Weekly Issue: Verizon is bulls up on 5G, paving the way for a Disruptive Innovator Leader position

Weekly Issue: Verizon is bulls up on 5G, paving the way for a Disruptive Innovator Leader position

Key points in this issue:

  • As expected, more negative earnings revisions roll in
  • Verizon says “We’re heading into the 5G era”
  • Nokia gets several boosts ahead of its earnings report
  • USA Technologies gets an “interim” CFO
  • We are issuing a Buy on and adding the Nokia Corp. (NOK) April 2019 call options (NOK190208C00006500) that closed last night at 0.30 with a stop loss of 0.15 to our options playbook this week.
  • Treading carefully after stopping out of our Del Frisco’s call option

 

As expected, more negative earnings revisions roll in

In full, last week was one in which the domestic stock market indices were largely unchanged and we saw that reflected in many of our Thematic Leaders. Late Friday, a deal was reached to potentially only temporarily reopen the federal government should Congress fail to reach a deal on immigration. Given the subsequent bluster that we’ve seen from President Trump, it’s likely this deal could go either way. Perhaps, we’ll hear more on this during his next address, scheduled ahead of this weekend’s Super Bowl.

Yesterday, the Fed began its latest monetary policy meeting. It’s not expected to boost interest rates, but Fed watchers will be looking to see if there is any change to its plan to unwind its balance sheet. As the Fed’s meeting winds down, the next phase of US-China trade talks will be underway.

Last week I talked about the downward revisions to earnings expectations for the S&P 500 and warned that we were likely to see more of the same. So far this week, a number of high-profile earnings reports from the likes of Caterpillar (CAT), Whirlpool (WHR), Crane Co. (CR), AK Steel (AKS), 3M (MMM) and Pfizer (PFE) have revealed December-quarter misses and guidance for the near-term below consensus expectations. More of that same downward earnings pressure for the S&P 500 indeed. And yes, those misses and revisions reflect issues we have been discussing the last several months that are still playing out. At least for now, there doesn’t appear to be any significant reversal of those factors, which likely means those negative revisions are poised to continue over the next few weeks.

 

Tematica Investing

With the market essentially treading water over the last several days, so too did the Thematic Leaders.  Apple’s (AAPL) highly anticipated earnings report last night edged out consensus EPS expectations with guidance that was essentially in line. To be clear, the only reason the company’s EPS beat expectations was because of its lower tax rate year over year and the impact of its share buyback program. If we look at its operating profit year over year — our preferred metric here at Tematica — we find profits were down 11% year over year.

With today’s issue already running on the long side, we’ll dig deeper into that Apple report in a stand-alone post on TematicaResearch.com later today or tomorrow, but suffice it to say the market greeted the news from Apple with some relief that it wasn’t worse. That will drive the market higher today, but let’s remember we have several hundred companies yet to report and those along with the Fed’s comments later today and US-China trade comments later this week will determine where the stock market will go in the near-term.

As we wait for that sense of direction, I’ll continue to roll up my sleeves to fill the Guilty Pleasure void we have on the Thematic Leaders since we kicked Altria to the curb last week. Stay tuned!

 

Verizon says “We’re heading into the 5G era”

Yesterday and early this morning, both Verizon (VZ) and AT&T (T) reported their respective December quarter results and shared their outlook. Tucked inside those comments, there was a multitude of 5G related mentions, which perked our thematic ears up as it relates to our Disruptive Innovators investing theme.

As Verizon succinctly said, “…we’re heading to the 5G era and the beginning of what many see as the fourth industrial revolution.” No wonder it mentioned 5G 42 times during its earnings call yesterday and shared the majority of its $17-$18 billion in capital spending over the coming year will be spent on 5G. Verizon did stop short of sharing exactly when it would roll out its commercial 5G network, but did close out the earnings conference call with “…We’re going to see much more of 5G commercial, both mobility, and home during 2019.”

While we wait for AT&T’s 5G-related comments on its upcoming earnings conference call, odds are we will hear it spout favorably about 5G as well. Historically other mobile carriers have piled on once one has blazed the trail on technology, services or price. I strongly suspect 5G will fall into that camp as well, which means in the coming months we will begin to hear much more on the disruptive nature of 5G.

 

Nokia gets several boosts ahead of its earnings report

Friday morning one of Disruptive Innovator Leader Nokia’s (NOK) mobile network infrastructure competitors, Ericsson (ERIC), reported its December-quarter results. ERIC shares are trading up following the report, which showed the company’s revenue grew by 10% year over year due primarily to growth at its core Networks business. That strength was largely due to 5G activity in the North American market as mobile operators such as AT&T (T), Verizon (VZ) and others prepare to launch their 5G commercial networks later this year. And for anyone wondering how important 5G is to Ericsson, it was mentioned 26 times in the company’s earnings press release.

In short, I see Ericsson’s earnings report as extremely positive and confirming for our Nokia and 5G investment thesis.

One other item to mention is the growing consideration for the continued banning of Huawei mobile infrastructure equipment by countries around the world. Currently, those products and services are excluded in the U.S., but the U.K. and other countries in Europe are voicing concerns over Huawei as they look to confirm their national telecommunications infrastructure is secure.

Last week, one of the world’s largest mobile carriers, Vodafone (VOD) announced it would halt buying Huawei gear. BT Group, the British telecom giant, has plans to rip out part of Huawei’s existing network. Last year, Australia banned the use of equipment from Huawei and ZTE, another Chinese supplier of mobile infrastructure and smartphones.

In Monday’s New York Times, there was an article that speaks to the coming deployment of 5G networks both in the U.S. and around the globe, comparing the changes they will bring. Quoting Chris Lane, a telecom analyst with Sanford C. Bernstein in Hong Kong it says:

“This will be almost more important than electricity… Everything will be connected, and the central nervous system of these smart cities will be your 5G network.”

That sentiment certainly underscores why 5G technology is housed inside our Disruptive Innovators investing theme. One of the growing concerns following the arrest of two Huawei employees for espionage in Poland is cybersecurity. As the New York Times article points out:

“American and British officials had already grown concerned about Huawei’s abilities after cybersecurity experts, combing through the company’s source code to look for back doors, determined that Huawei could remotely access and control some networks from the company’s Shenzhen headquarters.”

From our perspective, this raises many questions when it comes to Huawei. As companies look to bring 5G networks to market, they are not inclined to wait for answers when other suppliers of 5G equipment stand at the ready, including Nokia.

Nokia will report its quarterly results this Thursday (Jan. 31) and as I write this, consensus expectations call for EPS of $0.14 on revenue of $7.6 billion. Given Ericsson’s quarterly results, I expect an upbeat report. Should that not come to pass, I’m inclined to be patient and hold the shares for some time as commercial 5G networks launches make their way around the globe. If the shares were to fall below our blended buy-in price of $5.55, I’d be inclined to once again scale into them.

  • Our long-term price target for NOK shares remains $8.50.

 

USA Technologies gets an “interim” CFO

Earlier this week, Digital Lifestyle company USA Technologies (USAT) announced it has appointed interim Chief Financial Officer (CFO) Glen Goold. According to LinkedIn, among Goold’s experience, he was CFO at private company Sutron Corp. from Nov 2012 to Feb 2018, an Associate Vice President at Carlyle Group from July 2005 to February 2012, and a Tax Manager at Ernst & Young between 1997-2005. We would say he has the background to be a solid CFO and should be able to clean up the accounting mess that was uncovered at USAT several months ago.

That said, we are intrigued by the “interim” aspect of Mr. Goold’s title — and to be frank, his lack of public company CFO experience. We suspect the “interim” title could fuel speculation that the company is cleaning itself up to be sold, something we touched on last week. As I have said before, we focus on fundamentals, not takeout speculation, but if a deal were to emerge, particularly at a favorable share price, we aren’t ones to fight it.

  • Our price target on USA Technologies (USAT) shares remains $10.

 

Tematica Options+

The positive developments associated with Disruptive Innovator leader Nokia outlined above strongly suggest the company will deliver an upbeat December quarter earnings report, and will likely guide at least if line, if not higher, for 2019 given the accelerating 5G deployments and improving competitive landscape. That’s why we are adding the Nokia Corp. (NOK) April 2019 call options (NOK190208C00006500) that closed last night at 0.30 to our options playbook this week.

Not only does the timing on these calls capture this Thursday’s earnings report, but it also includes the next major mobile industry conference, the 2019 Mobile World Congress (MWC) that will be held in Barcelona from Feb. 25-28. Historically, during times of new mobile technology rollouts, MWC has been a hotbed of announcements. As we stand on the cusp of commercial 5G network deployments, odds are high that history will once again repeat itself.

While signs are bullish for 5G and Nokia, we as investors will want to limit our downside, which is why I’m setting a stop loss at 0.15 for this position.

 

Treading carefully after stopping out of our Del Frisco’s call option

On the housekeeping front, last night we were stopped out of our Del Frisco’s Restaurant Group call option. With the company evaluating its strategic options, we’ll carefully look to revisit a call option position in this company. This extra sense of caution follows the 20+% drop in GameStop (GME) shares following its Board’s decision to forego being taken private by private equity investors and remain both public and independent.

I would note that GameStop is hitting the headwind of our Digital Lifestyle theme as gamers increasingly shed physical formats over downloading games to their devices and consoles. As if that weren’t enough, I’m hearing reports that Apple, Google (GOOGL), Amazon (AMZN) and Microsoft (MSFT) are eyeing a streaming game service similar to what Thematic Leader Netflix (NFLX) has done for TV and movie content. I see this as another potential nail in the GameStop coffin, which means GME shares are one to avoid… at least in a long position.

 

 

Weekly Issue: As earnings season continues, the market catches a positive breather

Weekly Issue: As earnings season continues, the market catches a positive breather

Key points in this issue:

  • As expected, more negative earnings revisions roll in
  • Verizon says “We’re heading into the 5G era”
  • Nokia gets several boosts ahead of its earnings report
  • USA Technologies gets an “interim” CFO

 

As expected, more negative earnings revisions roll in

In full, last week was one in which the domestic stock market indices were largely unchanged and we saw that reflected in many of our Thematic Leaders. Late Friday, a deal was reached to potentially only temporarily reopen the federal government should Congress fail to reach a deal on immigration. Given the subsequent bluster that we’ve seen from President Trump, it’s likely this deal could go either way. Perhaps, we’ll hear more on this during his next address, scheduled ahead of this weekend’s Super Bowl.

Yesterday, the Fed began its latest monetary policy meeting. It’s not expected to boost interest rates, but Fed watchers will be looking to see if there is any change to its plan to unwind its balance sheet. As the Fed’s meeting winds down, the next phase of US-China trade talks will be underway.

Last week I talked about the downward revisions to earnings expectations for the S&P 500 and warned that we were likely to see more of the same. So far this week, a number of high-profile earnings reports from the likes of Caterpillar (CAT), Whirlpool (WHR), Crane Co. (CR), AK Steel (AKS), 3M (MMM) and Pfizer (PFE) have revealed December-quarter misses and guidance for the near-term below consensus expectations. More of that same downward earnings pressure for the S&P 500 indeed. And yes, those misses and revisions reflect issues we have been discussing the last several months that are still playing out. At least for now, there doesn’t appear to be any significant reversal of those factors, which likely means those negative revisions are poised to continue over the next few weeks.

 

Tematica Investing

With the market essentially treading water over the last several days, so too did the Thematic Leaders.  Apple’s (AAPL) highly anticipated earnings report last night edged out consensus EPS expectations with guidance that was essentially in line. To be clear, the only reason the company’s EPS beat expectations was because of its lower tax rate year over year and the impact of its share buyback program. If we look at its operating profit year over year — our preferred metric here at Tematica — we find profits were down 11% year over year.

With today’s issue already running on the long side, we’ll dig deeper into that Apple report in a stand-alone post on TematicaResearch.com later today or tomorrow, but suffice it to say the market greeted the news from Apple with some relief that it wasn’t worse. That will drive the market higher today, but let’s remember we have several hundred companies yet to report and those along with the Fed’s comments later today and US-China trade comments later this week will determine where the stock market will go in the near-term.

As we wait for that sense of direction, I’ll continue to roll up my sleeves to fill the Guilty Pleasure void we have on the Thematic Leaders since we kicked Altria to the curb last week. Stay tuned!

 

Verizon says “We’re heading into the 5G era”

Yesterday and early this morning, both Verizon (VZ) and AT&T (T) reported their respective December quarter results and shared their outlook. Tucked inside those comments, there was a multitude of 5G related mentions, which perked our thematic ears up as it relates to our Disruptive Innovators investing theme.

As Verizon succinctly said, “…we’re heading to the 5G era and the beginning of what many see as the fourth industrial revolution.” No wonder it mentioned 5G 42 times during its earnings call yesterday and shared the majority of its $17-$18 billion in capital spending over the coming year will be spent on 5G. Verizon did stop short of sharing exactly when it would roll out its commercial 5G network, but did close out the earnings conference call with “…We’re going to see much more of 5G commercial, both mobility, and home during 2019.”

While we wait for AT&T’s 5G-related comments on its upcoming earnings conference call, odds are we will hear it spout favorably about 5G as well. Historically other mobile carriers have piled on once one has blazed the trail on technology, services or price. I strongly suspect 5G will fall into that camp as well, which means in the coming months we will begin to hear much more on the disruptive nature of 5G.

 

Nokia gets several boosts ahead of its earnings report

Friday morning one of Disruptive Innovator Leader Nokia’s (NOK) mobile network infrastructure competitors, Ericsson (ERIC), reported its December-quarter results. ERIC shares are trading up following the report, which showed the company’s revenue grew by 10% year over year due primarily to growth at its core Networks business. That strength was largely due to 5G activity in the North American market as mobile operators such as AT&T (T), Verizon (VZ) and others prepare to launch their 5G commercial networks later this year. And for anyone wondering how important 5G is to Ericsson, it was mentioned 26 times in the company’s earnings press release.

In short, I see Ericsson’s earnings report as extremely positive and confirming for our Nokia and 5G investment thesis.

One other item to mention is the growing consideration for the continued banning of Huawei mobile infrastructure equipment by countries around the world. Currently, those products and services are excluded in the U.S., but the U.K. and other countries in Europe are voicing concerns over Huawei as they look to confirm their national telecommunications infrastructure is secure.

Last week, one of the world’s largest mobile carriers, Vodafone (VOD) announced it would halt buying Huawei gear. BT Group, the British telecom giant, has plans to rip out part of Huawei’s existing network. Last year, Australia banned the use of equipment from Huawei and ZTE, another Chinese supplier of mobile infrastructure and smartphones.

In Monday’s New York Times, there was an article that speaks to the coming deployment of 5G networks both in the U.S. and around the globe, comparing the changes they will bring. Quoting Chris Lane, a telecom analyst with Sanford C. Bernstein in Hong Kong it says:

“This will be almost more important than electricity… Everything will be connected, and the central nervous system of these smart cities will be your 5G network.”

That sentiment certainly underscores why 5G technology is housed inside our Disruptive Innovators investing theme. One of the growing concerns following the arrest of two Huawei employees for espionage in Poland is cybersecurity. As the New York Times article points out:

“American and British officials had already grown concerned about Huawei’s abilities after cybersecurity experts, combing through the company’s source code to look for back doors, determined that Huawei could remotely access and control some networks from the company’s Shenzhen headquarters.”

From our perspective, this raises many questions when it comes to Huawei. As companies look to bring 5G networks to market, they are not inclined to wait for answers when other suppliers of 5G equipment stand at the ready, including Nokia.

Nokia will report its quarterly results this Thursday (Jan. 31) and as I write this, consensus expectations call for EPS of $0.14 on revenue of $7.6 billion. Given Ericsson’s quarterly results, I expect an upbeat report. Should that not come to pass, I’m inclined to be patient and hold the shares for some time as commercial 5G networks launches make their way around the globe. If the shares were to fall below our blended buy-in price of $5.55, I’d be inclined to once again scale into them.

  • Our long-term price target for NOK shares remains $8.50.

 

USA Technologies gets an “interim” CFO

Earlier this week, Digital Lifestyle company USA Technologies (USAT) announced it has appointed interim Chief Financial Officer (CFO) Glen Goold. According to LinkedIn, among Goold’s experience, he was CFO at private company Sutron Corp. from Nov 2012 to Feb 2018, an Associate Vice President at Carlyle Group from July 2005 to February 2012, and a Tax Manager at Ernst & Young between 1997-2005. We would say he has the background to be a solid CFO and should be able to clean up the accounting mess that was uncovered at USAT several months ago.

That said, we are intrigued by the “interim” aspect of Mr. Goold’s title — and to be frank, his lack of public company CFO experience. We suspect the “interim” title could fuel speculation that the company is cleaning itself up to be sold, something we touched on last week. As I have said before, we focus on fundamentals, not takeout speculation, but if a deal were to emerge, particularly at a favorable share price, we aren’t ones to fight it.

  • Our price target on USA Technologies (USAT) shares remains $10.

 

 

 

WEEKLY ISSUE: The Cherry on Top of Apple’s Quarter Earnings Beat

WEEKLY ISSUE: The Cherry on Top of Apple’s Quarter Earnings Beat

 

Key Points from this Alert:

  • After March quarter earnings that shut down the doomsayers, an upsized capital return program and ahead of the upcoming WWDC 2018 event in June, our price target on Apple (AAPL) shares remains $200.
  • What’s the Fed likely to say later today?
  • We are scaling into AXT (AXTI) shares on the Tematica Investing Select List at current levels and keeping our long-term $11 price target intact.
  • We are also adding to our position in LSI Industries (LYTS) shares at current levels, and our price target remains $11.

 

Apple delivers for the March quarter and upsizes its capital return program

Last night in aftermarket trading, Apple (AAPL) shares popped more than 3% after closing the day more than 2% higher as Apple delivered a March quarter that was a sigh of relief to many investors. More specifically Apple served up results on the top and bottom line that were ahead of expectations, guided current quarter revenue ahead of expectations and upsized not only its share repurchase program, but its dividend as well. Heading into the earnings report, investors had become increasingly concerned over iPhone shipments for the quarter, particularly for the iPhone X, following recent comments on high-end smartphone demand from Taiwan Semiconductor (TSM), Samsung and others. That set a low sentiment bar, which the company once again walked over.

What Apple delivered included iPhone shipments modestly ahead of expectations – 52.2 million vs. 52.0 million – and an average selling price that fell $70 to $729. Down but certainly not the disaster that many had fretted for the iPhone X. iPad shipments were also stronger than expected and Apple continued to grow its Services business with Mac sales in line with analyst forecasts. Looking at the Services business, Apple is well on track to deliver on its $50 billion revenue target by 2021 and that’s before we factor in what’s to come from its recent acquisitions of Shazam and Texture as well as its burgeoning original content moves. In my view, that original content move, which replicates a strategy employed by Netflix (NFLX) and Amazon (AMZN), will make Apple’s already incredibly sticky devices even more so.

Think of it as Tematica’s Content is King investing theme meets Connected Society and Cashless Consumption… and yes, I need a better name for that three-pronged tailwind combination.

On the guidance, Apple put revenue ahead of consensus expectations and signaled a modest dip in gross margins due to the memory pricing environment. Even so, the sequential comparison for revenue equates to a quarter over quarter drop of 12.5%-15.5%, which likely reflects a mix shift in iPhones toward non-iPhone models. Pretty much as expected and far better than the doomsayers were predicting.

The bottom line on the March quarter results and June quarter outlook was investors fretted about the iPhone X to an extreme degree… an overreactive degree… forgetting the company has a portfolio of iPhone products as well as other products and services. Some may see the report as giving investors a sigh of relief, but I see it more as a reminder that investors should not count Apple out as we move into an increasingly digital lifestyle.

Is the company still primarily tied to the iPhone? Yes, but it is more than just the iPhone and that is something that will become more apparent in the coming year. We’re apt to see more of that in a month’s time at the company’s annual World-Wide Developer Conference, which several months later will be followed by what continues to sound like an iPhone product line up with refresh with several models at favorable price points.

The added cherry on top of the company’s meet to beat quarter and outlook was the incremental $100 billion share repurchase program and the 16% increase in the dividend. That dividend boost brings the company’s annual dividend to $2.92 per share, which equates to a dividend yield of 1.7%. Looking at dividend yields over the last few years applied to the new dividend supports our $200 price target for Apple shares.

  • After March quarter earnings and ahead of the upcoming WWDC 2018 event in June, our price target on Apple (AAPL) shares remains $200.

 

What’s the Fed likely to say later today?

While many were focused on Apple’s earnings, others, like myself, were also getting ready for the Fed’s latest monetary- policy meeting, which concludes today. Market watchers expect the FOMC to leave interest rates unchanged, but recent data (as well as some comments that company executives have made this earnings season) suggest that we’re seeing a pickup in U.S. inflation.

For example, Caterpillar (CAT) last week shared that its margins likely peaked during the first quarter due to rising commodity prices, most notably steel. Meanwhile, the April IHS Markit Flash U.S. Composite Purchasing Managers Index report last week showed that average prices for goods and services “increased solidly. The rate of input price inflation was the quickest since July 2013.”

And on the manufacturing side, the report noted that “price pressures within the factory sector intensified, with the rate of input-cost inflation picking up to the fastest since June 2011.” Markit also wrote that the services sector “witnessed its average cost burdens climbing month over month as well.”

We also learned just this week that the U.S. Personal Consumption Expenditures Price Index (which happens to be the Fed’s preferred inflation metric) rose 2.4% year over year. While that’s down a few ticks from February’s 2.7%, the PCE came in well above the Fed’s 2% inflation target for the second month in a row.

And lastly, the April ISM Manufacturing Index’s price component edged up to 79.3 from 78.1 in March, easily marking 2018’s highest level so far.

All of these figures have likely caught the Fed’s eyes and ears. Make no mistake about it — the central bank will review them with a fine-toothed comb. The FOMC came out of its last policy meeting rather divided as to the number of rate hikes it expects for 2018. Some FOMC members preferring the three hikes that markets widely expect, but others on the committee increasingly leaned toward four.

In the grand scheme of things, four vs. three rate hikes isn’t a “yuge deal” (as President Donald Trump would say). In fact, more investors are likely expecting the higher numbers of hikes given the recent inflationary economic data. But that’s just the investor base. Odds are that any language in the FOMC’s post-meeting communique that points to an upsized pace of rate hikes is bound to catch the mainstream media and others off-guard.

And one way or another, the Fed’s comments are bound to make the wage data that we’ll be getting in this Friday’s U.S. April jobs report a key focus. A hotter-than- expected headline number will boost the odds that we’ll see a fourth rate hike this year.

But between now and then, expect to see lower-than-usual trading volumes as investors wait to see the latest economic figures while also digesting this week’s litany of earnings reports. Things could get a little wonky, as investors reset expectations for corporate earnings and FOMC hikes, but I’ll continue to let our thematic tailwinds be our guide.

 

Scaling into AXTI (AXTI) shares …

Last week was a challenging one for shares of AXT Inc. (AXTI) and LSI Industries (LYTS), and while that is painful and frustrating in the near-term, I view this as an opportunity to scale deeper into both positions at better prices. The silver lining is this will improve our cost basis for the longer term.

With regard to AXT, the smartphone industry has been currently transfixed on comments from Taiwan Semiconductor (TSM), Samsung and SK Hynix that all warned on demand for high-end smartphones. As we saw last night, those comments were not necessarily indicative of Apple’s iPhone shipments for the March quarter and as I pointed out above Apple has a portfolio of smartphones and a growing services business. Also, given comments from mobile infrastructure company Ericsson (ERIC) and chip-supplier Qualcomm (QCOM), 5G smartphones should be hitting in 2019, which we see fostering the beginning of a major upgrade cycle for the iPhone and other vendors.

This is a great example of focusing on the long-term drivers rather than short-term share-price movement. Later this week two of AXT’s customers — Skyworks Solutions (SWKS) and Qorvo (QRVO) — will report their quarterly results. I expect those reports to reflect the short-term concerns as well as the longer-term opportunity as wireless connectivity continues to move past smartphones. With AXT’s substrates an essential building block for the RF semiconductors, let’s remain patient as I keep our long-term price target at $11, following the company’s first-quarter 2018 results that beat expectations but also call for sequential improvement in both revenue and earnings per share.

  • We are scaling into AXT (AXTI) shares on the Tematica Investing Select List at current levels and keeping our long-term $11 price target intact.

 

… and buying more shares of LSI Industries (LYTS) as well

Now let’s turn to LSI Industries. Concerns about a sudden management change last week, just days ahead of the company’s quarterly earnings report, led LYTS shares to plummet 20% but rebound a bit later in the week even as LSI reported March-quarter results that missed both top-line and bottom-line expectations. While the search for a new CEO is underway, what was said during the earnings conference call was favorable, in my opinion, and supports my thesis on the shares.

First, let’s tackle the elephant in the room that is the sudden CEO departure. As one might expect, such a late in the quarterly reporting game resignation is bound to jar investors, but the near 29% move lower over the ensuing few days was more than extreme. That said, a sudden CEO departure raises many questions, and when it’s in a market that has been registering Fear on the CNNMoney Fear & Greed Index, investors tend to a shoot first and ask questions later mentality.

What I saw on the earnings conference call was a calm management team that is looking for a next-generation CEO. What I mean by that is one that understands the changes that are happening in the lighting market with increasing connectivity in lighting systems and signage. This to me says the desired CEO will be one with a technology background vs. one with a legacy lighting background. Much the way the lighting technology being used is being disrupted with LEDs and soon OLEDs, LSI needs a forward-thinking CEO, not one that only thinks of traditional light bulbs.

Second, the company’s lighting business is nearing the end of its transition to light- emitting diodes (LEDs) from traditional lighting solutions. During the March quarter, LSI’s LED business grew 14% year over year to account for 92% of the segment vs. roughly 80% in the year-ago quarter. Despite that success, the legacy lighting business continues to decline, with sales of those products falling by more than 55% year over year in the March quarter.

With one more quarter left in its transition to LEDs, the weight of the legacy lighting business likely won’t be a factor much longer, and that should allow the power of the LED business to benefit the bottom line. The LED business is riding the combined tailwinds of both environmentally friendly green technology as well as the improving nonresidential landscape.

Alongside its earnings report, LSI’s Board of Directors declared a regular quarterly cash dividend of $0.05 per share that is payable May 15 to shareholders of record as of May 7. The annualized dividend equates to LYTS shares offering a dividend yield of 3.4% at recent levels, well above its historical range of 1.5%-2.5% over the 2015-2017 period. Applying those historical dividend yields to the current annualized dividend yields a share price between $8-$13. The stock market liked this as LYTS shares rallied some 10% over the last several days, but we still have ample upside to my long-term $11 price target.

This tells me that there is much further to go fro LYTS shares in the coming months as LSI finds a CEO and gets its story back on track. Let’s remain patient with this one.Helping with that patient attitude was yesterday’s March Construction Spending Report, which revealed private nonresidential construction rose 3.8% year over year for the month on a non-seasonally adjusted basis.

  • We are adding to our position in LSI Industries (LYTS) shares at current levels, and our price target remains $11.

 

 

Boosting our price target on LSI Industries

Boosting our price target on LSI Industries

 

Our shares of LSI Industries (LYTS) on the Tematica Investing Select List are popping today following a solid earnings beat for the companies December quarter and raised bottom line expectations for the coming year due in part to the benefits of tax reform. With that benefit, which is based on a consolidated tax rate of 29% vs. 34% for 2017, we are boosting our price target on LYTS shares to $11 from $10, which keeps the shares a Buy rating despite this morning’s 15% move higher. We’re more than happy to take that 15% move as it brings the return thus far on LYTS shares to just under 14%.

As I mentioned above, the earnings beat was partly due to tax reform. The other part was the stronger than expected operating performance as revenue for the quarter rose 7.7% year over year to $92.3 million, well ahead of the $88.5 million “consensus” expectation formulated by all two of the Wall Street analysts that follow the shares. More impressive was the sharp improvement in operating profit that rose significantly higher year over year as its operating margins climbed to roughly 4.9%, up from 3.3% in the year-ago quarter. This continues the trend of year over year margin improvement, which bodes well for incremental EPS growth in the coming quarters, even before we factor in the company’s new tax rate.

Once again, we are seeing that stocks under covered by Wall Street analysts offer opportunity, provided the fundamentals and other data points support the investment thesis. As a reminder, LSI remains well-positioned with its lighting solutions as non-residential construction activity continues to rise in the coming quarters. Comments from construction equipment heavy weight Caterpillar (CAT) are certainly comforting in this regard as it “expects improvement in North American residential, non-residential and infrastructure. The outlook does not include any impact from a potential U.S. infrastructure bill.”

I continue to see the rebuilding of US infrastructure as pouring gasoline on non-residential contraction and LSI’s business. I continue to wait for more formal details to emerge out of Washington on this, but between now and then, I’ll continue to look for additional confirming data points as the December quarter earnings season heats up.

  • We are boosting our price target on LSI Industries (LYTS) to $11 from $10

 

UA Calls Kill It This Olympic Season

Yes, for the second time in a week we’re coming to you with a special trading alert for one of our option calls. This time, it’s for the Under Armour (UA) calls we issued a buy recommendation on last week. 

If you’re like us here at Tematica then you’ve been enjoying the Olympic coverage and yes, we too don’t understand the green water in the diving well. Better not to ask!

While we’ve enjoyed the games, we’ve also seen a signifiant move in the Under Armour (UA) January 20, 2017 (UA170120C00045000) calls that are on the Tematica Pro Select List. Those same UA calls closed last night at 2.40, 80% higher than our buy-in on August 4th. When we see pronounced moves like that, particularly given that we are entering a slow season for the stock market, we want to be opportunistic.

That means we are selling half the UA call position, but keeping the other half in play to benefit from both the current Back to School spending season as well as the year-end holiday shopping season. Between these two events, Under Armour should be bringing a wide range of products to market, including more footwear and the launch of its sportswear line.

As you trim back your UA call position, be sure to put a protective stop loss in place at $2.00, which is where we will be placing ours on the Tematica Pro Select List. At that level, if the stop is triggered it should lock in roughly a 50% gain on the remaining calls.


Recap of Actions from this special alert:

  • Issuing a Sell on half the position on Under Armour (UA) January 20, 2017 (UA170120C00045000) that reached 2.40 yesterday, locking in an 80 percent return.
  • We are keeping the other half of the position; however we are boosting our protective stop from 0.80 up to 2.00, thereby locking in a 50% gain on the remaining calls.
Taking Some Profits on A Hyuuuuuuge Move in our Back to School Delivery Calls

Taking Some Profits on A Hyuuuuuuge Move in our Back to School Delivery Calls

Yesterday we issued a Buy rating on United Parcel Service (UPS)  UPS September 2016 $112 calls (UPS160923C00112000). We added the calls to the Tematica Pro Select List soon after the market open, but an hour after the market opened, the calls started to climb higher. At the close of trading yesterday, the calls reached 1.00, up more than 65 percent.

UPS Call ChartWhen we see such moves, we are inclined to hang on for more, but we are also reminded of the ol’ Wall Street adage — “Bulls make money, bears make money, but pigs get slaughtered.”

As such, we are selling half the call position, and keeping the other half in tact as we move deeper into Back to School spending. While it may be rather obvious, we would not commit new capital at current levels, and given the sharp pop, we are boosting our protective stop to 0.80 from 0.35. At the new level, should the stop loss be triggered, the remaining calls will lock in a profit of roughly 33%.

Another Move that should deliver on Back to School Shopping

Another Move that should deliver on Back to School Shopping

Key Points from this Alert

In last week’s Tematica Pro we added two call option plays for the Back to School shopping season. These were our Consumer Discretionary Select Sector SPDR Fund (XLV) September 16, 2016 calls (XLY160916C00082000) and Under Armour (UA) January 20, 2016 $45 (UA170120C00040000) additions, both of which closed last night essentially unchanged from where we added them last week. As you may recall, clothing and accessories, as well as footwear are expected to be in high demand this Back to School season, and those positions offer us ample exposure.

With Back to School shopping getting into gear over the coming weeks, both of those call options remain Buys at current levels. Our protective stop losses remain intact as well.

 

Another Move that should deliver on Back to School Shopping

As we’ve shared over the last few months in Tematica Investing, particularly when discussing our Amazon (AMZN) shares, we’ve seen a pronounced pick up in the transition to online and mobile shopping. As you more than likely know, this means ordering through a Connected Society device, such as a tablets, smartphone or even a computer, with your parcels showing up a few days later. This, of course, has been a boon to United Parcel Service (UPS) shares especially as it’s become clear that Amazon is not going to replicate UPS’s vast delivery network, but rather incremental capacity to meet its growing logistical needs.

Another confirming data point was found in this year’s back-to-school sales forecast from retail consultant Customer Growth Partners (CGP). Per CGP, back-to-school sales this year are expected to climb 3.3 percent to $540 billion (the back-to-school shopping period is defined as July through September). Digging into the data, online sales (roughly 18 percent of overall back-to-school sales) are expected to grow far faster, 11 percent year over year, meaning this area once again will take consumer wallet share. Much like we do, CGP expects Amazon to be a strong beneficiary, with the company accounting for “at least a quarter of back-to-school’s projected $17 billion rise this year.”

This bodes extremely well for UPS shares over the coming weeks and as such we are adding the following to our list:

 

On Friday, we’ll get the July Retail Sales Report, which could show some pull-forward in Back to School sales. We’ve noticed in recent outings to Costco Wholesale (COST) and Target (TGT) that the season items associated with Back to School spending were out in full force, and the schools in our area aren’t back in session until the week before Labor Day. Inside the report, we’ll be looking at the various line items, such as those found under Clothing & Clothing Accessories for our UA and XLY call options, while for our UPS calls the nonstore retailers will be the one to watch.

One interesting fact on all of these tax-free shopping holidays that have cropped up and coincided with Back to School shopping: Kansas, North Carolina, Nebraska, Rhode Island and Wisconsin are among the states that have decided against holding new tax holidays or reinstating them during the last few years. The reason according to the Institute on Taxation and Economic Policy, or ITEP, a nonpartisan think tank, is they will be saving money. ITEP estimates that state and local governments that retain the holidays will lose out on more than $300 million in revenue due to the holidays this year. Those losses in revenue come as states are also poised to see aggregate tax revenue growth below 4 percent this year, down from 5.5 percent in 2015, according to Moody’s Investors Service.

If you’re wondering if you are in one of those 17 states where you can shop tax free for Back to School, click here to find out.

 

VIX chart

 

A few weeks ago, we cautioned that as the frequency of June quarter corporate earnings slowed, we would be entering a seasonally weak time for the market. It seems that once again, the financial media is catching up to our way of thinking — this headline “Traders bet on another late-August volatility spike” appeared on CNBC.com yesterday, with the gist of the story being that if the Volatility Index (better known as the “VIX”) was below 12 in August, “there was almost a sure bet that the VIX will be higher three months out by more than 6 percent with a fair possibility of an outsized move.”

 

While the VIX closed last night at 12.05, it’s spent some time below 12 thus far in August. With a few weeks left to go, we’ll continue to keep an eye on the VIX, but with the market at increasing stretched valuation levels on expectations now for a dip in 2016 S&P 500 earnings year over year, we’ll continue to keep the inverse ETFs that are SH, DOG and RWM shares on the Tematica Pro Select List.

Getting some game-on for Back to School season

Getting some game-on for Back to School season

Key Points from this Alert

Despite the move higher in the domestic stock markets yesterday ( which we watched as Tematica CIO Chris Versace recovered from meniscal tear surgery and learned he’s got some arthritis in his right knee as well ) over the last five days two of the three of the major stock indices — the S&P 500 and the Dow Jones Industrial Average — moved lower between 0.5 percent and 1.18 percent, respectively.

While this was a positive for our ProShares Short S&P 500 (SH) and ProShares Short Dow30 ETF (DOG) shares, the move lower resulted in our being stopped out of our most recent addition, the Utilities Select Sector SPDR ETF (XLU) September $53 calls (XLU160916C00053000). The other addition we sought to make last week — Southern Company (SO) September $55 calls (SO160819C00055000) — opened up below our 0.12 stop loss last week, another reminder of how wide options can swing relative to the movements in the underlying shares as well as the need to assess downside risk as well as potential upside.

It’s true that over the next few weeks, many will be hitting the beaches and lakes as we enter the dog days of summer. It’s also true that students will soon be returning back to school — trust me I know this as I am already getting requests for my Fall 2016 syllabi for the graduate classes I will once again teach at New Jersey City University. What this means is parents and students will soon be opening their wallets for all sorts of supplies, shoes and apparel. We will also see quite a few notebook computers and tablets move off the shelves as education continues to embrace aspects of our Connected Society, which in our neck of the woods is referred to as the “Bring Your Own Tech” movement. Sadly for parents, all this means opening their wallets for Back to School spending, but it also means that before too long the youngsters will be out of the house for a few more hours Monday through Friday. Ah the sweet taste of freedom!

As we’ve seen over the last few years, the National Retail Federation (NRF) tends to be a tad over optimistic with its spending forecasts, but directionally it tends to hit the mark. That’s likely to be true once again with its 2016 Back to School spending forecast that calls for consumer to plunk down $75.8 billion this year. That breaks down to an average of $674 per household, up from $630 last year. The top three categories that consumer will spend on according to the NRF are:

  • Clothing and accessories – $235.29 per household
  • Electronics – $204.06 per household
  • Footwear – 126.55 per household

Doing some quick sandbox math, this tell us consumer are likely to spend 65% of their Back to School shopping dollars on these three categories. Let’s face it, toddlers grow into grade schoolers that soon become tweens and eventually teenagers before heading off to college — the one commonality across all of these age groups is growth, and that spurs demand for clothing and footwear. We already have exposure on the Tematica Pro Select List to some of the key beneficiaries of the Back to School shopping season — Amazon (AMZN), Nike (NKE), TJX Companies (TJX), Target (TGT), Ross Stores (ROST) and VF Corp. (VFC) — in our Consumer Discretionary Select Sector SPDR Fund (XLY) shares. To capture the incremental surge in Back to School shopping, however, we are making two trading additions to our List:

The one apparel and footwear company that is not owned by XLY ETF in any real size is Under Armour (UA). We recently added UA shares in Tematica Investing, using the recent post earnings weakness to do so, given the strong prospects in the second half of they year as the company attacks the international, women’s, footwear and sportswear markets. In all likelihood, UA’s moves into these markets will occur as it positions itself not just for Back to School shopping, but for year-end holiday shopping as well, especially with its new Under Armour Sportswear line of product. As such, we are taking a longer-term view as we add:

With corporate earnings set to slow markedly after this week, we’ll continue to evaluate contender call option trades for the back half of 2016 as we strive to turn out all the campaign noise that will be filling the airwaves and web pages.

The heat is on while the Fed stays cool on interest rates

The heat is on while the Fed stays cool on interest rates

Key Points from this Alert

Before jumping into our energy-focused calls for this week, we must first take a look at the Fed’s stand-pat announcement on rates yesterday and how we see it impacting things for us investors in the near-term.

After yet another two-day Federal Open Market Committee meeting, the Federal Reserve has again opted to leave interest rates unchanged, compared with earlier expectations for four hikes in 2016.

In digesting the Fed’s July press release, my initial view is that it was stitched together from previous ones because, by and large, the commentary was very much the same as we’ve seen over the last few months. Words like “moderate,” “some increase,” “run below,” “remain low,” and “little changed in recent months” tell me that despite the very recent improvement in domestic economic data (which has led to an increase in the Citi Economic Surprise Index), the Fed is keeping one eye out for more data confirmation on the strength (or weakness) in the economy, while keeping another eye on what is happening outside the US.

There are still ample unanswered questions regarding the implementation and impact of Brexit, as well as other issues, including the UK’s July drop into economic contraction territory, continued weakness in the Chinese and Japanese economies and Friday’s Italian bank stress tests. From what my Cocktail Investing co-author Lenore Hawkins is seeing with her proximity to economic problems in Italy, there is little indication that some sort of solution for the troubled banks is in the works, which could mean market fireworks in the near future. This is certainly not the time to get long the iShares MSCI Italy Capped ETF (EWI).

In addition, commentary during the current earnings season from companies ranging from Caterpillar (CAT) to Honeywell (HON), as well as industry data from the trucking and rail industries, continues to paint a tepid global economic picture. In terms of risk vs. reward, the Fed opted to err on the side of easy monetary policy lest it choke the burgeoning flame of the domestic economy.

The market’s reaction was pretty much a loud and resounding “meh” on the Fed news, which tells us this is what everyone expected — they must all be reading the Monday Morning Kickoff! The fact that there was no scheduled press conference following the decision was a likely tip-off. We doubt the Fed would act without explaining its reasons for doing so.

With the next FOMC scheduled for Sept. 20-21, we are again in data-dependent mode when it comes to monitoring the economy and speculating on Fed timing. The fact that it is an election year, and a contentious one at that, paired with little business investment occurring (no surprise again because it is an election year), odds are the economy will remain on the same flight path. In other words, 2 percent to 2.5 percent GDP growth in the back half of 2016 could lead some folks to further revisit earnings expectations for the back half of 2016.

The realization the Fed is not going to boost interest rates near term weighed on PowerShares DB US Dollar Bullish ETF (UUP). Even though our PowerShares DB US Dollar Bullish ETF (UUP) August 2016 $25 calls (UUP160819C00025000) were still above the strike price, the move lower in UUP shares led to our being stopped out of the position.  

The Heat is On

actheat_600x405

 

In our opening comments to yesterday’s Tematica Investing we commiserated with you over the summer heat. While we’re not weathermen, we know we’ve had to put our air conditioning to the test in what The Weather Channel has called a stretch of oppressive heat and humidity across from the Plains and Midwest into the East. Heat alerts had been issued for more than a dozen states from Louisiana to Minnesota. Heat advisories were extended to cover parts of Michigan, Indiana and northwest Ohio, and Kentucky, and in larger areas of states already under watch. Excessive heat warnings were in place for all of Iowa and large parts of Nebraska, the Dakotas and Illinois.

Industrial Production Components

 

To combat the heat, we’ve seen a pick up in Utility production in the reported monthly Industrial Production figures. Even the Federal Reserve recognized that warmer weather in June boosted air conditioning demand, which fueled the strong uptick in utilities output (see table). Odds are high we will see them move even higher in the July data when it’s published in a few weeks.

Given those strong prospects we are adding the Utilities Select Sector SPDR ETF (XLU) September $53 calls (XLU160916C00053000) that closed last night at 0.57. We’re opting to trade the September calls because the strike date shoed capture the August Industrial Production data. We would add the XLU September $53 calls up to $0.65, and we are putting a protective stop in at 0.35 to manage downside risk.

We are also adding the Southern Company (SO) September $55 calls (SO160819C00055000) following a sharp pullback yesterday to 0.19 from 0.44 the day before. This Atlanta, Georgia-based company is one of the largest utilities in the US Through its eleven electric and natural gas distribution units in nine states, Southern Company serves approximately nine million customers. We would not chase the SO calls beyond $0.25, and we are setting a protective stop at 0.12.

Stopped out of AT&T calls

Earlier this week, AT&T (T) shares got dinged on the news that Verizon Communications (VZ) won the bid for Yahoo! (YHOO). We shared our views on why not getting Yahoo! is actually a positive for AT&T, and while we think the market will once again come around to our way of thinking, the drop caused us to be stopped out of our AT&T September 2016 $44 calls (T160916C00044000) when the fell to 0.24. Our losses were limited thanks to our protective stop loss at 0.30, bitter sweet for sure, but far better than what could have been.


Recap of Actions from this week: