Sizing up thematic returns in February

Sizing up thematic returns in February

Equities continued to swoon during February as investors came to grips with the expanding impact of the coronavirus. Amid a growing sea of corporate warnings that led investors to question earnings forecasts for the current quarter as well as all of 2020, all the major stock market indices finished February down 6.4%-10.1%. The hardest hit was the Dow Jones Industrial Average, and the US stock market barometer that is the S&P 500 fell 8.4% in February, which added meaningfully to its decline year to date. 

Despite investors taking profits in the Technology and Healthcare sectors, they along with Communication Services helped temper the market’s February selloff. Names like Regeneron Pharmaceuticals (REGN), Biogen (BIIB) and Gilead Sciences (GILD) saw gains on advances in potential coronavirus treatment development in particular. While markets overall were impacted by unfolding events during the month Energy, Utilities and Consumer Discretionary names seemed to lead the way down. Muted demand for oil due to reduced manufacturing activity and fears of continued softening in the global economy saw oil prices drop almost 17% during the last week of the month. Unsurprisingly, cruise line operators Norwegian Cruise Lines (NCLH) and Caribbean Cruise Lines (RCL) were among the worst performers this month both posting losses over 30% with Carnival Corporation (CCL) not too far behind losing over 23% of its market value as those companies paired back 2020 expectations due to the coronavirus’s impact. The same was had with airlines with American Airlines Group (AAL) down 29.68% and Alaska Air Group (ALK) off 21.88% as they too canceled flights and reduced schedules owing to the virus.  

At Tematica we’ve often questioned the notion of the S&P 500’s construction as well as the ability of an 11-sector framework to accurately capture the evolving landscapes that we and other investors find ourselves confronting as structural changes associated with our 10 investment themes continue to unfold.  In our view a different perspective is needed, a thematic one, to properly identify those companies at the forefront of these unfolding structural changes. For example, cruise lines such as the ones mentioned above fall into the Consumer Discretionary sector while companies such as Omega Healthcare Investors (OHI) that offer long-term healthcare facilities is classified as Real Estate even though both are feeling the tailwinds of Tematica’s Aging Population investing theme on their respective businesses.

Another example of looking at the world thematically is found in the Tematica Research Cleaner Living Index, which focuses on the shifting consumer preference for cleaner products and services that are better for you, your body, your work, your workplace, and the environment.  Despite sharp February sell-offs in several index constituents, including Acuity Brands (AYI). Fresh Del Monte Produce (FDP) and Hain Celestial (HAIN), solar energy systems companies Sunrun (RUN) and SolarEdge Technologies ((SEDG), as well as plant-based alternative Beyond Meat (BYND) and Tesla (TSLA), led the Cleaner Index to slip by only 3.1% in February. That decline more than offset the index’s modest rise posted during January leaving it down 2.6% year to date vs. the S&P’s 8.6% drop at the end of February. 

Of note during February, 

  • Plant-based meat alternatives notched another win as Beyond Meat announced the Beyond Meat sandwich will be available at Starbucks’ (SBUX) nearly 1,200 coffee shops across Canada on March 3. The sandwich will include cheddar cheese and egg on an artisanal bun. Not to be outdone, Impossible Foods announced its plant-based meats will be available across Walt Disney (DIS) theme parks and cruise lines come Feb. 28. 
  • Confirming the drivers for Cleaner Living are global, during February it was reported by the Fraunhofer Institute for Solar Energy Systems (ISE) that 61.2% of Germany’s net public electricity generation was from renewable sources, marking a new monthly record. 
  • And while Tesla has an early lead in the electric vehicle space, BMW is set to take the wrap off its i4 electric concept car and General Motors (GM) is slated to discuss its electric vehicle and battery strategies at its upcoming EV Day on March 4. GM’s battery facing comments will be ones to watch ahead of Tesla’s “Battery Day” slated for April.

Amid the coronavirus headlines investors were digesting during February, there were two powerful reminders of the growing need for cybersecurity and digital privacy solutions. The first was the announcement from gaming and hospitality giant MGM Resorts International (MGM) that it had been the victim of a data breach in 2019. The second was a statement from the US State Department blaming the Russian military intelligence agency known as the GRU for the cyberattacks that hit Georgia last October and disrupted “several thousand Georgian government and privately-run websites and interrupted the broadcast of at least two major television stations.”

Those attacks are but the latest high-profile ones to be reported and point to the increasing need for companies, governments, other institutions and individuals to protect their data, especially as the regulatory environment could increase the frequency of financially motivated cyber-attacks. Each week in Thematic Reads, we share some of the latest headlines and news stories surrounding the Foxberry Tematica Research Cybersecurity and Data Privacy Index. As society becomes increasingly connected as part of our Digital Lifestyle investment theme and as new technologies associated with our Digital Infrastructure investing theme look to connect more devices than ever before, we continue to see an increasing demand profile for the constituents that comprise the Foxberry Tematica Research Cybersecurity & Data Privacy Index. During February the index fell 8.2% as gains registered in the shares of Cloudflare (NET), Norton Lifelock (NLOK) and ForeScout Technologies (FSCT) were offset by declines in Palo Alto Networks (PANW), Globalscape (GSB) and Mimecast (MIME) shares. 

Turning to the Tematica’s Thematic Dividend All-Stars Index, which is comprised companies with at least ten consecutive years of increasing annual regular dividend payments and whose business models will benefit from multiple thematic tailwinds tracked by Tematica’s Thematic Scorecard, its total return for February was -8.1% vs. the total return for the S&P 500 of -8.3%. Among the index’s 65 constituents, only Healthcare Services Group (HCSG), Albemarle Corp. (ALB) and Target (TGT) finished higher in February, leaving meaningful declines at Aaron’s (AAN), Nu Skin (NUS) and Invesco (IVZ) to have a greater impact on this equally weighted index. 

Generally speaking, companies that continually increase their dividends to shareholders tend to see a positive step function higher in their share prices. During the first two months of 2020, just over 25% of the index constituents announced fresh dividend increases including Aaron’s (AAN), Analog Devices (ADI), Digital Realty Trust (DLR), Best Buy (BBY) and AT&T (T). Given the positive impact of tailwinds associated with Tematica’s investment themes, we look forward to sharing news of new dividend increases at the other 72% of the index constituents in the coming months. 

Tematica Research Cleaner Living Index cleans up in 3Q 2019

Tematica Research Cleaner Living Index cleans up in 3Q 2019

 

Last week we closed out the month of September, shutting the books on the third quarter and began the final quarter’s march toward the end of 2019. While US stocks rebounded in September, the quarter in full was still a mixed one, as evidenced by a 1.2% rise in both the S&P 500 and the Dow Jones Industrial Average, versus the Nasdaq Composite Index and the Russell 2000 index that each finished the third quarter in the red. By comparison, the Tematica Research Cleaner Living Index (CLRN) soared 5.1% during the September quarter following its 4.0% move higher just in the month of September.

 

 

The Tematica Research Cleaner Living Index focuses on those companies poised to benefit from the growing demand for items that are better for you and the planet. The outperformance of the index during the last month of the quarter was led by double-digit moves in eight of the index’s 48 active constituents, including the more than 40% rebound in both Fresh Del Monte Produce (FDP) and Tenneco (TEN) shares, and the more than 24% climb in WW (WW) shares. The move in WW shares finished off a September quarter climb that totaled 95.5% in total, leaving them as the best performing constituent during the quarter. Rounding out the top three performers for the September quarter were Fresh Del Monte Produce, and SolarEdge Technologies (RUN), both of which climbed more than 30% during that 90-day period.

It will come as no surprise when we say the September quarter was filled with a lot of drama. It began with signs of the global economy slowing further, continued with more “two steps forward and one step back” on US-China trade talks, and ended with the impeachment inquiry winding through Washington that could stall any legislative efforts to be had by the current administration. More recently, September data published by ISM and IHS Markit have reignited global growth concerns, and the continued protests in Hong Kong have raised doubts over luxury good sales during the quarter.

All of this sets the stage for what is likely to be a tenuous, if not volatile, September quarter earnings season. Adding wood to that fire are recent earnings reports from FedEx (FDX), US Steel (X), HB Fuller (FUL), Actuant Corp. (ATU), and Landec (LNDC) that included weaker than expected guidance and we are also starting to see negative earnings pre-announcements like those from AXT Inc. (AXTI) and GoPro (GPRO) rear their head.

Taking all of those factors in full, we’ve seen year over year 2019 EPS expectations for the S&P 500 group of companies fall to just 1.8% currently, down from roughly 10% this time last year per data from FactSet. By comparison, the constituents for the Cleaner Living Index are expected to deliver EPS growth of 3.7% in 2019, led by Fresh Del Monte Produce, Brookfield Renewable Partners (BEP)Atlantica Yield (AY)Sanderson Farms (SAFM) and TerraForm Power (TERP).

We’ll also be watching with an eye toward 2020 as investors begin to focus on earnings growth prospects for the coming year and companies begin to gingerly share initial expectations that will shape 2020 forecasts. Based on current 2020 EPS expectations for the Cleaner Living Index constituents, in aggregate, the group is projected to deliver year over year EPS growth of 36.0%, far and above the 10.3% growth forecast for the S&P 500, again per FactSet data. Of the 48 Cleaner Living constituents, 2020 EPS expectations that are likely to have the greatest influence on year over year growth are Tesla (TSLA) and Freshpet (FRPT) as they go from generating bottom line losses to positive EPS as well as TPI Composites (TPIC) and NextEra Energy Partners (NEP).