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.


Weekly Issue: As trade concerns escalate, investors brace for an expectations reset

Weekly Issue: As trade concerns escalate, investors brace for an expectations reset


Key points inside this issue

  • Safety & Security Thematic Leader is up big year to date, and new body camera and digital records products hitting later this year should accelerate the company’s transition. Our long-term price target on AAXN shares remains $90.
  • The April Retail Sales Report should offer confirmation for Thematic King Amazon (AMZN) as well as Middle-Class Squeeze Thematic Leader Costco Wholesale (COST). 


Given the wide swings in the market over the last few days that are tied back to the changing US-China trade talk landscape, I thought it prudent to share my latest thoughts even if it’s a day earlier than usual. 

As we discussed in the last issue of Tematica Investing, we knew that coming into last week, it was going to be a challenging one. Trade tensions kicked up to levels few were expecting 10 days ago and as the week progressed the tension and uncertainty crept even higher. We all know the stock market is no fan of uncertainty, but when paired with upsized tariffs from both the US and China that will present new economic and earnings headwinds, something that was not foreseen just a few weeks ago, investors will once again have to revisit their expectations for the economy and earnings. And yes, odds are those past and even more recent expectations will be revisited to the downside. 

What was originally thought to have been President Trump looking to squeeze some last- minute trade deal points out of the Chinese instead turned out to be more of a response to China’s attempt to do the same. This revealed the tenuous state of U.S./China trade talks. Last Friday morning, the U.S. had boosted tariffs to 25% from 10% on $200 billion worth of Chinese goods with President Trump tweeting there is “absolutely no need to rush” and that “China should not renegotiate deals with the U.S. at the last minute.” Even as the new tariffs and tweets arrived, trade negotiations continued Friday in Washington with no trade deal put in place, which dashed the hopes of some traders. Candidly, I didn’t expect a trade deal to emerge given what had transpired over the prior week. 

That hope-inspired rebound late Friday in the domestic stock market returned to renewed market pressure over the weekend and into this week as more questions over U.S.-China trade have emerged. As we started off this week, the trade angst between the U.S. and China has edged higher as China has responded to last week’s U.S. tariff bump by saying it would increase tariffs on $60 billion of U.S. goods to 25% from 10% beginning June 1st. Clearly, the latest round of tweets from President Trump won’t ease investor concern as to how the trade talks will move forward from here.

As the trade war rhetoric kicks up alongside tariffs, the next date to watch will be the G-20 economic summit in Japan next month. According to Trump economic adviser Larry Kudlow, there is a “strong possibility” Trump will meet Chinese President Xi and this morning President Trump confirmed that. 

The cherry or cherries on top of all of this is the growing worries over increasing tension with Iran, which is weighing on the market this morning, and yet another 2019 growth forecast cut by the EU that came complete with a fresh warning on Italy’s debt levels. Growth projections by the European Commission showed a mere 0.1% for GDP growth this year in Italy. The country has the second-largest debt pile in the EU and, according to the latest forecasts by the commission, the Italian debt-to-GDP ratio will hit 133% this year and rise to 135% in 2020. I point these out not to worry or spook you, but rather remind you there are other issues than just US-China trade that have to be factored into our thinking.

The natural market reaction to all of these concerns is to adopt a “risk off” attitude, which, as we’ve seen before, can ignite a storm of “fire first, ask questions later.” And as should be no surprise, that has fueled the sharp move lower in the major market indices. Over the last several days, the S&P 500, which as we know if the barometer used by most institutional and professional investors, fell 4.7% while the small-cap heavy Russell 2000 dropped 5.7%.

At times like this, it pays to do nothing. Hard to believe but as you’ve often heard few will step in to catch a falling knife and given the sharp declines, we also run the risk of a dead cat bounce in the market. We should be patient until the market finds its footing, which means parsing what comes next on the economic and earnings as well as trade front.  

I’ll continue to look for replacements for open Thematic Leader slots as well as other contenders poised to benefit from our pronounced thematic tailwinds. In the near-term, that will mean focusing on ones that also have a more U.S.-focused business model, a focus on inelastic and consumable products. Another avenue that investors are likely to revisit is dividend-paying companies, particularly those that fall into the Dividend Aristocrats category because they’ve consistently grown their dividends for the past 10 years. As I sift through the would-be contenders, I’ll be sure to look for those that intersect our investing themes and the aristocrats. 


Tematica Investing

As the stock market has come under pressure, a number of our Thematic Leaders, as well as companies on the Select List, have given back some of their year-to-date gains. One that has rallied and moved higher in spite of the market sell-off is Safety & Security Thematic Leader Axon Enterprises (AAXN) and are up some 48% year to date. That makes it the second-best performer on the Thematic Leaderboard year to date behind Clean Living company Chipotle Mexican Grill (CMG) that is up nearly 60% even after the market’s recent bout of indigestion.

Axon reported its March quarter earnings last week, which saw revenue grow 14% year over year as Axon continues to shift its business mix from Taser hardware to its Software & Sensor business that fall under the Axon Body and Axon Records businesses. During the company’s earnings conference call, the management team shared its next gen products will be available during the back half of the year. These include the Axon Body, its first camera with LTE live streaming, will launch during the September quarter and Axon Records, its first stand-alone software product. Records w will launch with a major city police department and it is already testing with a second major police department. As far as the new Axon Body product, I suspect the untethering of this camera could spur adoption much the way Apple’s (AAPL) Apple Watch saw a pronounced pick up when it added cellular connectivity to its third model. 

These new products, which leverage the intersection between our Digital Infrastructure investing theme and our Safety & Security one, should accelerate the transition to a higher margin, recurring revenue business in the coming quarters. In other words, Axon’s transformation is poised to continue and as that happens investors will be revisiting how they value the company’s business. More than likely that means further upside ahead for AAXN shares. 

  • Our price target on Safety & Security Thematic Leader Axon Enterprises (AAXN) remains $90.


Here comes the April Retail Sales Report

Later this week, we’ll get the April Retail Sales Report, which should benefit for the late Easter holiday this year. Up until the March report, this data stream was disappointing during December through February but even so from a thematic perspective the reports continued to reinforce our Digital Lifestyle and Middle-class Squeeze investing themes. 

When we look at the April data, I’ll be looking at both the sequential and year over year comparisons for Nonstore retailers, the government category for digital shopping and the category that best captures Thematic King Amazon (AMZN). I’ll also be looking at the general merchandise stores category with regard to Middle-Class Squeeze Thematic Leader Costco Wholesale (COST). Costco has already shared its April same-store sales, which rose 7.7% in the US despite having one less shopping day during the month compared to last year. Excluding the impact of gas prices and foreign exchange, Costco’s April sales were up 5.6% year over year. From my perspective, the is the latest data point that shows Costco continues to take consumer wallet share. 

With reported disposable income data inside the monthly Personal Income & Spending reports essentially flat for the last few months and Costco continuing to open new warehouse locations, which should spur its high margin membership revenue, I continue to see further upside ahead in COST shares. And yes, the same applies to Amazon shares as well.

  • Our $250 price target for Middle-class Squeeze Thematic Leader Costco Wholesale (COST) is under review.


Weekly Issue: Looking to Avoid the Dead Cat Bounce

Weekly Issue: Looking to Avoid the Dead Cat Bounce


Key points inside this issue

  • As trade concerns escalate, investors brace for an expectations reset.
  • Safety & Security Thematic Leader is up big year to date, and new body camera and digital records products hitting later this year should accelerate the company’s transition. Our long-term price target on AAXN shares remains $90.
  • The April Retail Sales Report should offer confirmation for Thematic King Amazon (AMZN) as well as Middle-class Squeeze Thematic Leader Costco Wholesale (COST). 
  • Given the wide swings in the market over the last few days and the risk of a dead cat bounce, we are once again remaining on the sidelines when it comes to a new option recommendation. 


Given the wide swings in the market over the last few days that are tied back to the changing US-China trade talk landscape, I thought it prudent to share my latest thoughts even if it’s a day earlier than usual. 


As trade concerns escalate, investors brace for an expectations reset

As we discussed in the last issue of Tematica Investing, we knew that coming into last week, it was going to be a challenging one. Trade tensions kicked up to levels few were expecting 10 days ago and as the week progressed the tension and uncertainty crept even higher. We all know the stock market is no fan of uncertainty, but when paired with upsized tariffs from both the US and China that will present new economic and earnings headwinds, something that was not foreseen just a few weeks ago, investors will once again have to revisit their expectations for the economy and earnings. And yes, odds are those past and even more recent expectations will be revisited to the downside. 

What was originally thought to have been President Trump looking to squeeze some last- minute trade deal points out of the Chinese instead turned out to be more of a response to China’s attempt to do the same. This revealed the tenuous state of U.S./China trade talks. Last Friday morning, the U.S. had boosted tariffs to 25% from 10% on $200 billion worth of Chinese goods with President Trump tweeting there is “absolutely no need to rush” and that “China should not renegotiate deals with the U.S. at the last minute.” Even as the new tariffs and tweets arrived, trade negotiations continued Friday in Washington with no trade deal put in place, which dashed the hopes of some traders. Candidly, I didn’t expect a trade deal to emerge given what had transpired over the prior week. 

That hope-inspired rebound late Friday in the domestic stock market returned to renewed market pressure over the weekend and into this week as more questions over U.S.-China trade have emerged. As we started off this week, the trade angst between the U.S. and China has edged higher as China has responded to last week’s U.S. tariff bump by saying it would increase tariffs on $60 billion of U.S. goods to 25% from 10% beginning June 1st. Clearly, the latest round of tweets from President Trump won’t ease investor concern as to how the trade talks will move forward from here.

As the trade war rhetoric kicks up alongside tariffs, the next date to watch will be the G-20 economic summit in Japan next month. According to Trump economic adviser Larry Kudlow, there is a “strong possibility” Trump will meet Chinese President Xi and this morning President Trump confirmed that. 

The cherry or cherries on top of all of this is the growing worries over increasing tension with Iran, which is weighing on the market this morning, and yet another 2019 growth forecast cut by the EU that came complete with a fresh warning on Italy’s debt levels. Growth projections by the European Commission showed a mere 0.1% for GDP growth this year in Italy. The country has the second-largest debt pile in the EU and, according to the latest forecasts by the commission, the Italian debt-to-GDP ratio will hit 133% this year and rise to 135% in 2020. I point these out not to worry or spook you, but rather remind you there are other issues than just US-China trade that have to be factored into our thinking.

The natural market reaction to all of these concerns is to adopt a “risk off” attitude, which, as we’ve seen before, can ignite a storm of “fire first, ask questions later.” And as should be no surprise, that has fueled the sharp move lower in the major market indices. Over the last several days, the S&P 500, which as we know if the barometer used by most institutional and professional investors, fell 4.7% while the small-cap heavy Russell 2000 dropped 5.7%.

At times like this, it pays to do nothing. Hard to believe but as you’ve often heard few will step in to catch a falling knife and given the sharp declines, we also run the risk of a dead cat bounce in the market. We should be patient until the market finds its footing, which means parsing what comes next on the economic and earnings as well as trade front.  

I’ll continue to look for replacements for open Thematic Leader slots as well as other contenders poised to benefit from our pronounced thematic tailwinds. In the near-term, that will mean focusing on ones that also have a more U.S.-focused business model, a focus on inelastic and consumable products. Another avenue that investors are likely to revisit is dividend-paying companies, particularly those that fall into the Dividend Aristocrats category because they’ve consistently grown their dividends for the past 10 years. As I sift through the would-be contenders, I’ll be sure to look for those that intersect our investing themes and the aristocrats. 


Tematica Investing

As the stock market has come under pressure, a number of our Thematic Leaders, as well as companies on the Select List, have given back some of their year-to-date gains. One that has rallied and moved higher in spite of the market sell-off is Safety & Security Thematic Leader Axon Enterprises (AAXN) and are up some 48% year to date. That makes it the second-best performer on the Thematic Leaderboard year to date behind Clean Living company Chipotle Mexican Grill (CMG) that is up nearly 60% even after the market’s recent bout of indigestion.

Axon reported its March quarter earnings last week, which saw revenue grow 14% year over year as Axon continues to shift its business mix from Taser hardware to its Software & Sensor business that fall under the Axon Body and Axon Records businesses. During the company’s earnings conference call, the management team shared its next gen products will be available during the back half of the year. These include the Axon Body, its first camera with LTE live streaming, will launch during the September quarter and Axon Records, its first stand-alone software product. Records w will launch with a major city police department and it is already testing with a second major police department. As far as the new Axon Body product, I suspect the untethering of this camera could spur adoption much the way Apple’s (AAPL) Apple Watch saw a pronounced pick up when it added cellular connectivity to its third model. 

These new products, which leverage the intersection between our Digital Infrastructure investing theme and our Safety & Security one, should accelerate the transition to a higher margin, recurring revenue business in the coming quarters. In other words, Axon’s transformation is poised to continue and as that happens investors will be revisiting how they value the company’s business. More than likely that means further upside ahead for AAXN shares. 

  • Our price target on Safety & Security Thematic Leader Axon Enterprises (AAXN) remains $90.


Here comes the April Retail Sales Report

Later this week, we’ll get the April Retail Sales Report, which should benefit for the late Easter holiday this year. Up until the March report, this data stream was disappointing during December through February but even so from a thematic perspective the reports continued to reinforce our Digital Lifestyle and Middle-class Squeeze investing themes. 

When we look at the April data, I’ll be looking at both the sequential and year over year comparisons for Nonstore retailers, the government category for digital shopping and the category that best captures Thematic King Amazon (AMZN). I’ll also be looking at the general merchandise stores category with regard to Middle-Class Squeeze Thematic Leader Costco Wholesale (COST). Costco has already shared its April same-store sales, which rose 7.7% in the US despite having one less shopping day during the month compared to last year. Excluding the impact of gas prices and foreign exchange, Costco’s April sales were up 5.6% year over year. From my perspective, the is the latest data point that shows Costco continues to take consumer wallet share. 

With reported disposable income data inside the monthly Personal Income & Spending reports essentially flat for the last few months and Costco continuing to open new warehouse locations, which should spur its high margin membership revenue, I continue to see further upside ahead in COST shares. And yes, the same applies to Amazon shares as well.

  • Our $250 price target for Middle-class Squeeze Thematic Leader Costco Wholesale (COST) is under review.


Tematica Options+

For the last two weeks, we’ve sat on the sidelines in terms of a new call option position. Given the sharp move lower in that time –roughly 4.5% for the S&P 500 and more than 5.7% for the small-cap heavy Russell 2000, which included last Friday’s sharp reversal before giving it all back and earlier this week – it has been a volatile time for trading options. 

Coming after the market’s sharp move lower on Monday, one of my concerns is avoiding a potential dead cat bounce in the stock market, which we’ve seen happen before in the past during quick swings to the downside. The key during times like this is to preserve capital rather than get whipsawed. Being prudent rather than overly risky. 

As we move through the week, we’ll get the April Retail Sales report. As we get and dissect that report, I’ll be assessing a new call option prospect in either TJX Companies (TJX) or Ross Stores (ROST), both of which have domestic-focused businesses and are riding our Middle-class Squeeze investing theme. 

Weekly Issue: Streaming Services and the Middle Class Squeeze

Weekly Issue: Streaming Services and the Middle Class Squeeze

Key points inside this issue

  • Stocks continue to melt higher on hopes, but details will matter in the end
  • Our price target on Middle-Class Squeeze company Costco Wholesale (COST) remains $250.
  • Netflix: Mark your calendars for Apple and Disney events
  • Taking a look at LendingClub (LC) shares as consumer debt climbs

 

Sorry, we’re a day late with your weekly issue. I’m just back from InsideETFs 2019, the industry event for the exchange-traded (ETF) industry. This isn’t the first time I’ve attended the event, and attendees continue to hear about the uptake of ETFs, as well as the growing number of differentiated strategies to be had. Some, in my opinion, are faddish in nature, looking to capture assets even though their strategies may not be ones that survive more than a few years. We’ve got a long issue this week, so I’ll suffice to say that such ETFs are not thematic investing, but rather trend investing and we’re already starting to see several of those older trend products being repositioned to something else.

As we close out this week, we’ll be halfway through the first quarter of 2019. Hard to believe, as we have yet to go through the swarm earnings reports from retailers, but it’s true. Given what appears to be the rollbacking of items that weighed on the stock market during the last few months of 2018, we’ve seen all the major stock market indices rebound hard, even though the global economy continues to slow. Once again, this has made the US the best house in the neighborhood, which has likely bid up assets and made the dollar a headwind to multinational companies in the process. As we are fonding of saying, the devil is in the details and that includes any would be progress on US-China trade and Congress with immigration reform. We remain cautiously optimistic, especially on the China trade front, but recognize that more time is likely to be needed until a Trump-sized “big deal” can be reached.

As we get set for the second half of the quarter, we here at Tematica will continue to not only watch the data and our Thematic Signals to assess what’s the next likely step for the market from here, but also the happenings in Washington on trade and infrastructure.

 

Tematica Investing

Odds are, the Thematic Leaders have seen some lift from the sharp rebound in the market thus far in 2019. As we can see in the chart above, several of them are going gangbusters, including Chipotle Mexican Grill (CMG), Netflix (NFLX), Alibaba (BABA) and Axon Enterprises (AXXN). This morning we’ll get the first Retail Sales report since before the federal government shutdown, and in my view, it will more than likely continue to show what it did during all of 2018 – digital shopping taking share and Middle-Class Squeeze leader Costco Warehouse (COST) continuing to win consumer wallet share.

On a reported basis, Costco’s January same-store sales rose 6.6% (7.3% excluding the impact of gasoline prices and foreign exchange). Exiting the month, Costco operated 768 warehouse locations vs. 746 this time last year, a 3% year over year, which reflects its stated path to open more locations in 2019, allowing for the steady growth of its high margin membership fee revenue stream. In my view, this lays the groundwork for a favorable earnings report from Costco on March 7, which is also when it will publish its February sales results.

  • Our price target on Middle-Class Squeeze company Costco Wholesale (COST) remains $250.

 

Netflix: Mark your calendars for Apple and Disney

While we have our calendars out and are marking them for that upcoming Costco date I mentioned early, let’s also circle March 25th, which is the rumored date of Apple’s next event. Per the Apple rumor mill, the company will not only showcase its new news subscription service (say that three times), but also unveil its video service as well. This video service falls into the category of one of the best, worst kept secrets, given the number of deals it has inked for original shows and movies. The news subscription service, which is expected to be called Apple News Magazines, comes after Apple acquired Texture, the would-be Netflix (NFLX) of magazines last year.

While we could see a new device or two, this event will be focused primarily on Apple’s Services business, which it is using to further its position inside our Digital Lifestyle investing theme.  Much like Proctor & Gamble’s (PG) Gillette razor blade business, I would not be surprised if Apple adopts a similar mindset with its devices being the razor that gets replaced periodically, while its far more profitable Services business is the one that people consume on a frequent basis.

Soon after Apple’s event, Disney will hold its annual Investor Day on April 11th at which it is expected to unveil its much discussed, but yet to be seen Disney streaming service dubbed Disney+. Given its robust library of films, content, and characters, Disney should not be underestimated on this front, and in my view much like Apple and its Services business, success with Disney+ could change the way Wall Street values DIS shares. Key items to watch will be the Disney+ price point, original content rollout, and subscriber growth.

Stepping back, if one were to argue that we are on the path to a crowd of streaming services between Netflix, Amazon (AMZN), Hulu, CBS, NBC, AT&T (T), and now Apple and Disney, I would have to agree. In many ways, we’re heading for cable-TV without the cable box, but on an ala carte basis. While we’ve argued that consumers will go to where there is great content, the more streaming services there are the more likely we see the proliferation of good or not so good content. The risk they run is that just like cable channels that need to be filled with content, so too will their streaming services. Also too, one unknown is how many services will a person subscribe to? Past a certain point, consumers will balk, especially if all they’ve succeeded in doing is replicating that high cable bill they sought to originally sought to escape.

Needless to say, I’ll be watching the unveiling and uptake of these new services from Apple and Disney with an eye for what it may mean for Digital Lifestyle company Netflix (NFLX). One interesting item to watch will be to see what is actually included in the Disney and Apple services at launch and over time. Both companies are rumored to be working on streaming gaming services as are Microsoft (MSFT) and Alphabet (GOOGL), which to date is something Netflix has resisted at least publicly. If Apple were to bundle a gaming, video and news service along with Apple Music into one digital content bundle, that would offer some consumer wallet leverage over other single, stand-alone services.

 

Taking a look at LendingClub shares

Earlier this week, Tematica’s Chief Macro Strategist Lenore Hawkins posted a Thematic Signal for our Middle-Class Squeeze investing theme following the news that a record 7 million Americans are 90 days or more behind on their auto loan payments. Lenore went on to show some additional data that consumer loans from banks are in contraction mode, which as we know is a sign the US economy is not going gangbusters.

What we are seeing is the consumer looking to get their financial house in order, most likely after ringing up credit card, auto loan and student debt over the last several quarters. A new report from LendingTree (TREE) points to total credit card debt having climbed to more than $1 trillion in under five years, with more people using personal loans to manage existing debt. This has led the amount owed on personal loans to double what it was five years ago and the number of outstanding loans to rise some 50% in the last three years. According to the report’s findings, managing existing debt was the most popular reason for a personal loan, representing 61% of all loan requests in 2018. Of that percentage, 39% of borrowers plan to use their loans to consolidate debt, while 22% planned to use it to refinance credit cards.

From a stock detective’s point of view, the question to ask is what company is poised to benefit from this aspect of our Middle-Class Squeeze investing theme?

One candidate is LendingClub (LC), which operates an online credit marketplace that connects borrowers and investors in the US. It went public a few years ago and was heralded as a disruptive business for consumers and businesses to obtain credit based on its digital product offering. That marketplace facilitates various types of loan products for consumers and small businesses, including unsecured personal loans, unsecured education and patient finance loans, auto refinance loans, and unsecured small business loans. The company also provides an opportunity to the investor to invest in a range of loans based on term and credit.

Last year 78% of its $575 million in revenue was derived from loan origination transaction fees derived from its platform’s role in accepting and deciding on applications on behalf of the company’s bank partners. More than 50 banks—ranging in total assets of less than $100 million to more than $100 billion—have taken advantage of LendingClub’s partnership program.

LendingClub’s second largest revenue stream is derived from investors fees, which include servicing fees for various services, including servicing and collection efforts and matching available loans with capital and management fees from investment funds and other managed accounts, gains on sales of whole loans, interest income earned and fair value gains/losses from loans held on the company’s balance sheet.

In the past LendingClub was tainted with uncertainty given several investigations, but in mid-December, it settled with the SEC and DOJ, with the SEC stating:

“The SEC’s Enforcement Division determined not to recommend charges against LendingClub Corporation, which promptly self-reported its executives’ misconduct following a review initiated by its board of directors, thoroughly remediated, and provided extraordinary cooperation with the agency’s investigation.”

The SEC’s comments are a positive affirmation of the company’s internal procedures and policies, which also helps reduce the potential negative impact from the still-remaining Federal Trade Commission complaint. The FTC’s complaint against LendingClub charged it has misled consumers and has been deducting hidden fees from loan proceeds issued to borrowers.

Those recent developments have improved the company’s risk profile at a time when its core business has been growing given Middle-Class Squeeze pains being felt by more consumers. According to data TransUnion, subprime personal loan balances have been climbing since 2014 and are forecast to increase 20% this year to a record $156.3 billion.

Here’s the thing, the year-end shopping season isn’t just for shopping,  it’s also the seasonally strongest time of year for subprime loan originations, which according to TransUnion rose to 5 million loans at the end of 2018. That sets up what is likely to be a favorable December quarter earnings report from LendingClub when it issues those results next week (Tuesday, Feb. 19). The thing is I continue to see far more upside to be had with Middle-Class Squeeze Thematic Leader Costco Wholesale, which is not only growing its very profitable membership fee income stream the company is also a dividend payer.

 

Weekly Issue: Another company poised to benefit from the Middle Class Squeeze

Weekly Issue: Another company poised to benefit from the Middle Class Squeeze

Key points inside this issue

Sorry, we’re a day late with your weekly issue. I’m just back from InsideETFs 2019, the industry event for the exchange-traded (ETF) industry. This isn’t the first time I’ve attended the event, and attendees continue to hear about the uptake of ETFs, as well as the growing number of differentiated strategies to be had. Some, in my opinion, are faddish in nature, looking to capture assets even though their strategies may not be ones that survive more than a few years. We’ve got a long issue this week, so I’ll suffice to say that such ETFs are not thematic investing, but rather trend investing and we’re already starting to see several of those older trend products being repositioned to something else.

As we close out this week, we’ll be halfway through the first quarter of 2019. Hard to believe, as we have yet to go through the swarm earnings reports from retailers, but it’s true. Given what appears to be the rollbacking of items that weighed on the stock market during the last few months of 2018, we’ve seen all the major stock market indices rebound hard, even though the global economy continues to slow. Once again, this has made the US the best house in the neighborhood, which has likely bid up assets and made the dollar a headwind to multinational companies in the process. As we are fonding of saying, the devil is in the details and that includes any would be progress on US-China trade and Congress with immigration reform. We remain cautiously optimistic, especially on the China trade front, but recognize that more time is likely to be needed until a Trump-sized “big deal” can be reached.

As we get set for the second half of the quarter, we here at Tematica will continue to not only watch the data and our Thematic Signals to assess what’s the next likely step for the market from here, but also the happenings in Washington on trade and infrastructure.

 

Tematica Investing

Odds are, the Thematic Leaders have seen some lift from the sharp rebound in the market thus far in 2019. As we can see in the chart above, several of them are going gangbusters, including Chipotle Mexican Grill (CMG), Netflix (NFLX), Alibaba (BABA) and Axon Enterprises (AXXN). This morning we’ll get the first Retail Sales report since before the federal government shutdown, and in my view, it will more than likely continue to show what it did during all of 2018 – digital shopping taking share and Middle-Class Squeeze leader Costco Warehouse (COST) continuing to win consumer wallet share.

On a reported basis, Costco’s January same-store sales rose 6.6% (7.3% excluding the impact of gasoline prices and foreign exchange). Exiting the month, Costco operated 768 warehouse locations vs. 746 this time last year, a 3% year over year, which reflects its stated path to open more locations in 2019, allowing for the steady growth of its high margin membership fee revenue stream. In my view, this lays the groundwork for a favorable earnings report from Costco on March 7, which is also when it will publish its February sales results.

  • Our price target on Middle-Class Squeeze company Costco Wholesale (COST) remains $250.

 

Netflix: Mark your calendars for Apple and Disney

While we have our calendars out and are marking them for that upcoming Costco date I mentioned early, let’s also circle March 25th, which is the rumored date of Apple’s next event. Per the Apple rumor mill, the company will not only showcase its new news subscription service (say that three times), but also unveil its video service as well. This video service falls into the category of one of the best, worst kept secrets, given the number of deals it has inked for original shows and movies. The news subscription service, which is expected to be called Apple News Magazines, comes after Apple acquired Texture, the would-be Netflix (NFLX) of magazines last year.

While we could see a new device or two, this event will be focused primarily on Apple’s Services business, which it is using to further its position inside our Digital Lifestyle investing theme.  Much like Proctor & Gamble’s (PG) Gillette razor blade business, I would not be surprised if Apple adopts a similar mindset with its devices being the razor that gets replaced periodically, while its far more profitable Services business is the one that people consume on a frequent basis.

Soon after Apple’s event, Disney will hold its annual Investor Day on April 11th at which it is expected to unveil its much discussed, but yet to be seen Disney streaming service dubbed Disney+. Given its robust library of films, content, and characters, Disney should not be underestimated on this front, and in my view much like Apple and its Services business, success with Disney+ could change the way Wall Street values DIS shares. Key items to watch will be the Disney+ price point, original content rollout, and subscriber growth.

Stepping back, if one were to argue that we are on the path to a crowd of streaming services between Netflix, Amazon (AMZN), Hulu, CBS, NBC, AT&T (T), and now Apple and Disney, I would have to agree. In many ways, we’re heading for cable-TV without the cable box, but on an ala carte basis. While we’ve argued that consumers will go to where there is great content, the more streaming services there are the more likely we see the proliferation of good or not so good content. The risk they run is that just like cable channels that need to be filled with content, so too will their streaming services. Also too, one unknown is how many services will a person subscribe to? Past a certain point, consumers will balk, especially if all they’ve succeeded in doing is replicating that high cable bill they sought to originally sought to escape.

Needless to say, I’ll be watching the unveiling and uptake of these new services from Apple and Disney with an eye for what it may mean for Digital Lifestyle company Netflix (NFLX). One interesting item to watch will be to see what is actually included in the Disney and Apple services at launch and over time. Both companies are rumored to be working on streaming gaming services as are Microsoft (MSFT) and Alphabet (GOOGL), which to date is something Netflix has resisted at least publicly. If Apple were to bundle a gaming, video and news service along with Apple Music into one digital content bundle, that would offer some consumer wallet leverage over other single, stand-alone services.

 

Taking a look at LendingClub shares

Earlier this week, Tematica’s Chief Macro Strategist Lenore Hawkins posted a Thematic Signal for our Middle-Class Squeeze investing theme following the news that a record 7 million Americans are 90 days or more behind on their auto loan payments. Lenore went on to show some additional data that consumer loans from banks are in contraction mode, which as we know is a sign the US economy is not going gangbusters.

What we are seeing is the consumer looking to get their financial house in order, most likely after ringing up credit card, auto loan and student debt over the last several quarters. A new report from LendingTree (TREE) points to total credit card debt having climbed to more than $1 trillion in under five years, with more people using personal loans to manage existing debt. This has led the amount owed on personal loans to double what it was five years ago and the number of outstanding loans to rise some 50% in the last three years. According to the report’s findings, managing existing debt was the most popular reason for a personal loan, representing 61% of all loan requests in 2018. Of that percentage, 39% of borrowers plan to use their loans to consolidate debt, while 22% planned to use it to refinance credit cards.

From a stock detective’s point of view, the question to ask is what company is poised to benefit from this aspect of our Middle-Class Squeeze investing theme?

One candidate is LendingClub (LC), which operates an online credit marketplace that connects borrowers and investors in the US. It went public a few years ago and was heralded as a disruptive business for consumers and businesses to obtain credit based on its digital product offering. That marketplace facilitates various types of loan products for consumers and small businesses, including unsecured personal loans, unsecured education and patient finance loans, auto refinance loans, and unsecured small business loans. The company also provides an opportunity to the investor to invest in a range of loans based on term and credit.

Last year 78% of its $575 million in revenue was derived from loan origination transaction fees derived from its platform’s role in accepting and deciding on applications on behalf of the company’s bank partners. More than 50 banks—ranging in total assets of less than $100 million to more than $100 billion—have taken advantage of LendingClub’s partnership program.

LendingClub’s second largest revenue stream is derived from investors fees, which include servicing fees for various services, including servicing and collection efforts and matching available loans with capital and management fees from investment funds and other managed accounts, gains on sales of whole loans, interest income earned and fair value gains/losses from loans held on the company’s balance sheet.

In the past LendingClub was tainted with uncertainty given several investigations, but in mid-December, it settled with the SEC and DOJ, with the SEC stating:

“The SEC’s Enforcement Division determined not to recommend charges against LendingClub Corporation, which promptly self-reported its executives’ misconduct following a review initiated by its board of directors, thoroughly remediated, and provided extraordinary cooperation with the agency’s investigation.”

The SEC’s comments are a positive affirmation of the company’s internal procedures and policies, which also helps reduce the potential negative impact from the still-remaining Federal Trade Commission complaint. The FTC’s complaint against LendingClub charged it has misled consumers and has been deducting hidden fees from loan proceeds issued to borrowers.

Those recent developments have improved the company’s risk profile at a time when its core business has been growing given Middle-class Squeeze pains being felt by more consumers. According to data TransUnion, subprime personal loan balances have been climbing since 2014 and are forecast to increase 20% this year to a record $156.3 billion.

Here’s the thing, the year-end shopping season isn’t just for shopping,  it’s also the seasonally strongest time of year for subprime loan originations, which according to TransUnion rose to 5 million loans at the end of 2018. That sets up what is likely to be a favorable December quarter earnings report from LendingClub when it issues those results next week (Tuesday, Feb. 19). The thing is I continue to see far more upside to be had with Middle-Class Squeeze Thematic Leader Costco Wholesale, which is not only growing its very profitable membership fee income stream the company is also a a dividend payer.

 

Tematica Options+

 

Adding a call option play on Lending Club

While we aren’t adding Lending Club shares to the Thematic Leaders, we will look to capitalize on the opportunity ahead of the company’s December quarter earnings report by adding the Lending Club (LC) March 2019 4.00 calls (LC 190315C0000400)that closed last night at 0.10. Given the tight trading pattern of these calls, I’m not recommending a stop loss level just yet, but as they trend higher I plan to do so.

 

Boosting the stop loss on our Del Frisco’s calls

The September 2019 10.00 calls for Del Frisco’s Restaurant Group (DFRG) calls that we added last week climbed more than 58% over the last several trading sessions. While we’ll continue to hold these calls as Del Frisco’s continues to review potential takeout bids, we will boost our stop loss on the calls from 0.30 to 0.60, which also happens to be our entry point.

 

Weekly Issue: Thematic M&A and Adding Back a Digital Infrastructure Position

Weekly Issue: Thematic M&A and Adding Back a Digital Infrastructure Position

Key points inside this issue

  • Despite the stock market’s year to date gains, concerns remain for December quarter earnings season
  • Thematic M&A was rampant in 2018
  • Our price targets on AMN Healthcare (AMN), Chipotle Mexican Grill (CMG) and Netflix (NFLX) remain $75, $550 and $500, respectively.
  • Putting shares of Guilty Pleasure thematic leader Altria (MO) on watch
  • We are issuing a Buy on and adding back shares of Digital Infrastructure company, USA Technologies (USAT), to the Tematica Select List with a price target of $10.

 

Despite the stock market’s year to date gains, concerns remain for December quarter earnings season

Over the last week, stocks continued to move higher placing all the major domestic stock market averages higher. Quite the turn from what we saw in much of the December quarter that evaporated all of 2018’s gains. Part of the rebound reflects the harsh beating that many stocks received as investors came to grips with the various factors that I’ve been discussing here over the last two months. The down and dirty summation of those factors is this: the global economy continues to slow and it is raising questions over not only GDP prospects for the coming year but also earnings.

Stoking those earnings growth concerns were negative pre-announcements from Apple (AAPL), Samsung, LG, Macy’s (M), Target (TGT) and Kohl’s (KSS) over the last two weeks. That combination points to slower smartphone demand, but I continue to see it picking up in the coming quarters as the Disruptive Innovation that is 5G ripples its way across our Digital Infrastructure and Digital Lifestyle investing themes.  This week we can add Delta Airlines (DAL), Dialog Semiconductor (DLGNF), Nordstrom (JWN), Electronics for Imaging (EFII), Sherwin Williams (SHW) and Ford Motor Company (F) to that list as well as earnings misses from Wells Fargo (WFC), BlackRock (BLK) and others. Not exactly a vote of confidence for the December quarter earnings season.

Adding fuel to the uncertainty, this morning rail company Genesee & Wyoming (GWR) reported traffic volumes for December fell 4.8% year over year. That piles on the limited data we are getting, which included the January reading for the Empire State Manufacturing Survey General Business Conditions Index that fell to 3.9 from 11.5 in December. That drop was led by a deceleration in new orders, inventories, and the number of employees. The survey’s six-month outlook also dropped, falling to 17.8 from 30.6 last month. These data points fit the view that there is a slowdown in manufacturing activity, which has piqued concerns about a broader slowdown in economic activity unfolding in 2019.

On top of that, yesterday Sen. Chuck Grassley said U.S. Trade Representative Robert Lighthizer saw little progress on “structural issues” in last week’s talks with China. These issues include intellectual property, stealing trade secrets, and putting pressure on corporations to share information with the Chinese government and industries. These issues are the very ones I was concerned about in terms of the trade negotiations. With China cutting its growth forecast some days ago to 6% from 6.5% and more data pointing to that economy cooling, there is likely room for the trade talks to include those issues, but my concern remains the ticking timeline until tariffs jump further. If that comes to pass, it would be another headwind to the global economy and corporate earnings for the coming quarters.

Given all of that, I remain concerned with the December quarter earnings season that will kick into gear next week and what it could do for the stock market’s recent rebound. We’ll continue to keep the long position in ProShares Short S&P 500 (SH) in play as we watch and listen to the thematic signals we see. One great thematic signal this week for our Guilty Pleasures investing theme is that Pizza Hut, owned by Yum Brands (YUM) is expanding beer delivery to 300 restaurants across seven states later this month. Amazing to think that only now Pizza Hut is realizing one of the great culinary pairings of Pizza and beer as it looks to offer customer one-stop shopping as well as capture that incremental revenue and profits. Odds are there will be some element of our Digital Lifestyle theme at play, given the push toward mobile orders we are seeing across the restaurant industry. Now to see what beer they offer… hopefully, it will be more than just the big brand beers like Budweiser.

Another signal that points to the bleeding over of our Digital Lifestyle, Disruptive Innovators and Aging of the Population themes is the partnering between Walgreens Boots Alliance (WBA) and Microsoft (MSFT). Over the next several years, the two will research and develop new methods of delivering healthcare services through digital devices, including virtually connecting people with Walgreens stores.

We at Tematica see thematic signals for our 10 investing themes practically everywhere… and that means we will continue using them to build and refine our investing mosaic in the days, weeks and months ahead. As we navigate the next few weeks, we may have a change or two on the Thematic Leaders and a few companies that make it onto the Contender List for when the stock market finds its footing.

 

Thematic M&A was rampant in 2018

Over the last two weeks, we here at Tematica have been reviewing the thematic database of more than 2,400 stocks that we’ve ranked based on their exposure to our 10 investment themes. That was no small project let me tell you, and it was a key initiative for 2018. In looking back over that body of work, I noticed more than a dozen companies that were in the database at the start of last year had been acquired during the second half of 2018. Here’s a short list of what I’m talking about:

As you can see, the acquisition activity was spread across a number of our themes and included both strategic and financial buyers. In each case, the buyer looked to fill a competitive hole be it a product, market or technology. That’s the classic finance take on it, but we know those buyers were looking to solidify their exposure to the thematic tailwinds that are powering their businesses or in some cases expose themselves to another one.

Are we likely to see more thematically based M&A in the coming months?

My view is yes, particularly as the global economy slows and companies look to deliver top and bottom line growth be it on an organic or acquired basis.

Adding back shares of Digital Infrastructure company USA Technologies

Today I am calling shares of mobile payments company, USA Technologies (USAT),  back onto the Tematica Select List following news earlier this week about the results of an internal investigation into its accounting practices. You may recall that last year, USAT shares were a high flyer for the Select List. However, upon learning that the USAT board would conduct an internal investigation into the accounting of certain of its present and past contractual arrangements and its financial reporting controls and would miss filing the company’s 10-K, we smartly jettisoned the shares near $10.25 last September.

We had been trimming the position at higher levels near $14 in the preceding months, but in light of those developments we “got out of Dodge”, so to speak, and did not stick around for the free fall to $3.44 by early December. While we continued to see growing adoption of mobile payments, especially at USAT’s core market of vending machines and unattended retail, we also saw the stock price pain associated with these investigations and potential financial restatements. “No thanks” was my thinking.

The company on Monday announced both the findings of its internal investigation and remedial actions to be implemented by the board. It also shared that it is working to file its 10-K as soon as possible and disclosed the departures of both its chief financial officer (CFO) and chief services officer (CSO). In tandem with those announcements, USAT also shared it is in negotiations for a new CFO.

In terms of the investigation and the planned responses, the company’s Audit Committee found that, for certain transactions, USAT had prematurely recognized revenue and, in some cases, the reported number of connections associated with the transactions under review. The committee went on to recommend the company enhance its internal controls and its compliance and legal functions; expand its public disclosures; and consider appropriate employment actions related to certain employees as well as splitting the roles of chairman and CEO.

These measures, along with the departure of the CFO and CSO, are not surprising, but they do put USAT on the path to restoring investor confidence in its reporting. While this investigation was happening the market for mobile payments continued to be on a tear as companies such as PepsiCo (PEP) inked a new five-year agreement with USAT.

Clearly, there is more work to be completed, and there is the risk that we are re-entering these shares on the early side. However, as we have seen in the past, as these clouds lift investors will focus on the tailwinds of the business, which in this case are centered on mobile payments and are improving. Therefore, we will resume ownership of USAT shares and look to scale on potential stock price weakness when the company formally restates its revenue and other key metrics. Better a bit early than too late is my thinking on this one.

Our previous price target on USAT shares was $16. However, we should prudently assume that several of the underlying financial metrics will be restated lower. Consequently, I’m taking a haircut relative to our prior target and putting out a new price target of $10. As the company releases its updated financials, I’ll look to fine-tune that price target as needed

  • We are issuing a Buy on and adding back shares of Digital Infrastructure company, USA Technologies (USAT), to the Tematica Select List with a price target of $10.

 

The Thematic Leaders

As the stock market moved higher week over week as of last night’s close, we saw several Thematic Leaders move higher. These included Aging of the Population leader AMN Healthcare (AMN), and Clean Living leader Chipotle Mexican Grill (CMG) as well as Thematic King Amazon (AMZN). The big winner, however, was Digital Lifestyle leader Netflix (NFLX), which yesterday announced it would boost prices for its monthly memberships by 13% to 18%. This marks the company’s biggest price increase and I suspect was well thought out by the management team, given the increasingly competitive playing field. That price increase should drive Wall Street’s revenue expectations higher and improve its ability to not only spend on proprietary content but also its ability to service its quarterly debt costs.

  • Our price targets on AMN Healthcare (AMN), Chipotle Mexican Grill (CMG) and Netflix (NFLX) remain $75, $550 and $500, respectively.

 

Putting Altria shares on watch

Even though we’re just a few weeks into 2019, shares of Guilty Pleasure leader Altria have been underperforming on both an absolute basis and a relative one compared to the S&P 500. Weighing the shares down are questions over its ability to recoup the $12.8 billion investment for a 35% stake, in e-vapor market leader Juul Labs (JUUL). While this is part of the company’s efforts to reposition itself, given prospects for continued declines in its core tobacco market, complicating things is the FDA’s move to stub out youth access to e-vapor and flavored cigarettes.

Odds are this will take several years to come about but it raises questions as to whether Altria is trading one shrinking market for another. Candidly, I would have preferred Altria take that $12.5 billion and spread it across several cannabis investments. I’ll continue to be patient for now with this thematic leader, however, I’ll be looking at several in the coming days that could offer a far better risk to return tradeoff.

 

Weekly Issue: Revisiting a Thematic High Flyer

Weekly Issue: Revisiting a Thematic High Flyer

Key points inside this issue

  • Despite the stock market’s year to date gains, concerns remain for December quarter earnings season
  • Thematic M&A was rampant in 2018
  • Our price targets on AMN Healthcare (AMN), Chipotle Mexican Grill (CMG) and Netflix (NFLX) remain $75, $550 and $500, respectively.
  • Putting shares of Guilty Pleasure thematic leader Altria (MO) on watch
  • We are issuing a Buy on and adding back shares of Digital Infrastructure company, USA Technologies (USAT), to the Tematica Select List with a price target of $10.
  • We are issuing a Buy on and adding the USA Technologies (USAT) March 2019 7.50 calls (USAT190315C00007500) that closed last night at 0.42 to the Tematica Select List with an initial stop loss at 0.20

 

Despite the stock market’s year to date gains, concerns remain for December quarter earnings season

Over the last week, stocks continued to move higher placing all the major domestic stock market averages higher. Quite the turn from what we saw in much of the December quarter that evaporated all of 2018’s gains. Part of the rebound reflects the harsh beating that many stocks received as investors came to grips with the various factors that I’ve been discussing here over the last two months. The down and dirty summation of those factors is this: the global economy continues to slow and it is raising questions over not only GDP prospects for the coming year but also earnings.

Stoking those earnings growth concerns were negative pre-announcements from Apple (AAPL), Samsung, LG, Macy’s (M), Target (TGT) and Kohl’s (KSS) over the last two weeks. That combination points to slower smartphone demand, but I continue to see it picking up in the coming quarters as the Disruptive Innovation that is 5G ripples its way across our Digital Infrastructure and Digital Lifestyle investing themes.  This week we can add Delta Airlines (DAL), Dialog Semiconductor (DLGNF), Nordstrom (JWN), Electronics for Imaging (EFII), Sherwin Williams (SHW) and Ford Motor Company (F) to that list as well as earnings misses from Wells Fargo (WFC), BlackRock (BLK) and others. Not exactly a vote of confidence for the December quarter earnings season.

Adding fuel to the uncertainty, this morning rail company Genesee & Wyoming (GWR) reported traffic volumes for December fell 4.8% year over year. That piles on the limited data we are getting, which included the January reading for the Empire State Manufacturing Survey General Business Conditions Index that fell to 3.9 from 11.5 in December. That drop was led by a deceleration in new orders, inventories, and the number of employees. The survey’s six-month outlook also dropped, falling to 17.8 from 30.6 last month. These data points fit the view that there is a slowdown in manufacturing activity, which has piqued concerns about a broader slowdown in economic activity unfolding in 2019.

On top of that, yesterday Sen. Chuck Grassley said U.S. Trade Representative Robert Lighthizer saw little progress on “structural issues” in last week’s talks with China. These issues include intellectual property, stealing trade secrets, and putting pressure on corporations to share information with the Chinese government and industries. These issues are the very ones I was concerned about in terms of the trade negotiations. With China cutting its growth forecast some days ago to 6% from 6.5% and more data pointing to that economy cooling, there is likely room for the trade talks to include those issues, but my concern remains the ticking timeline until tariffs jump further. If that comes to pass, it would be another headwind to the global economy and corporate earnings for the coming quarters.

Given all of that, I remain concerned with the December quarter earnings season that will kick into gear next week and what it could do for the stock market’s recent rebound. We’ll continue to keep the long position in ProShares Short S&P 500 (SH) in play (although our option call on those shares was stopped out) as we watch and listen to the thematic signals we see. One great thematic signal this week for our Guilty Pleasures investing theme is that Pizza Hut, owned by Yum Brands (YUM) is expanding beer delivery to 300 restaurants across seven states later this month. Amazing to think that only now Pizza Hut is realizing one of the great culinary pairings of Pizza and beer as it looks to offer customer one-stop shopping as well as capture that incremental revenue and profits. Odds are there will be some element of our Digital Lifestyle theme at play, given the push toward mobile orders we are seeing across the restaurant industry. Now to see what beer they offer… hopefully, it will be more than just the big brand beers like Budweiser.

Another signal that points to the bleeding over of our Digital Lifestyle, Disruptive Innovators and Aging of the Population themes is the partnering between Walgreens Boots Alliance (WBA) and Microsoft (MSFT). Over the next several years, the two will research and develop new methods of delivering healthcare services through digital devices, including virtually connecting people with Walgreens stores.

We at Tematica see thematic signals for our 10 investing themes practically everywhere… and that means we will continue using them to build and refine our investing mosaic in the days, weeks and months ahead. As we navigate the next few weeks, we may have a change or two on the Thematic Leaders and a few companies that make it onto the Contender List for when the stock market finds its footing.

 

Thematic M&A was rampant in 2018

Over the last two weeks, we here at Tematica have been reviewing the thematic database of more than 2,400 stocks that we’ve ranked based on their exposure to our 10 investment themes. That was no small project let me tell you, and it was a key initiative for 2018. In looking back over that body of work, I noticed more than a dozen companies that were in the database at the start of last year had been acquired during the second half of 2018. Here’s a short list of what I’m talking about:

As you can see, the acquisition activity was spread across a number of our themes and included both strategic and financial buyers. In each case, the buyer looked to fill a competitive hole be it a product, market or technology. That’s the classic finance take on it, but we know those buyers were looking to solidify their exposure to the thematic tailwinds that are powering their businesses or in some cases expose themselves to another one.

Are we likely to see more thematically based M&A in the coming months?

My view is yes, particularly as the global economy slows and companies look to deliver top and bottom line growth be it on an organic or acquired basis.

 

Tematica Investing

Adding back shares of Digital Infrastructure company USA Technologies

Today I am calling shares of mobile payments company, USA Technologies (USAT),  back onto the Tematica Select List following news earlier this week about the results of an internal investigation into its accounting practices. You may recall that last year, USAT shares were a high flyer for the Select List. However, upon learning that the USAT board would conduct an internal investigation into the accounting of certain of its present and past contractual arrangements and its financial reporting controls and would miss filing the company’s 10-K, we smartly jettisoned the shares near $10.25 last September.

We had been trimming the position at higher levels near $14 in the preceding months, but in light of those developments we “got out of Dodge”, so to speak, and did not stick around for the free fall to $3.44 by early December. While we continued to see growing adoption of mobile payments, especially at USAT’s core market of vending machines and unattended retail, we also saw the stock price pain associated with these investigations and potential financial restatements. “No thanks” was my thinking.

The company on Monday announced both the findings of its internal investigation and remedial actions to be implemented by the board. It also shared that it is working to file its 10-K as soon as possible and disclosed the departures of both its chief financial officer (CFO) and chief services officer (CSO). In tandem with those announcements, USAT also shared it is in negotiations for a new CFO.

In terms of the investigation and the planned responses, the company’s Audit Committee found that, for certain transactions, USAT had prematurely recognized revenue and, in some cases, the reported number of connections associated with the transactions under review. The committee went on to recommend the company enhance its internal controls and its compliance and legal functions; expand its public disclosures; and consider appropriate employment actions related to certain employees as well as splitting the roles of chairman and CEO.

These measures, along with the departure of the CFO and CSO, are not surprising, but they do put USAT on the path to restoring investor confidence in its reporting. While this investigation was happening the market for mobile payments continued to be on a tear as companies such as PepsiCo (PEP) inked a new five-year agreement with USAT.

Clearly, there is more work to be completed, and there is the risk that we are re-entering these shares on the early side. However, as we have seen in the past, as these clouds lift investors will focus on the tailwinds of the business, which in this case are centered on mobile payments and are improving. Therefore, we will resume ownership of USAT shares and look to scale on potential stock price weakness when the company formally restates its revenue and other key metrics. Better a bit early than too late is my thinking on this one.

Our previous price target on USAT shares was $16. However, we should prudently assume that several of the underlying financial metrics will be restated lower. Consequently, I’m taking a haircut relative to our prior target and putting out a new price target of $10. As the company releases its updated financials, I’ll look to fine-tune that price target as needed

  • We are issuing a Buy on and adding back shares of Digital Infrastructure company, USA Technologies (USAT), to the Tematica Select List with a price target of $10.

 

The Thematic Leaders

As the stock market moved higher week over week as of last night’s close, we saw several Thematic Leaders move higher. These included Aging of the Population leader AMN Healthcare (AMN), and Clean Living leader Chipotle Mexican Grill (CMG) as well as Thematic King Amazon (AMZN). The big winner, however, was Digital Lifestyle leader Netflix (NFLX), which yesterday announced it would boost prices for its monthly memberships by 13% to 18%. This marks the company’s biggest price increase and I suspect was well thought out by the management team, given the increasingly competitive playing field. That price increase should drive Wall Street’s revenue expectations higher and improve its ability to not only spend on proprietary content but also its ability to service its quarterly debt costs.

  • Our price targets on AMN Healthcare (AMN), Chipotle Mexican Grill (CMG) and Netflix (NFLX) remain $75, $550 and $500, respectively.

 

Putting Altria shares on watch

Even though we’re just a few weeks into 2019, shares of Guilty Pleasure leader Altria have been underperforming on both an absolute basis and a relative one compared to the S&P 500. Weighing the shares down are questions over its ability to recoup the $12.8 billion investment for a 35% stake, in e-vapor market leader Juul Labs (JUUL). While this is part of the company’s efforts to reposition itself, given prospects for continued declines in its core tobacco market, complicating things is the FDA’s move to stub out youth access to e-vapor and flavored cigarettes.

Odds are this will take several years to come about but it raises questions as to whether Altria is trading one shrinking market for another. Candidly, I would have preferred Altria take that $12.5 billion and spread it across several cannabis investments. I’ll continue to be patient for now with this thematic leader, however, I’ll be looking at several in the coming days that could offer a far better risk to return tradeoff.

 

Tematica Options+

Adding a call position on the shares of USA Technologies

Above I added shares of USA Technologies back to the Tematica Select List given the upside to be had as the company continues to put its accounting and revenue recognition behind it. The next key steps will be filling the CFO role and getting its 10-K filed. Those two catalysts should help restore investor confidence and drive the shares higher in the process.

To capitalize on that likelihood, we are adding the USA Technologies (USAT) March 2019 7.50 calls (USAT190315C00007500) that closed last night at 0.42 and expire on March 15. These calls have a wider than usual trading berth, which has me setting our stop loss somewhat wider than usual at 0.20. As the calls move higher, I’ll look to boost that stop loss level.

 

Stopped out of SH calls, and sticking with DFRG calls

With the S&P 500 continuing to notch another move higher over the last week, we were stopped out of the ProShares Short S&P 500 Jan 2019 30.00 calls (SH190118C00030000) at 0.35. While we experienced a hefty loss given the 0.76 entry point, that stop-loss helped minimize our losses given those calls closed last night at 0.25.

We continue to be in the green with our Del Frisco’s Restaurant Group (DFRG) June 2019 10.00 (DFRG190621C00010000) calls, which closed last night up 20% from our buy-in price last week. With the company having formally put itself in play recently, which included the Board forming a review committee for potential bids, we will continue to hold these calls.

 

 

Weekly Issue: We aren’t out of the woods just yet

Weekly Issue: We aren’t out of the woods just yet

Key Points from this Issue:

  • We are downgrading Universal Display (OLED) shares from the Thematic Leaders to the Select List and cutting our price target to $125 from $150. In the coming days, we will name a new Thematic Leader for our Disruptive Innovators investing theme.
  • Given the widespread pain the market endured in October, Thematic Leaders Chipotle Mexican Grill (CMG), Del Frisco’s (DFRG), Axon Enterprises (AXXN), Alibaba (BABA) and Netflix (NFLX) were hit hard; however, the hardest hit was Amazon (AMZN).

 

This week we closed the books on the month of October, and what a month it was for the stock market. In today’s short-term focused society, some will focus on the rebound over the last few days in the major domestic stock market indices, but even those cannot hide the fact that October was one of the most challenging months for stocks in recent memory. In short, the month of October wiped out most the market’s year to date gains as investors digested both September quarter earnings and updated guidance that spurred a re-think in top and bottom line expectations.

All told, the Dow Jones Industrial Average fell 5.1% for the month, making it the best performer of the major market indices. By comparison, the S&P 500 fell 6.9% in October led by declines in eight of its ten subgroups. The technology-heavy Nasdaq Composite Index dropped 9.2% and the small-cap focused Russell 2000 plummeted 10.9%. That marked the Nasdaq’s steepest monthly drop since it posted a 10.8% fall in November 2008. The month’s move pulled the Russell 2000 into negative territory year to date while for the same time period both the Dow and S&P 500 closed last night up around 1.5%.

We are just over halfway through the September quarter earnings season, which means there are ample companies left to report and issue updated guidance. Candidly, those reports could push or pull the market either higher or continue the October pain. There are still ample risks in the market to be had as the current earnings season winds down. These include the mid-term elections; Italy’s next round of budget talks with Brussels; upcoming Trump-China trade talks, which have led to another round of tariff preparations; and Fed rate hikes vs. the slowing speed of the global economy.

Despite the very recent rebound in the stock market, CNN’s Fear & Greed Index remains at Extreme Fear (7) as I write this – little changed from last week. What this likely means is we are seeing a nervous rebound in the market, and it will likely some positive reinforcement to make the late October rebound stick. As we navigate that pathway to the end of the year, we will also be entering the 2018 holiday shopping season, which per the National Retail Federation’s annual consumer spending survey should rise more than 4% year over year.

This combination of upcoming events and sentiment likely means we aren’t out of the woods just yet even though we are seeing a reprieve from the majority of October. As is shared below, next week has even more companies reporting than this week as well as the midterm elections. The strategy of sitting on the sidelines until the calmer waters emerge as stock prices come to us is what we’ll be doing. At the right time, we’ll be adding to existing positions on the Thematic Leaders and Thematic Select List as well as introducing new ones.

Speaking of the Thematic Leaders and the Select List, as the mood shifts from Halloween to the year-end shopping season,  we have several companies including Amazon (AMZN), United Parcel Service (UPS), Costco Wholesale (COST), Del Frisco’s Restaurant Group (DFRG), McCormick & Co. (MKC) and Apple (AAPL) among others that should benefit from that uptick in holiday spending as well as our Digital Lifestyle, Living the Life and Middle-class Squeeze investing themes in the next few months.

 

UPDATES TO The Thematic Leaders and Select List

Given the widespread pain the market endured in October, we were not immune to it with the Thematic Leaders or companies on the Tematica Select List. Given the volatility, investor’s nerves it was a time of shoot first, ask questions later with the market – as expected – trading day to day based on the most recent news. I expect this to continue at least for the next few weeks.

The hardest hit was Amazon, which despite simply destroying September quarter expectations served up what can only be called a conservative forecast for the current quarter. For those that didn’t tune in to the company’s related earnings conference call, Amazon management flat out admitted that it was being conservative because it is too hard to call the second half of the quarter, which is when it does the bulk of its business during the frenetic holiday shopping season. I have long said that Amazon shares are one to hold not trade, and with the move to expand its private label product, move into the online pharmacy space as well as continued growth at Amazon Web Services, we will do just that. That conservative guidance also hit United Parcel Service (UPS) shares, but we see that as a rising tide this holiday season as digital shopping continues to take consumer wallet share this holiday shopping season.

Both Chipotle Mexican Grill (CMG), Del Frisco’s (DFRG), Axon Enterprises (AXXN), Alibaba (BABA) and Netflix (NFLX) have also been hit hard, and I’m waiting for the market to stabilize before scaling into these Thematic Leader positions. As we’ve moved through the current earnings season, comments from Bloomin’ Brands (BLMN), Del Taco (TACO), Wingstop (WING), Habit Restaurant (HABT) and others, including Chipotle, have all pointed to the benefit of food deflation. Chipotle’s Big Fix continues with progress had in the September quarter and more to be had in the coming ones. Del Frisco’s will soon report its quarterly results and it too should benefit from a consumer with high sentiment and lower food costs.

With Axon, the shares remain trapped in the legal volley with Digital Ally (DGLY), but as I pointed out when we added it to the Leaders, Axon continues to expand its safety business with law enforcement and at some point, I suspect it will simply acquire Digital Ally given its $30 million market cap. Turning to Alibaba (BABA) and Netflix (NFLX), both have been hit hard by the downdraft in technology stocks, with Alibaba also serving as a proxy for the current US-China trade war. In my opinion, there is no slowing down the shift to digital streaming that is driving Netflix’s business and its proprietary content strategy is paying off, especially outside the US where it is garnering subscriber growth at price points that are above last year’s levels. This is one we will add to as things settle down.

The same is true with Alibaba – there is no slowing down the shift to the Digital Lifestyle inside of China, and as Alibaba’s other business turn from operating losses to operating profits, I expect a repeat of what we saw with Amazon shares. For now, however, the shares are likely to trade sideways until we see signs of positive developments on trade talks. Again, let’s hang tight and make our move when the time is right.

 

Downgrading Universal Display shares to the Select List

Last night Thematic Leader Universal Display (OLED) reported rather disappointing September quarter results that fell well short of expectations and guided the current quarter below expectations given that the expected rebound in organic light emitting diode materials sales wasn’t ramping as expected despite a number of new smartphones using organic light emitting diode displays. On the earnings call, the company pointed out the strides being had with the technology in other markets, such as TV and automotive that we’ve been discussing these last few months but at least for the near-term the volume application has been smartphones. In short, with that ramp failing to live up to expectations for the seasonally strongest part of the year for smartphones, it speaks volumes about what is in store for OLED shares.

By the numbers, Universal now expected 2018 revenue in the range of $240-$250, which implies $63-$73 million for the December quarter vs. $77.5 million for the September quarter and $88.3 million in the year-ago one. To frame it another way, that new revenue forecast of $240-$250 million compares to the company’s prior one of $315- $325 million and translates into a meaningful fall off vs. 2017 revenues of $335.6 million. A clear sign that the expected upkeep is not happening as fast as was expected by the Universal management team. Also, too, the first half of the calendar year tends to be a quiet one for new smartphone models hitting shelves. And yes, there will be tech and consumer product industry events like CES, CEBIT, and others in 2019 that will showcase new smartphone models, but candidly we see these new models with organic light emitting diode displays as becoming a show-me story given their premium price points. Even with Apple (AAPL) and its September quarter earnings last night, its iPhone volumes were flat year over year at 46.9 million units falling short of the 48.0 million consensus forecast.

In my view, all of this means the best case scenario in the near-term is OLED shares will be dead money. Odds are once Wall Street computes the new revenue numbers and margin impact, EPS numbers for the next few quarters will be taken down and will hang on the shares like an anchor. Given our cost basis in the shares near $101, and where the shares are likely to open up tomorrow – after market trading indicates $95-$100, down from last night’s closing price of $129.65 – we have modest downside ahead. Not bad, but again, near-term the shares are likely range bound.

Given our long-term investing style and the prospects in markets outside of the smartphone, we’re inclined to remain long-term investors. That said, given the near-term headwinds, we are demoting Universal Display shares from the Thematic Leaders to the Select List. Based on revised expectations, we are cutting our price target from $150 to $125, fully recognizing the shares are likely to rangebound for the next 1-2 quarters.

  • We are downgrading Universal Display (OLED) shares from the Thematic Leaders to the Select List and cutting our price target to $125 from $150. In the coming days, we will name a new Thematic Leader for our Disruptive Innovators investing theme.

 

Clean Living signals abound

As we hang tight, I will continue to pour through the latest thematic signals that we see day in, day out throughout the year, but I’ll also be collecting ones from the sea of earnings reports around us.

If I had just read that it would prompt me to wonder what some of the recent signals have been. As you know we post them on the Tematica Research website but during the earnings season, they can get a tad overwhelming, which is why on this week’s Cocktail Investing podcast, Lenore Hawkins (Tematica’s Chief Macro Strategist) and I ran through a number of them. I encourage you to give it a listen.

Some of the signals that stood out of late center on our Clean Living investing theme. Not only did Coca-Cola (KO) chalk up its September quarter performance to its water and non-sugary beverage businesses, but this week PepsiCo (PEP) acquired plant-based nutrition bar maker Health Warrior as it continues to move into good for you products. Mondelez International (MDLZ), the company behind my personal fav Oreos as well as other cookies and snacks is launching SnackFutures, a forward-thinking innovation hub that will focus on well-being snacks and ingredients. Yep, it too is embracing our Clean Living investing theme.

Stepping outside of the food aspect of Clean Living, there has been much talk in recent months about the banning of plastic straws. Now MasterCard (MA) is looking to go one further with as it looks to develop an alternative for those plastic debit and credit cards. Some 6 billion are pushed into consumer’s hands each year. The issue is that thin, durable card is also packed with a fair amount of technology that enables transactions to occur and do so securely. A looming intersection of our Clean Living, Digital Infrastructure and Safety & Security themes to watch.

 

Turning to next week

During the week, the Atlanta Fed published its initial GDP forecast of 2.6% for the current quarter, which is essentially in line with the same forecast provided by the NY Fed’s Nowcast, and a sharp step down from the initial GDP print of 3.5% for the September quarter. Following the October Employment Report due later this week, where wage growth is likely to be more on investor minds that job gains as they contemplate the velocity of the Fed’s interest rate hikes, next week brings several additional pieces of October data. These include the October ISM Services reading and the October PPI figure. Inside the former, we’ll be assessing jobs data as well as pricing data, comparing it vs. the prior months for hints pointing to a pickup in inflation. That will set the stage for the October PPI and given the growing number of companies that have announced price increases odds are we will some hotter pricing data and that could refocus the investor spotlight back on the Fed.

Next week also brings the September JOLTS report as well as the September Consumer Credit report. Inside those data points, we expect more data on the continued mismatch between employer needs and available worker skills that is expected to spur more competitive wages.  As we examine the latest credit data, we will keep in mind that smaller banks reporting higher credit card delinquency rates while Discover Financial (DFS) and Capital One (COF) have shared they have started dialing back credit spending limits. That could put an extra layer of hurt on Middle-class Squeeze consumers this holiday season.

Also, next week, the Fed has its next FOMC meeting, and while it’s not expected to boost rates at that meeting, we can expect much investor attention to be focused on subsequent Fed head comments as well as the eventual publication of the meeting’s minutes in the coming weeks ahead of the December meeting.

On the earnings front, following this week’s more than 1,000 earnings reports next week bring another 1,100 plus reports. What this means is more than half of the S&P 500 group of companies will have issued September quarter results and shared their revised guidance. As these reports are had, we can expect consensus expectations for those companies to be refined for the balance of the year. Thus far, roughly 63% of the companies that have issued EPS guidance for the current quarter have issued negative guidance, but we have yet to see any meaningful negative revisions overall EPS expectations for the S&P 500.

Outside the economic data and corporate earnings flow next week, we also have US midterm elections. While we wait for the outcome, we would note if the Republicans maintain control of the House and Senate, it likely means a path of less resistance for President Trump’s agenda for the coming two years. Should the Democrats gain ground, which has historically been the case following a Republican presidential win, it could very well mean an even more contentious 24 months are to be had in Washington with more gridlock than not. Should that be the case, expectations for much of anything getting done in Washington in the medium-term are likely to fall.

Yes, next week will be another busy one that could challenge the recent market rebound. We’ll continue to ferret out signals for our thematic lens as we remain investors focused on the long-term opportunities to be had with thematic investing.

 

 

 

 

Caution still warranted as we book a big win with Chipotle

Caution still warranted as we book a big win with Chipotle

Key points in this issue

  • Despite the market’s improved mood over the last few trading days, we are not out of the proverbial woods just yet. As such, we are sticking with our current plan of sitting on the sidelines until calmer market waters emerge.
  • We are booking another win with our Chipotle Mexican Grill (CMG) Jan 2018 450.00 calls (CMG190118C00450000) that closed last night at 34.76, up almost 73% from our 20.10 buy-in in mid-October.

Last night we closed the books on the month of October, and what a month it was for the stock market. In today’s short-term focused society some will focus on the rebound over the last few days in the major domestic stock market indices, but even those cannot hide the fact that October was one of the most challenging months for stocks in recent memory. All told, the Dow Jones Industrial Average fell 5.1% for the month, making it the best performer of the major market indices. By comparison, the S&P 500 fell 6.9% in October while the technology-heavy Nasdaq Composite Index dropped 9.2% and the small-cap focused Russell 2000 plummeted 10.9%. In short, the month of October wiped out most the market’s year to date gains.

As I write this, we are just over halfway through the September quarter earnings season, which means there are ample companies left to report and issue updated guidance. Candidly, those reports could push or pull the market either higher or continue the October pain. Some may be tempted to put on some short-the-market positions as we did in late September, which paid off handsomely for us, but that was when there was a clear risk to the downside. Today, that downside view is far less compelling. Don’t misunderstand, there are still ample risks in the market to be had as the current earnings season winds down. These include the mid-term elections; Italy’s next round of budget talks with Brussels; upcoming Trump-China trade talks, which have led to another round of tariff preparations; and Fed rate hikes vs. the slowing speed of the global economy.

Most of those factors will unfold over the coming weeks and then we’ll be in the thick of the holiday shopping period. As we navigate these must-watch events, I’ll be watching option plays in companies like Amazon (AMZN) and United Parcel Service that are riding our Digital Lifestyle theme in the upcoming holiday shopping season.

 

Exiting our Chipotle calls with a hefty win

Last week I cautioned patience with our Chipotle Mexican Grill (CMG) January 2018 450 calls (CMG190118C00450000) and that coupled with the market rebound these last few days drove those calls higher. With last night’s close, the underlying CMG shares hit 460.33, well above our 450.00 strike price and that share price rebound led our CMG calls to close at 34.76 – up just shy of 73%. Not bad for a position that was added just two weeks ago.

Given my comments above, I’m taking the quick win on this trade and putting the returned capital and profits into the war chest as we wait for a calmer market to emerge.

  • We are booking another win with our Chipotle Mexican Grill (CMG) Jan 2018 450.00 calls (CMG190118C00450000) that closed last night at 34.76, up almost 73% from our 20.10 buy-in in mid-October.
Weekly Issue: Economic reality is catching up with the stock market

Weekly Issue: Economic reality is catching up with the stock market

 

Coming into this week I said it would likely be another volatile one, and as much as I would like to say I was wrong, I wasn’t. Over the last five days, the individual price charts of the major stock market indices resembled a roller coaster ride, finishing lower week over week. This trajectory continued what we’ve seen over the last few weeks, which has all the major market indices in the red for the last month and that has erased most of their year to date gains.

Stepping back, yes, the market is trading day to day as expected but while there are pockets of strength we are seeing a growing number of companies miss top-line expectations. Coupled with guidance that in some cases may be conservative, but in other reflects a syncing up with the economic and other data of the last few months, investors have become increasingly nervous. This is evidenced in the wide swing over the last month at the CNN Fear & Greed Index, which now sits at Extreme Fear (6) down from Greed (65) several weeks ago. Looking at the AAII Investor Sentiment Survey this week, bullish sentiment fell to 28% from 34%, the fourth weakest reading for bullish sentiment this year. Bearish sentiment rose from 35% to 41%, the highest reading since the last week of June.

What this tells us is pessimism over the near-term direction of the stock market is at its highest level in months, which in turn is likely giving way to what we call a “shoot first and ask questions later” mentality. As almost any seasoned investor will say, that is one of the biggest mistakes one can make as it tends to let emotion, not logic and fact, rule the day.

What times like this call for is stepping back, collecting data shared in earnings releases and corresponding conference calls and presentations, to update our investing mosaic. We’ve had several Thematic Leaders and residents on the Tematica Investing Select List, including Chipotle Mexican Grill (CMG), Amazon (AMZN), Altria (MO),  Alphabet/Google, and Nokia (NOK) report this week as well as a dozens of others, such as AT&T (T), Verizon (VZ), Lockheed Martin (LMT), McDonald’s (MCD), iRobot (IRBT), and Hilton (HLT) report this week. That’s why I’ll be spending the weekend pouring over earnings releases and conference call transcripts, using our thematic lens to update our investing mosaic as needed. It also means furnishing you with a number of updates very early next week.

As I revisit our investing mosaic, the questions being asked will include ones like “Are we seeing any slowdown in the shift to digital commerce, the cloud, streaming content, the move to foods that are better for you?” and so on. Odds are the answers to those and similar questions will be no, which means we will continue to sit on the sidelines as earnings expectations for the market are adjusted likely leading the risk to reward dynamics in share prices to become more favorable. As calmer waters emerge in the coming weeks, we will use one of our time-tested strategies and scale into our Thematic Leader positions as well as those in the Select List where it makes sense.

 

What to Watch Next Week

As we trade the end of October and Halloween for the start of November next week, we have another barn burner one ahead for September quarter earnings as more than 1,000 companies will report their results and update their outlooks. We also have a full plate of economic data coming at us, some of which will influence the second edition of the September quarter’s GDP reading while others will start to put some shape around the GDP reading for the current quarter. To set the table for that data following the initial September quarter GDP print of 3.5%, the New York Fed’s Nowcast model is looking for 2.4% while The Wall Street Journal’s Economic Forecast Survey of more than 60 economists is calling for 2.9%. Thus far we have yet to see any forecast from the Atlanta Fed’s Nowcast model for the December quarter, however, odds are it will once again start out overly bullish and find its way closer to the economic reality of the quarter. We like to kid the Atlanta Fed, but it did start out modeling September quarter GDP of 4.7%. Of course, we would have loved to have seen that, but we’re in the business of letting the economic data talk to us. The fact the Citibank Economic Surprise Index (CESI) has been negative for several months, meaning the data is coming in below expectations, was a clue the Atlanta Fed would have to refine its outlook.

So, what do we have on tap from an economic data perspective?

Monday will bring the September Personal Income and Spending report, one that will we will be watching closely to see if consumers continued to spend above wage gains. Tuesday has the October Consumer Confidence reading for October, and the recent stock market gyrations could take some wind out of the September confidence gains. As we gear into the holiday shopping season, we’ll be closely watching the Expectations component for signs of any softening. Also, on Tuesday, we have Apple’s (AAPL) latest event at which it is widely expected to unveil its latest iPad and Mac models. The ADP Employment Report for October, as well as the 3Q 2018 Employment Cost Index report, will be had on Wednesday, and we expect them to receive more than a passing scrutiny given the growing scarcity of workers with needed skillsets and wage gains.

Thursday we will get the October auto and truck sales and we’ll be looking to see if those sales continue to resemble what we’ve seen in the housing market of late – fewer unit sales, but ones with higher price tags. Also, in focus, that day will be the October ISM Manufacturing Index, where we will be eyeing its order and backlog data as well as employment metrics. Rounding out Thursday, we’ll get the September Construction Spending Report. The first Friday of the new month usually means it’s time for the employment report, and yes, we will indeed be getting the October Employment report one week from today. While we expect many to be focused on the speed of job creation, we’ll be digging into the qualitative factors of the jobs created and who is taking them as well as focusing on the degree of wage gains.

Turning to next week’s earnings calendar, it is simply chock full of reports and once again Thursday will be the day with the heaviest flow – just under 400 companies on that day alone.  Just like this week, among the sea of reports to be had, there will be several, including Facebook (FB) and Apple that will capture investor attention given the impact they could have on the market. As we move through the week, we’ll be adding to our investment mosaic along the way.

Enjoy the weekend, stock up on all those tricks and treats and get some rest for the week ahead. I’ll be back with more early next week.