports and ISM’s July reading on the US service economy. Given our pension for looking at other data set in addition to the formal economic data, we here at Tematica will be on the lookout for the last Cass Freight Index and other truck tonnage figures as well as the weekly railcar loading data. Those have been signaling the slowdown we’ve seen in the government produced economic data, and as such we’ll keep a close watch on them in order to stay one step ahead of the herd. 

Should the coming economic data be continue to disappoint relative to expectations and signal the vector and velocity of the domestic economy is down and even slower than recent revisions suggest, odds are the market will increasingly expect another Fed rate cut sooner than later. Our concern, however, is the intended effect of this week’s rate cut and another one should it come to pass on business investment could be muted by the continued trade uncertainty and weakening global economy. As we’ve seen with falling mortgage rates that didn’t stimulate demand earlier this year, in the near-term businesses may stay on the sidelines given the trade and economic uncertainties despite more favorable interest rates.


New Global Middle Class and Digital Lifestyle Converge at Walgreens 

New Global Middle Class and Digital Lifestyle Converge at Walgreens 

A few days ago we ran across a story that probably didn’t make headlines in too many places. Here at Tematica, however, it was quickly shared with the team because it perfectly depicts the coming together of two of our investment themes: The New Global Middle Class and the Digital Lifestyle. Here is part of the story from Mediapost.com:

Walgreens is adding the Alipay mobile payment platform to more than 7,000 Walgreens locations nationwide. Alipay, operated by Ant Financial Services Group and used by 1 billion people globally, will allow shoppers at Walgreens to use the same payment system commonly used in China. More than two-thirds of Chinese tourists used smartphones for payments abroad last year, according to Nielsen.The Alipay deployment will allow Walgreens to offer the payment system to more than 4 million Chinese travelers in the U.S. at any given time, and Walgreens is the largest U.S. drugstore chain to deploy Alipay, according to Walgreens. “Walgreens is focused on making shopping more convenient for our customers. This collaboration has particular significance for our Chinese customer population, who now has a new way to experience Walgreens,” stated Richard Ashworth, Walgreens president of operations. “Not only can they buy our products via our dedicated store on Alibaba’s Tmall Global marketplace, but they will now also be able to shop in the U.S. using Alipay as they would in China.”

Source: Walgreens Starts Accepting Alipay Payments Nationwide 02/19/2019

 

So here we have a U.S. retailer adding a mobile payment option specifically to cater to tourists coming from China.  The global leader in mobile payments is mainland China, where 61% of worldwide users are based, and Alipay has emerged as the dominant provider, boasting over 850 million active users. In 2018, there were reports of apparel brand Guess adding Alipay as a payment option in 50 of its U.S. stores. That move by Guess followed on the heels of brands such as Lacoste, GNC, Rebecca Minkoff, Holt Renfrew and Harry Rosen offering up Alipay at checkout.

What we will be monitoring closely at Tematica Reseach is whether the use of Alipay can gain a foothold in the U.S. market beyond Chinese tourists. With over 189 million active iPhones in the United States, and most of those Apple (AAPL) devices equipped with the Apple Pay feature, a 2018 survey by CivicScience showed only 1 percent of respondents used mobile payments as their primary payment method over credit and debit cards or cash. With the average Chinese tourist spending over $5,000 on overseas trips, anything retailers can do to reduce the friction of a transaction is well worth it and U.S. consumers witnessing the ease of checkout for those tourists might just tip the balance across other apps as well.

What Investors Need to Know About the Implications of Trump’s Tariffs

What Investors Need to Know About the Implications of Trump’s Tariffs

 

A couple of days ago, I shared my view that President Trump’s tariff overtures are more than likely a negotiating tactic as he looks to tackle yet another of his campaign promises – international trade. The resignation of Gary Cohn on Tuesday, President Trump’s top economic adviser and the head of the National Economic Council, have certainly fanned the flames that this might not be a bluff by Trump — either that or Gary Cohn was unwilling to play the game.

I continue to think Trump is following the negotiating strategies he laid out in his 1987 book, Art of the Deal. But as an investor, we have to game out the potential outcomes so we can assess the potential risk and position ourselves accordingly. 

 

Should Trump enact the seemingly unpopular trade tariffs on steel and aluminum, what then? 

For starters, with an increase in the cost of importing from other countries and a lack of price pressure on American suppliers, steel and aluminum will become more expensive to U.S. companies. No big surprise there. The companies impacted will be wide, ranging from manufacturers of aircraft, high-speed rail, cars, trucks, construction equipment, motors, satellite dishes, smartphones, tablets and appliances. And let’s not forget cans, which will impact the price of food, soda and beer, as well as a variety of other products.

What this means is the cost production for Boeing (BA), Ford (F), General Motors (GM), Navistar (NAV), Paccar (PCAR), Caterpillar (CAT, Deere (DE), Cummins (CMI), Apple (AAPL), Dell, Whirlpool (WHR), Coca-Cola (KO), PepsiCo (PEP), Molson Coors (TAP), Anheuser Busch (BUD), and numerous others will rise. 

 

Will those companies look to change to domestic suppliers? 

Most likely, but that will take not only time, but require more domestic capacity to come on line. As we’ve seen in the domestic oil industry, it’s not as easy as flicking a light switch – it takes time, and more importantly, it takes people, the right people. That’s right, the skill set to work in a steel or aluminum plant is not the same as working at McDonalds (MCD), the Gap (GPS) or an AMC Theater (AMC).

What we’re likely to see amid a rise in demand for domestic steel and aluminum is rather similar to what we are seeing in the freight industry. The currently capacity constrained domestic truck market has led to sharp increases in freight costs cited by a growing number of consumer product companies ranging from Tyson Foods (TSN) to J.M. Smucker (SJM) and Ross Stores (ROST). 

The same materials constraints is poised to happen to homebuilders this spring, given the current lumber shortage… and yes the current truck shortage could mean a double whammy for homebuilders like Toll Brothers (TOL), D.R. Horton (DHI), Lennar Corp. (LEN) and the rest of the industry, both public and private, as they truck materials to new building sites.

We’ve talked quite a bit about how rising home prices due to low supply have likely priced out a number of prospective buyers. Let’s also remember the rising level of consumer debt and lack of wage gains for the vast majority of workers that Lenore Hawkins, Tematica’s Chief Macro Strategist, and I have been talking about on the Cocktail Investing Podcast and writing about. What this probably means is more consumers will be priced out of the housing market as homebuilders look to offset rising costs with higher prices. Basic economics. 

Getting back to the impact of the proposed Trump tariffs, while they would help potentially level the playing field for steel and aluminum companies like AK Steel (AKS), Steel Dynamics (STLD), Century Aluminum (CENX), Arconic (ARNC) and other, in the short to medium term they will more than likely lead to higher prices. 

While companies may look to offset those rising costs, the reality is that in today’s world where a public company must at a minimum meet the bottom EPS expectations lest it’s stock price get crushed, odds are they will raise prices to minimize the hit to the profits and the bottom line. We’ve seen this time and time again over the years at Starbucks (SBUX) with a nickel here and there price increase with its latest in September ranging from 10 to 30 cents on a variety of menu items. 

To use the lingo favored by the Fed and economists, we run the risk of inflation. Yes, folks, I said it, inflation, and as we know over the last few weeks that word has become a focus for investors as they look to gauge how far and how fast the Fed will boost rates in 2018 and before too long 2019. We know in watching these higher prices will weigh on the buying activity of Cash-Strapped Consumers and most likely others as items become less affordable. Not sure, consider the median U.S. income last year was all of $31,685 compared to $31,248 in 2000 – over 18 years an income gain of just $437! 

This is where I remind you that the U.S. consumer is a meaningful contributor to the domestic economy, (with consumer spending accounting for nearly 70% of GDP) and Lenore would kick me if I didn’t remind you how far along we are in the business cycle. The combination of rising prices and questionable consumer demand also runs the risk of profit and EPS pressure that would likely weigh on stock prices. 

Boiling it down, the question is does Trump want to run the risk of torpedoing the economy and the stock market, two of his much tweeted about barometers for his presidency?

My thought is probably not.

I do, however, expect Trump and his ego will continue down this negotiation path, ultimately compromising for a better trade deal than the current one. And yes, my fingers are crossed. 

Will it be smooth sailing to that destination? Not likely and we can see last night’s resignation of Gary Cohn, President Trump’s top economic adviser, as a sign the waters will be more than choppy over the next few weeks. 

 

The Response from the EU and Its Potential Impact to the Fed and Interest Rates

Upping the ante, this morning the European Union shared its response to Trump’s proposed metals tariffs saying it would take the case to the World Trade Organization and coordinate its actions with other trade partners that are also against the proposed tariffs from the U.S. The EU went on to share a “provisional list” of U.S. products that would see higher tariffs from the EU, if Trump moves ahead with the import tariffs. The full list has yet to be made public, but among its speculated $3.5 billion impact will to items such as peanut butter, cranberries and oranges. Perhaps EU officials have been busy reading Trump’s Art of the Deal? 

What all this looks like… or at least I hope it is… is a good ol’ fashion game of chicken — international trade negotiation style.

Like most games, there tends to be a winner and a loser, and while it’s possible that Trump comes out ahead on this, the risk he runs will impact the American consumer, the domestic economy and at least certain stocks if not the overall market. 

Remember also that the next monetary policy meeting by the Fed is in two weeks. At its January meeting, the Fed was beginning to shake and bake tax reform implications into its outlooks, and I suspect the Fed heads are likely doing the same with a potential trade war. Do I feel bad for new Fed Chief Jerome Powell? Let’s just say that I wouldn’t want his job, but then again given my pension for calling it like I see it they probably wouldn’t want me. 

 

Lackluster Demand for the Apple iPhone 8 Puts Pressure on OLED and others

Lackluster Demand for the Apple iPhone 8 Puts Pressure on OLED and others

Yesterday we witnessed a sharp decline in technology stocks as evidenced by the declines in Facebook (FB), Amazon (AMZN), Alphabet (GOOGL), Netflix (NFLX) and Apple (AAPL). Regarding Apple shares, yesterday’s move lower simply adds to the recent pressure on the shares we’ve seen since the company’s lackluster September special event as investors question iPhone 8 model demand ahead of the early November launch of the iPhone X. Of course, snafus with the latest Apple Watch and MacOS High Sierra aren’t helping a company that seems plagued either a lack of vision or remaining trapped in a position until technology forces align for its next new product.

Pressure on Apple shares has overflowed and resulted in the same downward pressure on our Universal Display (OLED) shares, slipping from a high of $142 on September 19, down to a hair below $125 when the market closed last evening. We’ll continue to keep OLED shares on the Tematica Select List however, as Apple adopts its technology across other devices, and as demand from other devices (other smartphones, TVs, wearables, automotive interior lighting) climbs in the coming quarters. As a reminder, tomorrow brings the 2017 Analyst Day from Applied Materials (AMAT) and we expect bullish comments for both its semiconductor capital equipment business as well as its display business.

 

Other Market & FED Notes

We’ve noted that we have seen the Wall Street herd rotate sectors as of late, with water and electric utilities being strong performers of late — both part of our Scarce Resource investment theme. While the S&P 500 Volatility Index (VIX) may be near record lows, the recent performance of those safe havens signals that investors are in a wearisome mood. Another group that has performed well over the last several weeks is multinational companies, which have benefitted from the dollar’s renewed weakness in July, August and early September. We’ve seen this with our Amazon (AMZN), International Flavors & Fragrances (IFF), and Facebook (FB) shares to name a few.

More recently, however, we’ve seen the dollar rebound modestly, and with the Fed talking up several interest rate hikes in as many quarters, we are likely to see the dollar move further off early September lows. This brings Fed Chairwoman Janet Yellen’s speech this afternoon into focus. Will we get much more from Yellen on the pace of balance sheet unwinding vs. what the Fed shared last week? Probably not, but we’ll still be looking to parse her usual clear as mud words.

The expected lack of “new info” from the Fed will likely keep the market mentality fixated on the Fed’s forecasted interest rate hike timetable. We here at Tematica prefer to remain data dependent when it comes to contemplating potential Fed rate hikes. That view led Federal Reserve Bank of Minneapolis President Neel Kashkari to reiterate his view yesterday that raising rate now is a bad idea:

“When I look at the economy, I don’t see any signs the economy is close to overheating… I see no need to tap the brakes and attempt to moderate the economy with higher short-term rates.”

Realizing Kashkari is a lone voting wolf inside the Fed, odds are the herd view will continue to influence the prevailing narrative in the near-term. We’ll remain patient as that group will once again take some time to come around to how we see things.

In the short-term, a continued rebound in the dollar is likely to pressure multinational companies ranging from General Electric (GE) and Caterpillar (CAT) to the likes of Amazon, Facebook, Applied Materials, and even MGM Resorts (MGM) that are on the Tematica Select List. With this in mind, we’ll be closely dissecting the forward guidance to be had from Nike (NKE) later today and the Select List’s own McCormick & Co. (MKC), which reports this Thursday (Sept. 28).

As the herd continues to feel its way around, we’re inclined to re-test our thematic thesis on the stocks comprising the Select List, but given what we’ve seen in our Thematic Signals we have reason to believe our thematic tailwinds continue to blow.  As we do this, we’ll remember this week unveils President Trump’s tax reform proposal followed by the administration’s regulatory agenda that will be outlined next week (Oct. 2), not to mention all the amped-up geo-political news between the U.S. and North Korea.

Odds are the next few weeks, will be tumultuous, but let’s remember that “fortune favors the prepared” and that’s what w we aim to be. This means looking for thematically well-positioned companies that offer favorable risk-to-reward dynamics, like the recent addition of Corning (GLW) and Nokia (NOK), as well as opportunities to scale into existing positions on the Tematica Select List.

 

 

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. 

 

 

China and Trade – It’s Complicated

China and Trade – It’s Complicated

On Monday, August 14th I spoke with David Asman and Melissa Francis, hosts of After the Bell on Fox Business, about the recent moves in the market and the discussions around trade relations with China. I pointed out that while trade is often discussed in the media as a transaction in which there is a winner, (the country with the trade surplus) and a loser, (the country with trade deficit) trade is much more complex.

First off, any theft of property, be it intellectual or otherwise cannot be accepted. Trade between individuals, businesses or nations must include respect for the property rights of all parties involved. Property rights and the respect for them is vital for economic development. Without them, innovation faces enormous headwinds.

Putting that aside, the focus of any discussion on trade with China is typically centered on American workers who are displaced by competition from China, but this negates that many American jobs factories and offices that would not be able to exist without access to complementary Chinese workers in Chinese factories. The lower-cost labor available in China allows a myriad of ideas hatched in the U.S. to become viable products, which in turn then can create hundreds and thousands of jobs in engineering, design, marketing, logistics, retailing, finance, accounting, and manufacturing that might never have existed  because an entirely domestic production would have been cost-prohibitive. If all of the components in Apple’s (AAPL) iPhone had to be manufactured and assembled domestically, it would cost multiples more and all the businesses that exist today thanks to the ubiquitous nature of such smart phones would never have come into existence.

The nearly half a trillion dollar in annual trade between the U.S. and China is also not a one-way street. For example, in 2016, according to the U.S. Department of Commerce, the United States had a $17 billion trade surplus with China in agriculture and an $8 billion surplus in transportation equipment. From a geographical perspective, eight U.S. states run trade surpluses with China, including West Virgina, Louisiana, Oregon, and Washington state.

Bottom Line: International trade, like most everything in life, isn’t a simple matter. Making major changes to trade policy with a significant trade partner will naturally result in some winners, but also in some losers. When such impactful rules of the game are potentially changed, we at Tematica revisit those companies that benefit from our Thematic tailwinds to assess how and if they may be affected. For now, the talk around trade with China has been just that, talk. We will keep a vigilant eye on this however for any movement that could have a material impact on the companies we follow.

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: A Company in Transition Can Be an Opportunity When the Time is Right

WEEKLY ISSUE: A Company in Transition Can Be an Opportunity When the Time is Right

In this Week’s Issue:

  • Updates on Tematica Select List Holdings
  • A Company in Transition Can Be an Opportunity When the Time is Right

 

We have one last major earnings hurrah in the short-term and that will hit on Thursday. From there, the pace of earnings should begin to slow, but like any lengthy meal, it means digestion will ensue. This time around the digestion phase will be the usual matching up of company reports and cross-referencing guidance, but with an eye to how realistic earnings expectations are for the back half of 2017.

In addition to doing our own work on this, as you read this Tematica’s Chief Investment Strategist is winging his way to Singapore to give a presentation on thematic investing. While the trip to and fro will be a lengthy one, including a long layover in Japan, we strongly suspect he’ll have a number of data points and insight to share in the next issue of Tematica Investing that will be published on Aug. 16. That’s right, while others may take off the last two weeks of August, we’ll be coming at you as we close the second month of 3Q 2017 and get ready for September.

Historically September has been one of the worst performing months for the market, and given our concerns about earnings expectations vs. the market’s valuation, the pending normalization of the Fed’s balance sheet and speed of the economy not to mention continued drama in DC and North Korea, we want to dress the investing table properly ahead of entering the last month of the quarter.

 

 

Updates on Tematica Select List Holdings

As we mentioned in this week’s Monday Morning Kickoff, we had a sea of more than 600 companies report their latest quarterly performance. Here are some quick highlights and corresponding actions for those Tematica Select List members that reported last week.

Following Facebook’s (FB) better-than-expected June quarter, in which advertising revenue rose 47 percent year-on-year and mobile revenue jumped 53 percent and the company trimmed back its operating expense guidance, we are boosting our price target on the shares to $200 from $165. At the current share price, we now see just over 15 percent upside to our new price target. Clearly, that is tempting. However, we’d look for the shares to settle following its earnings report and bullish commentary before revisiting the current rating on the shares.

  • We’ve increased our price target to $200 from $165 for Facebook (FB) shares, which offers 18 percent upside from current levels.
  • As we re-issue our Buy rating on FB shares, we would suggest subscribers let the currently over bought shares cool off following last week’s post earnings report climb. We see a compelling line closer to $160.

Also during the week, Amazon (AMZN) reported results that missed expectations, which we attribute to our warning over ramping expenses. Given its outlook, however, the shares finished the week down modestly. We acknowledge that quarter-to-quarter expenses can be tricky when it comes to Amazon, but there is no denying the winds that are at its back. As we enter the Back to School and soon to be upon us holiday shopping period we continue to see Amazon taking consumer wallet share. The fact that it continues to expand its offering while growing its very profitable Amazon Web Services is not lost on us.

  • Our price target on Amazon (AMZN) shares remains $1,150, which keeps the shares a Buy at current levels.
  • As we have said previously, AMZN shares are ones to own, not trade.

Buried inside the earnings report from MGM Resorts (MGM) last week was improved margin guidance, along with a strong event calendar, which in our view offsets the current disruption at its Monte Carlo facility. As a reminder, that facility is being rebranded to Park MGM. On the back of that call, Telsey Advisory Group not only reiterated its Outperform rating, but boosted its price target to $39. We’ll look to see if the near-term event calendar featuring the upcoming McGregor vs. Mayweather fight on Aug. 26 lives up to expectations, before adjusting our $37 price target for this Guilty Pleasure company.

When we added shares of AXT (AXTI) to the Tematica Select List, we knew the business would benefit from our increasingly Connected Society as well as new technologies that are part of our Disruptive Technology investing theme. Today we are boosting our price target to $11 from $9 on shares of this compound semiconductor substrate manufacturer following an upbeat 2Q 2107 earnings report. While the company’s EPS for the quarter was in-line with expectations, quarterly revenue was ahead of expectations and management confirmed the upbeat outlook by core customer Skyworks Solutions (SWKS) as it signaled continued volume gains are to be had in the coming quarters. We continue to see increasing demand for its substrates fueled by wireless and light emitting diode applications as well as the adoption of next generation technologies in data centers and other telecommunication applications. As volume improves, so to should margins and EPS generation as well.

  • We are boosting our price target on AXT Inc. (AXTI) shares to $11 from $9, which keeps a Buy rating intact.

Finally, while Applied Materials (AMAT) shares closed down 8 percent over the last several days, competitor Lam Research (LRCX) offered an upbeat view of semiconductor capital equipment demand on its 2Q 2017 earnings report. On the corresponding earnings call, Lam management shared several confirming data points behind our Applied thesis, including “Demand trends are robust, particularly in memory both in enterprise and consumer end markets. Applications such as machine learning and artificial intelligence are foundational to the next generation of technology innovation, and they are driving strong memory content growth for DRAM and NAND that offer attractive economics for our customers.”

One of the key differences between Applied and Lam is Applied’s position in display technology equipment that is benefitting from the ramp in organic light emitting diodes displays. Lam does not participate in that market and as good as its outlook is for semiconductor capital equipment, which bodes well for Applied, recent news that LG Display would invest several billion dollars to help Apple (AAPL) secure organic light emitting diode display capacity only benefits Applied.

  • We continue to be bullish on both Applied Materials (AMAT) as well as Universal Display (OLED) shares and our respective price targets remain $55 and $125.

A Company in Transition Can Be an Opportunity When the Time is Right

Often times companies that are in transition are ones that are put on the shelf that investors tend not to revisit. While that can be a good thing, there are times when it may not be and that’s the question today. Is Nokia (NOK), the former mobile phone market share leader that bungled the smartphone revolution worth taking another look at? Kind of like a bad relationship, most investors tend to walk away from a stock like a bad breakup, never looking back. But in this case, we think NOK, which was once a darling of our Connected Society investing theme a decade plus ago is showing signs it might be deserving of another chance as it morphs into Asset-lite company.

Let’s remember, Nokia shrewdly sold off its mobile phone business to Microsoft (MSFT) a few years ago fetching $7.2 billion in return. Soon thereafter Nokia sold its Here mapping and locations services business to an automotive industry consortium consisting of Audi, BMW Group and Daimler for $3.1 billion. So yes, the Nokia of today is very different than it was just a decade ago.

What’s left, is a company comprised of two businesses – Nokia Networks and Nokia Technologies. The Networks business is one that includes its mobile networks equipment — the hardware the carries all that cellular data — that is used by carriers across the globe, which are filling in some phase of expanding existing 3G or 4G LTE network coverage, building new 4G LTE networks (like in India) or prepping to test 5G networks. The Networks are a lumpy business as equipment demand peaks as a new technology is ramped and then fades as only incremental spending remains. We’ve seen this with 2G, 3G, and 4G networks, and odds are we will see this again with 5G. The Networks business also includes its services business as well as its IP/Optical Networks business, but the key mobile networks business accounts for

The issue will be one of timing – when does the ramp really begin? – and the competitive landscape, given the emergence of Chinese players like Huawei.
The simplest way to view Nokia Networks is it is one of the equipment vendors that Dycom Industries (DY) would use as it builds out a 4G, 5G or wirelines network for AT&T (T), Verizon (VZ) or Comcast (CMCSA). Its competitors include Ericsson (ERIC) as well as Alcatel Lucent (ALU), but also several Chinese vendors including Huawei and ZTE as well as Samsung.

While many may focus on that lumpy and competitive business, to us here at Tematica the far more interesting business is the company’s licensing arm called Nokia Technologies, a division that taps into our Asset-Lite investment theme that focuses on businesses that leverage intellectual property, patent portfolios and both licensing in and out models, outsourcing and similar business models. It’s an attractive investment theme because it requires little capital to operate, but often generates significant profits. Case in point, Nokia’s Technology division accounts for roughly 7 percent of overall revenue, but it generates more than one-third of the company’s overall operating profit.

Nokia Technology’s assets include the company’s vast mobile IP library, as well as developments in digital health and digital media. Given Nokia’s storied history in the phone market, many smartphone makers license the company’s patents for everything from display technology to antenna design. These licenses tend to span several years, and are extremely profitable. Moreover, Nokia is not resting on its laurels and licensing aging IP – during the first half of 2017, it spent EUR 1.9 billion ($2.2 billion) as it develops digital media, immersive virtual reality, and digital health technologies as well as builds out its mobile and wireline IP portfolio.

We’d note that Apple (AAPL) recently plunked down $2 billion to re-up its licensing agreement with Nokia, after engaging in a patent dispute when the last agreement lapsed. During 2Q 2017 Nokia also ironed out a licensing deal with Chinese smartphone vendor Xiaomi, and has its sight on not only other Chinese vendors, but also expanding its reach as connectivity moves beyond the smartphone and tablet to the home, car and Internet of Things. We see the expanded nature of Nokia’s latest licensing agreement with Apple as a potential harbinger of things to come. On the recent 2Q 2017 earnings call Nokia managements shared that, “instead of a simple patent licensing agreement, we have agreed on a more extensive business collaboration with Apple, providing potential for a meaningful uplift in our IP Routing, Optical Networks and Digital Health business units over time.” In our view, this makes Nokia a looming Disruptive Technology company mixed with a hefty dose of Connected Society.

Now here’s where things get interesting – while Nokia Technologies represented just 7 percent of overall sales in 2Q 2017, it was responsible for more than 60 percent of Nokia’s overall operating profit. Viewed from a different angle, its operating margins are more than 60 percent vs. just 8 percent or so for the Networks business. As one might suspect, the company is targeting a restructuring program to improve profitability at its Networks business, but from our perspective, the real story and the thematic tailwinds that make it attractive are the earnings leverage is tied to the Nokia Technologies business. Should Nokia begin to ink either more licensing deals with Chinese and other smartphone vendors or ones that allow it to expands its IP scope, we could see a meaningful lift in 2018 expectations. Current consensus expectations sit at EPS of 0.35 on revenue of $26.7 billion. That means NOK shares are trading at 18.3x that 2018 forecast, but the question in our mind is after two years with no EPS growth can Nokia grow actually grow its EPS by 35 percent in 2018.

As we’ve learned in the past with InterDigital (IDCC) and Qualcomm (QCOM)sometimes these licensing wins can be lumpy, taking far more time than one might expect. From time to time, it may include legal action as well, which can lead to a rise in legal fees in the short term. Given the company’s net cash position of roughly EUR 4.0 billion ($4.7 billion), we’re not too concerned about its ability to protect itself while continuing to invest in R&D or pay an annual special dividend each year.

As we look for greater near-term clarity at Nokia Technologies and as management looks to restructure Nokia Networks as well as the current valuation, rather than jump on Nokia shares trading at $6.58 at the open this morning as we head into the dog days of summer, we’re placing them onto the Tematica Contender List and we’ll watch for future IP licensing progress or for the shares at about 15% less, at the $5.50 level.

One other item… In an interesting development, a few years ago Microsoft has sold the Nokia brand in two parts to HMD and Foxconn. HMD is a company comprised of former Nokia employees in Finland and through Nokia Technologies it has licensed the sole use of the Nokia brand on mobile phones and tablets worldwide for the next decade, as well as key cellular patents. Meanwhile, Foxconn acquired the manufacturing, distribution and sales arms of Microsoft-Nokia and has also agreed to build the new Nokia phone for HMD. To us, this could be a wild card to watch, but the question will be whether or not they make the move from feature phone to smartphone and have any success? Only time will tell.

 

 

 

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.