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Trade and Impeachment Uncertainty Returns

Trade and Impeachment Uncertainty Returns

Today’s Big Picture

US equity futures point to a drop at the open and are being driven by two-weekend news items. First, on the impeachment front, a second whistleblower has come forward claiming first-hand knowledge of the allegations against President Trump. Second, reports are indicating Chinese officials are reluctant to agree to a broad trade deal as aimed for by President Trump and would likely exclude the reformation of Chinese industrial policy and government subsidies, two topics of longstanding U.S. complaints. 

This combination along with weak economic data out of Europe this morning is adding a fresh dose of uncertainty back into the market following Friday’s supposed Goldilocks September Employment Report, and raises questions…

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Surprises From Market Breadth with Record Margin Debt

Surprises From Market Breadth with Record Margin Debt

As we discussed earlier, heading into the third quarter earnings season, we have above average level of positive guidance in terms of both top line sales and earnings as well as lower-than-average negative earnings guidance. We  pointed out yesterday, however, that an uncomfortable portion of that guidance is driven by gains from a weak dollar and we are seeing signs that may be reversing course.

 

In the last quarter, companies that delivered on or beat expectations didn’t get much of a reward for their efforts. We looked at the current market conditions to get a feel for what the earnings reactions could be this reporting season.

 

Margin Debt

Margin debt has reached $550.9 billion, a record high for the second consecutive month and the sixth record high in the past eight months.  Anyone who recalls just a tad bit of market history can see that rapidly rising margin debt has preceded the beginnings of both the March 2000 and July 2007 bear markets. However, nearly one in four monthly margin debt readings since 1959 have been record highs, so to assume that a pullback is imminent based on a record high is folly at best. Instead, we like to look at the rate of change over a 12-month period. Here we can see that the rate of change recently hasn’t been nearly as dramatic as the wild moves we saw around the 2000 and 2007 crashes. This metric does not indicate a market that has been wildly laying on the leverage, despite reaching yet another record high.

Market Breadth

Another measure of the health of the market is the Advance/Decline line which has been well above its 50-day and 200-day moving average. This indicator is showing a market that appears rather robust, but the value of this indicator may lessened by the rapidly rising use of ETFs. When an investor puts money into an ETF, those funds are used to buy all the companies in the ETF indiscriminately, which can give the appearance of greater robustness than would otherwise exist.

 

To further assess breadth, we look at the ratio of equal weight versus market cap weighted for the major market indices. What we found is the S&P 500 and the Russell 2000 equal weight indices underperformed their market cap weighted indices by a material amount year-to-date. This metric indicates that the indices upward moves have been driving by larger cap high-flyers, which indicates weaker breadth than we’d like to see.

 

High Fliers Losing Some Altitude

Amazon (AMZN) tried to carve out a head and shoulders pattern this week, down by over 2% during the week, but closed the week back in the black by Friday. If it moves below the neckline where it is currently perched rather precariously, the shorts will go for the jugular and this is one of those mega cap stock that has been helping to keep the indices up. Another high flier that has driven a good portion of the market’s gains, Apple (APPL), has dropped below both its 50-day and 100-day moving averages and is now down in 13 of the last 18 days as the new product line doesn’t exactly have consumers busting down the doors.

 

Facebook (FB) is also feeling the pain with all the bad press surrounding is ad platform that Ivan and his Russian buddies have been abusing to stir up domestic strife here in the U.S. Who knew Putin’s team may not play fair! The stock suffered its worst day this week since last November, falling over 5% at one point during the week and closing below its 50-day moving average for the first time since July 6th. By week’s end the shares had moved back to neutral territory in this Teflon market, but the warning flares have been fired. Netflix (NFLX) joined in falling as much as 5.5% this week to waver right arounds its 50-day moving average.

 

With the performance of the equal weight indices below that of the market cap weighted, weakness in the big guys are cause for concern. The end of the week saw a rebound in most, such as Alphabet (GOOGL) but we’ll be watching to see if the rebound holds.

 

Another Breadth Indicator

We then looked at the percent of companies above their 50-day moving average in the S&P 500, Nasdaq and the NYSE Composite. We found that the number of stocks trading above their 50-day moving averages has been rising, so from this metric, the markets are looking to have decent breadth, which limits the damage from those high fliers weakening.

 

When assessing either the markets or a stock we always want to find confirming or discordant data points to increase our confidence. While we have conflicting indicators here, our assessment leans more towards a bullish view based on this data for the near term.

 

Volatility

 

What about that wacky VIX that appears to be on a IV drip of some sort of powerful sedative? No matter what gets thrown at it, the index continues to be like Fonzi. The recent Commitments of Traders report from the CFTC revealed that the net speculative short position on the VIX has once again reached a new record high at 171,187 futures and options contractions, taking out the prior 158,114 peak in early August. This is a 63% increase! Talk about the calm before the storm. Yeah, we know, been saying that for a while. This has been a seriously impressive run!

 

Of all the days the VIX has been below 10 since its inception, 70% those have been in 2017. We can’t help but shake our heads, (and remember to stock up on Alka Seltzer) when we consider the likely impact on the markets when the reversion to the mean rule kicks in.

 

Given the lack of volatility, investors seem to be going all in. The last week’s Market Vane report found that the bullish share has reached the highest level in the current bull market. The last time it was this high was in June 2007.

 

The bottom line is while equities are clearly expensive at these levels, the market breadth looks decent and volatility is still hitting the snooze button. The disconnect between fundamentals, historical norms and the current market is likely to at some point result in some seriously dramatic moves.  However, we’ve all seen that expensive stocks can get even more expensive and for at least the near term, we are not seeing any clear catalyst for a pullback that would get the attention of this seemingly Teflon market.

WEEKLY ISSUE: Nike offers several points of confirmation; Boosting two price targets

WEEKLY ISSUE: Nike offers several points of confirmation; Boosting two price targets

Yesterday, we received the first of what is likely to be quite a bit on potential tax reform. If the efforts we’ve seen pertaining to repeal and replacing Obamacare are any indication, tax reform will take some time and call for reaching across the aisle. We’re cautiously optimistic such reform can take place in a lasting fashion as it would help give a boost to disposable incomes, which would be a boon to the consumer spending led U.S. economy. We’ll have more on this as it develops as well as implications of other happenings inside the Beltway, from more barbs with North Korea to President Trump’s regulatory reform overview to be shared next week.

 

Making some adjustments to the Tematica Investing Select LIst as we close the quarter

As the new tax policies are put forth and put under the microscope, we will soon close the books on September and 3Q 2017. With a few days left in the current quarter, the S&P 500 is up 3.3%, and we’ve had a number of positions ranging from AXT Inc. (AXTI), USA Technologies (USAT), International Flavors & Fragrances (IFF) and Facebook (FB) handily beat that index. Some of our more recently added positions, including this week’s Corning (GLW) and last week’s LSI Industries (LSI) have dipped along with the market these last few days, but our outlook for both remains undiminished.

We have seen some former stalwarts, like Amazon (AMZN) and Alphabet (GOOGL) underperform over the last few months, but we’re heading into the seasonally strongest time of the year for these two companies – we’ll continue to keep both on the Tematica Investing Select List. The same goes for Starbucks (SBUX) as it rolls out its pumpkin flavored beverages and its peppermint mocha alongside other seasonal favorites.

Our price targets remain as follows:

  • Alphabet (GOOGL) — $1,050
  • Amazon (AMZN) — $1,150
  • AXT Inc (AXTI) — $11
  • Corning (GLW) — $37
  • Facebook (FB) — $200
  • LSI Industries (LYTS) — $10

 

We are boosting our price targets this morning on International Flavors & Fragrances and USA Technologies as follows:

  • Raising our IFF price target to $150 from $145;
  • Increasing our USAT target to $6.50 from $6.00

 

These increases offer additional upside, but not enough to warrant subscribers committing new capital at this time. Rather subscribers should continue to own these positions to capture incremental upside and in the case of IFF its dividend stream.

 

Now let’s step back and take a wider view

Our position has been and remains that we are likely to see the recent bout of volatility continue as we close the books on the third quarter of 2017 and roll right into earnings season. That reporting activity will come to a head just as we get the bulk of economic data for the month of September, the proverbial icing on the 3Q 2017 GDP cake. Based on the hurricanes, odds are this data will be a bit wobbly, to say the least, and odds are we will see more GDP revisions for the three months ending in just a few days. While some may look through the economic data, the quarterly results from Darden Restaurants (DRI) earlier this week and the subsequent drop in its shares tell us the market has yet to fully price in the impact of the hurricanes.

Here’s the thing – this could lead to the stock market retrenching from current levels, and in our view letting some of the froth out of the market is a good thing. Candidly, with the market trading near 19x expected earnings – head and shoulders above the 5- and 10-year averages – it begs the question as to how much additional upside is to be had?  This is especially true for investors that are only now returning to the market.

Our strategy for the near-term will be to focus on those companies that have strong thematic tailwinds and whose shares have a more than favorable risk-to-reward tradeoff. This could be in new positions like the ones we’ve added over the last 10 days or it could be in existing ones that come under pressure this earnings season. We always like the former, but the latter is also welcome if it allows us to improve our cost basis for the long-term.

Now, let’s dig into what Nike said last night in its quarterly earnings results – the skinny is, it was reinforcing on several levels for our themes as well as our recent comments on the dollar. Here we go…

 

What’s Nike telling us this morning?

Last night athletic footwear and apparel company Nike reported better than expected quarterly results, but the shares are trading off this morning. Sifting through the results, we see the 3% decline in North American sales as offering credence to our Cash-Strapped Consumer theme, while the 9% growth year over year in China, as well as the 5% year on year improvement in Asia-Pac/Latin America for the company, reflects our Rise & Fall of the Middle-Class thematic. That mix brought Nike’s international business to more than 55% of its overall revenue, and yes during the earnings call last night the company conceded that it has indeed benefitted from the weakening dollar during the last several months.

When it offered its outlook, however, Nike quickly called out that its expected margin contraction with “FX continuing to be the single largest driver.” Yesterday we shared our view the rebounding dollar could present a renewed headwind as the investing herd adjusts it view to incorporate the Fed’s interest rate hike forecast and we see that comment by Nike as confirmation. In addition to the near-term post-hurricane economic slump, this is potentially another reason we could see earnings expectations get reset in the back half of 2017 in the coming weeks.

We’ll look for more confirmation today during Applied Material’s (AMAT) 2017 Analyst Day and tomorrow when McCormick & Co. (MKC) and reports its quarterly earnings. As a reminder, we expect Applied to deliver a favorable demand picture for both its semiconductor as well as display capital equipment businesses, with the former benefitting from ramping demand in China. With regard to McCormick, consensus expectations have the company delivering EPS of $1.05 on revenue of $1.18 billion for the August-ending quarter. As we’ve all seen of late, missing expectations by a penny or two these days is likely to lead to a 4%-8% drop in the share price, and should that happen with MKC shares we’re inclined to scale into the position near or below our original cost basis of $91.80 on the Tematica Investing Select List.

  • Our price target on Applied Materials (AMAT) shares remains $55
  • Our price target on McCormick & Co. (MKC) shares remains $110

The Impact of the Nike — Amazon Deal

Turning back to Nike’s earnings conference call, heading into it, one of the things we wanted was more color on was the company’s invigorated relationship with Amazon (AMZN). We were not disappointed. During the call, even we were somewhat surprised by how blunt Nike was about the pressures facing U.S. retail when it said:

“…a developed market like North America must embrace change to its legacy retail infrastructure. As the leader, we’re fully committed to energizing and growing the marketplace through both our own NIKE Direct businesses and with strategic wholesale partners… over the past 90 days, it has become increasingly evident to all that the North America marketplace is undergoing significant transformation. Several quarters ago, we said that the U.S. retail landscape was not in a steady state, but rather would continue to be disrupted by the accelerating consumer shift to digital and more personal brand experiences… those shifts are now profoundly impacting the more undifferentiated dimensions of retail, resulting in store closures, bankruptcies, and a promotional environment… We’ve proven, I think, through our ability to create some real great success with other consumer-oriented digital partners like Tmall and Zalando that there isn’t a real opportunity here, and we’re excited about where that can go with Amazon (AMZN).”

In our view, those comments sum up the impact on brick & mortar retail that is being had by our Connected Society investing theme. Odds are, Nike is only one of the initial branded apparel companies that will look to leverage Amazon’s logistics and related infrastructure, and this keeps up long-term bullish on AMZN shares.

  • Our long-term price target on Amazon (AMZN) shares remains $1,150.

We also clearly heard Nike is embracing several aspects of our Disruptive Technology theme when it said, “…we target doubling our direct connection to consumers, we are ramping up investment in digital capabilities ranging from data science and analytics to machine learning to augmented reality to image recognition and personalization.”

The only thing better than a company riding one of our investment tailwinds is when it is riding two or more. Over the last three months, NKE shares have underperformed the overall market falling nearly 2.5% vs. the S&P’s 3.3% climb. As the investing herd digests Nike’s comments and the shares drift lower, we’ll revisit the potential upside and downside to be had over the coming 12-18 months. If it’s compelling, we’ll be back with more on this Rise & Fall of the Middle-Class company that is looking to leverage our Connected Society and Disruptive Technology themes.

 

WEEKLY ISSUE: Shedding Dycom Shares, Remaining Bullish on UPS and Facebook

WEEKLY ISSUE: Shedding Dycom Shares, Remaining Bullish on UPS and Facebook

Throwing in the Cards on Dycom (DY)

Before we get things started this week, early this morning Connected Society company Dycom (DY) reported an EPS beat for the quarter but issued a weaker than expected outlook for the current quarter. Of late, we’ve noticed stock price fatigue when a company beats expectations and raises its outlook, and that likely means Dycom’s report will be met with investors shedding the shares. In recent years, we’ve seen similar reports from companies met with sharp moves lower, and given the current environment, we see the odds of that happening with DY shares rather likely.

We expect the management team to discuss the rationale and drivers behind its recast guidance on the earnings call this morning. As investors, we’ll want to cap the potential pullback in the shares on the Tematica Select List and that has us exiting the position. As Wall Street analysts parse the data and lower their EPS expectations we see target price cuts being set lower as well.

  • We are issuing a Sell rating on Dycom (DY) shares.
  • As we do this, we will shift DY shares to the Tematica Contender List because it will only be a matter of time before mobile operators pony up to expand existing network capacity and build out their 5G as well as gigabit fiber networks.

 

No Shortage of Confirming Thematic Data Points this Week

While last week ended on a high note with all the major stock indices finished higher, this week we’ve seen a return of volatility to the market thanks to North Korea at the same time Texas grapples with one of the worst hurricanes in recent memory. The people of Houston are certainly in our thoughts this week and in the coming ones as we assess the impact to be had on the both the Texas economy and that of the overall country.

Exacerbating the markets move has been the usual seasonally low trading volume we tend to find at the tail end of the summer. As we called out in this week’s Monday Morning Kickoff, there are a number of reasons to think September, which is usually one of the most volatile months for stocks, is likely to be so once again.

As we prepare that amid the usual end of the month, start of the new month data flow, we’ll continue to take our cues and investment moves from our thematic lens. Even amidst the political tension of the last few weeks, once again there has been no shortage of confirming data points for our 17 investment themes. Earlier this week we shared comments our initial findings on the Amazon (AMZN)-Whole Foods Market (WMF) tie up, but also what the Mayweather vs. McGregor bout meant for Las Vegas and our MGM Resort (MGM) shares as well as how we found positive confirmation for our Applied Materials (AMAT) shares in a filing made by Samsung.

We also shared out take on a recent upgrade to Starbucks (SBUX) shares made by Wedbush following prospects for stronger than expected U.S. same-store-sales. As temperatures start to cool, and holiday shopping season thoughts begin to form we recognize that Starbucks will once again have its semi-addictive seasonal beverage — the Pumpkin Spice Latte — and when matched with its expanded food offering we see the recent trend of better than expected same-store sales continuing.

We’ve also uncovered more signs that brick & mortar retail remains in a worrisome place. First, Simon Property Group (SPG), the nation’s largest mall operator, is asking an Indiana court to issue an injunction to put the brakes on Starbucks phasing out of its 379 Teavana locations over the coming twelve months. No doubt Simon Property Group is feeling the headwind associated with the shift toward digital commerce in a big way, but we have to say this move reeks of desperation. We certainly understand the difficult position Simon Property Group is with its business at risk as more retailers embrace digital commerce solutions on their own or pair with Amazon to leverage its logistics capabilities.

The thing is, while Simon Property Group may try to fight one set of retail closures, in reality, it is a game of “whack-a-mole” as others are popping up to take their place. Over the weekend Affordable Luxury candidate Perfumania Holdings (PERF), which sells discounted perfumes from high-end brands, such as Dolce & Gabana and Burberry, filed for Chapter 11 bankruptcy and intends to close 64 of its 226 stores. We blame the adoption of our digital commerce aspect of our Connected Society theme not only at Amazon, but also Ulta Beauty (ULTA) and Sephora. Sephora, in particular, has focused on digital commerce and has embraced augmented reality, a component of our Disruptive Technology theme, to improve the customer experience.

Sephora is not alone in making cosmetics shopping even easier. Shopping platform FaceCake has partnered with brands like NARS Cosmetics to let online shoppers try on everything from makeup to handbags. Another example is IKEA as its new Catalog App uses augmented reality to allow customers to virtually place and view 200 different IKEA products in their homes. All you need is a smartphone (unfortunately, no Swedish meatballs are included in the online app). As more retailers embrace augmented reality in their apps, we question the need for consumers to visit physical store locations.

Connecting the dots, however, we find the growing usage of augmented reality will speed the shift toward digital commerce, and that bodes very well for our shares of United Parcel Service (UPS) as we head into the seasonally strongest time of the year for the company.

  • Our price target on United Parcel Service (UPS) shares remains $122; given the 10% move in the position, subscribers should continue to hold the share.
  • Those that missed our initial recommendation should look to revisit the shares closer to $105.

 

 

Restaurants Too Are Feeling the “Retail-Mageddon” Pinch

On a related note to the pains retailers are feeling we covered earlier, the restaurant industry is suffering from many of the same woes afflicting retailers – plain and simple, there are too many physical locations, and customers increasingly prefer to have everything delivered to their door.

That’s why pizza chains, especially Domino’s (DPZ) and Papa John’s (PAPA) have been able to gain an edge. Roughly 60% of Papa John’s orders are digital from not only its own app, but also via Facebook (FB)’s name product as well as its Messenger product. As the restaurant industry looks for solutions by leveraging our Connected Society, Disruptive Technology, and Cashless Consumption themes, we see Facebook (FB) and its multi-tiered platform offering benefitting. This along with its move into original content that bodes well for additional advertising, as well as its overall monetization efforts across those platforms keeps us bullish on Facebook shares.

  • Our price target on Facebook (FB) shares remains $200

 

Looking Ahead to the Coming Weeks

As we put the summer behind us in the coming days and absorb the litany of economic data to be had, our intention is to use whatever market volatility emerges to our advantage. This means revisiting recent additions to the Tematica Contender List like Nokia (NOK) and Innovative Solutions (ISSC), but also examining new potential positions for the select list as well.

 

No Sleepy End of  Summer in Sight

No Sleepy End of  Summer in Sight

 

We’ve survived the eclipse, and while the display was a bit underwhelming outside of the Beltway, we hope you enjoyed this rare experience that pulled 10 percent of US viewers away from Netflix while it was happening. Rest assured the consumers of streaming content that help power our Connected Society investing theme were back on board soon thereafter propelling Marvel’s The Defenders to a binge viewing pop after dropping last Friday. From time to time we may see speed bumps for our Connected Society investing theme, but much like trying to put toothpaste back into the tube, we don’t see a reversal in this tailwind or any other of those associated with our investing themes anytime soon.

If anything, as we break down the monthly retail sales data, examine data points such as the box office take and maneuverings by companies like Target (TGT) and Wal-Mart (WMT), we see that Connected Society tailwind blowing even harder as we head into the 2017 holiday shopping season. This morning it was shared that Wal-Mart is teaming with Alphabet (GOOGL) to bring Wal-Mart products to people who shop on Google Express, Google’s online shopping mall. What’s significant about this news is that it marks the first time Wal-Mart has made its products available in the U.S. on a website other than its own. Also, too, Wal-Mart is embracing aspects of our Disruptive Technology theme as it makes it products available to customers via Google Home (Google’s answer to Amazon’s Echo) as well as Google Assistant, its artificial intelligence software assistant found in smartphones powered by Google’s Android software.

Clearly, Wal-Mart is shoring up its position and investing for where retail continues to head — a path that is increasingly chartered by the Connected Society. To us, this development, along with Nike’s (NKE) recent teaming with Amazon (AMZN), is a clear signal of what’s happening in retail. It also says that lines are being drawn between those partnered with Amazon and those that aren’t. We suspect many will see this as evidence of the “retail-megeddon” that is upending the retail industry. Here at Tematica, however, our view is Amazon and Wal-Mart are in the thematic sweet spot and are positioned to become the Coke and Pepsi of retail.

We also continue to see Costco Wholesale (COST) emerging as the bronze medal winner in retail. The company’s July retail sales metrics certainly showed it is gaining consumer wallet share as it rides our Cash-Strapped Consumerand Rise & Fall of the Middle-Class tailwinds. Plus, Costco’s business model is also based on collecting membership fees, which continue to grow, and thus insulates it somewhat from the struggles of brick & mortar retail. In our view, if Costco were to acquire Boxed.com, that transaction would be a game changer for Costco’s digital shopping business.

  • We continue to have Buy ratings on Amazon (AMZN), Alphabet (GOOGL), Costco Wholesale (COST) shares with price targets of $1,150,  $1,050 and $190, respectively. 

 

 

The No Man’s Land that is the last two weeks of August. 

As we shared in this week’s Monday Morning Kickoff, trading volumes are likely to be lower these next 10 days ahead of the Labor Day weekend.  Of course, while many try to get their last bit of R&R in at a nearby beach or lake, Washington is once again taking center stage. As you have probably guessed that means some back and forth political maneuvering will push the market around over the coming weeks as renewed hopes of U.S. tax reform contend with President Trump threatening a government shutdown if Congress didn’t present him with a spending bill for the next fiscal year that included funding for a border wall. Not exactly the tone we’d like to hear ahead of the debt ceiling negotiations.

While we ultimately think the debt ceiling will be raised, we’re not looking forward to the “deadline is approaching” drama that will likely unfold. Giving us some reassurance, during a public event on Monday in Kentucky with Treasury Secretary Steven Mnuchin, Senate Majority Leader Mitch McConnell said there was “zero chance — no chance” that Congress would fail to raise the debt ceiling. Of course, that doesn’t mean it’s going to be a walk in the park getting there.

As we watch those developments, we’ve started to get some hints as to what tax reform might look like. Early indications suggest capping the mortgage interest deduction for homeowners, scrapping people’s ability to deduct state and local taxes, eliminating businesses’ ability to deduct interest and allowing for the “repatriation” of corporate profits from overseas. As we’ve seen with the efforts to repeal and replace Obamacare, the devil will be in the details, and more solid ones should emerge in the coming weeks.

Finally, less than a week into NAFTA renegotiations, President Trump has cast doubt on the future of the trade agreement saying, “I think we’ll end up probably terminating NAFTA at some point.” Again, the devil will be in the details, and until those emerge we’re likely to see corporate American hem and haw as it faces several new obstacles that are fanning the flames of uncertainty.

In our view, this is points to a potentially tumultuous next few weeks, low volume end of August followed by September, historically one of the worst months for the stock market. From a Tematica Select List perspective, we’ve seen the recent volatility ding some of the positions, but we remain comfortable given the confirming data points that we are seeing.

For example, during his address Monday night, President Trump announced a new strategy that calls for sending more troops to Afghanistan. Trump provided few specifics about his policy and how much the U.S. military commitment in the region would increase as a result. The decision, however, to further commit rather than withdraw equates to a tailwind for defense spending that is a part of our Safety & Security investing theme. Also, this week, security researchers have discovered several apps on the Google Play store harboring malware, another reminder of the downside to our increasingly Connected Society that provides lift for the cyber security aspect of our Safety & Security investing theme. As we look for details on incremental defense spending, we’ll continue to recommend subscribers add PureFunds ISE Cyber Security ETF (HACK) shares to their holdings if they haven’t already done so.

  • We continue to have a buy on PureFunds ISE Cyber Security ETF (HACK) shares with a long-term price target of $35.

 

 

More Tailwinds for OLEDs

Last week, as it reported a solid earnings beat and raised its outlook for the balance of the year, Applied Materials (AMAT) had several bullish things to say on organic light-emitting diode display demand:

“Display is growing even faster than wafer fab equipment as customers make multi-year investments to address large inflections in both TV and mobile. In TV, a major push to new Gen 10.5 substrates is under way. These huge, 10- square-meters substrates are ideally suited for manufacturing larger-format screens, 60 inches and bigger. We now expect 30 new Gen 10.5 factories to be built over the next several years. At the same time, mobile organic light-emitting diode (OLED) display investment is getting stronger as customers prepare for broad adoption of OLED in smartphones. OLED enables new form factors that result in a larger display area for smartphone, further expanding the overall market.”

We could not have summed it up better ourselves, and that report keeps us bullish on both AMAT and Universal Display (OLED) shares despite the recent pullback both have experienced.

  • We continue to have Buy ratings on both Applied Materials (AMAT) and Universal Display (OLED) shares with prices targets of $55 and $135, respectively

 

USAT Beats Expectations and Offers Bullish Outlook

Yesterday, shares of Cashless Consumption company USA Technologies (USAT) popped in early trading following an earnings and revenue beat for the June quarter. More specifically, the company beat bottom line expectations by $0.01 per share and topped revenues with $34.3 million, $3.2 million ahead of consensus forecasts, and up more than 55% year over year. Ticking through the press release there were a number of positive connection and customer metrics shared by the company and as expected the company offering a bullish outlook for the coming quarters.

That’s the good news.

The less good news is the company fell short when it came to discussing the impact of its recent stock offering that was completed in late July. Yes, during the current quarter, and we find that somewhat disappointing. The company did say, however, that it plans to “to take advantage of opportunities both organic and inorganic that may present themselves in this rapidly evolving landscape” and that means an acquisition or more. When peppered on the earnings conference call, USAT shared that it would seek acquisitions to “enhancing our offering with additional value-added services or allowing us to expand into additional verticals or geographies to drive further growth.”

Not a bad development by any stretch, but it is one that raises some unknowns, particularly for a small company. As we’ve heard many a banker say, the headaches associated with small acquisitions are the same ones with big ones, the only difference is the size of the fee. Given the size of the business as well as the team, the question is will USAT undertake nip and tuck acquisitions that add to its capabilities and expand its footprint or would it look to make a bolder move, potentially swallowing a larger player? We’re fans of the former, while the latter tends to result in some of those headaches such as product, facility, technology and spending integration and rationalization, as well as layoffs.

Given the global proliferation of mobile payments and the first-hand experience I had in Singapore, we’re going to stick with USAT shares for the time being. Based on any potential acquisition, we’ll look to digest the implications and what it may mean for holding the shares.

  • Our price target on USA Technologies (USAT) shares remains $6.

 

 

Disruptive Voice Technology Continues to Take Hold

Last night we shared the news that Barclays (BRC) has enabled voice payments to be made using Apple’s (AAPL) Siri functionality. This is another step forward in the disruptive use of voice technology as an interface across smartphones, intelligent speakers and soon other applications. As more and more applications come to market, we continue to be bullish on shares of Nuance Communications (NUAN) despite the slow tumble they’ve experienced over the last several weeks. As a reminder, the company has inked technology deals with Apple as well as Facebook (FB) to power their respective messaging chat bots even as the use of voice technology proliferates.

  • We remain bullish on Nuance (NUAN) shares, and our price target stands at $21.

 

 

Even Though DY Remains in Radio-Silence, We Continue to Be Patient

Next week Dycom Industries (DY) will report its quarterly results on Wednesday morning (August 30). Despite the ever-increasing need to add incremental wireless capacity and build out next generation wireline networks, in part for wireless data backhaul, to keep up with data demand, DY shares have sunk some 28% over the last three months. This equates to a round trip in the position from a high of just over $110 back to our blended cost basis of $76.68 on the Tematica Select List.

Frustrating to say the least. That frustration is compounded by the lack of news to be had from the company. Its last communique was at the Stifel Industrials Conference back in June. We know network spending at its key customers — AT&T (T), Verizon (VZ) and Comcast (CMCSA) — remains on track as they look to bring incremental 4G and gigabit internet capacity on stream, while beta-ing 5G capacity. Comcast’s recent launch of Xfinity Wireless also likely means additional wireless capital spending will be had in the coming quarters.

  • We’ll continue to be patient with Dycom Industries (DY), which is hovering in oversold territory.
  • Should the shares retreat further into the mid-$60s, we’re inclined to once again scale into the position, improving our cost basis along the way. 

 

 

Markets Reach New Highs, But Why?

Markets Reach New Highs, But Why?

At Tematica, we separate our politics from our analysis to be able to provide objective assessments, which means that we need to call out an error we see in the prevailing narrative. Thursday the Dow hit its 7th straight record close, despite the news that Special Counsel Mueller has impaneled a grand jury in the Russia election tampering probe. While many are attributing the market’s gains to president Trump’s administration, this divergence calls that into question. As does the reality that President Trump’s approval rating has hit new lows with disapproval ratings reaching new highs while the market has continued to rise.

Apple (AAPL) and Boeing (BA) collectively have been responsible for 70 percent of the Dow’s gains the past 6 weeks while the FAANG stocks – Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Alphabet (GOOGL) – which account for just 11 percent of the S&P 500 market capitalization have generated 26 percent of year-to-date return. Juicing up those returns has been leverage, with margin debt up 20 percent on a year-over-year basis in each of the past 5 months and is today over 60 percent HIGHER than at the 2007 peak.

The reality is that in the past 6 weeks, the median stock price and median sector price haven’t actually moved. What has happened has been a falling U.S. dollar, which is on track for the weakest annual performance in 14 years. That’s really something in light of the prevailing narrative that assures us the U.S. economy is going like gangbusters. Ignore that recent ISM report which saw Services experience the biggest drop since November 2008 – same goes for the Composite Index. Amazing to have a falling dollar and the U.S. Treasury 10-year yield right around where it was during the depth of the Great Recession while the Fed is tightening and yet we are to believe the economy is firing away, hmmm.

The top three stocks in the Dow for foreign revenue, Apple (APPL), Boeing (BA) and McDonalds (MCD) account for 50 percent of the Dow’s year-to-date gains, hmmmm.

So what’s going on here?

Euro to US Dollar Exchange Rate Chart

Euro to US Dollar Exchange Rate data by YCharts

In euro terms, the S&P 500 is actually down 1.9 percent year-to-date. In Mexican peso terms it is down around 4 percent and even in the polish zloty it is down roughly 5 percent.

In fact, when President Trump was elected, the U.S. stock market capitalization represented 36 percent of total global market capitalization. That ratio rose to nearly 38.5 percent but has since fallen to 35 percent where it was all the way back in June 2015. On a relative basis, the U.S. stock market has significantly outperformed. What we are seeing here is more a function of a falling currency that a rising stock market reflecting a robust economy.

What could go wrong? The Intercontinental Exchange now has a net short position for the U.S. dollar for the first time since May 2014 and after that time the greenback gained 5 percent within 3 months. If the market has been rising on a falling dollar….

Then there is that debt ceiling debate that, when taking into account recent dynamics in D.C. between various members of Congress and the White House, could make Game of Thrones appear rather tame. This coming at a time when the tax reform debate is set to kick off. Oh and there are those November elections to really bring out the softer side of politics. With the Chargers no longer playing in San Diego this Fall, (What the hell?) I think I’ll have more than enough games to watch coming out of Washington.

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

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

In this Week’s Issue:

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

 

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

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

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

 

 

Updates on Tematica Select List Holdings

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

 

WEEKLY ISSUE: Confirming Thematic Data Points Coming At Us In Spades

WEEKLY ISSUE: Confirming Thematic Data Points Coming At Us In Spades

In this Week’s Issue:

  • Thematic Data Points Revealed in Earnings Thus Far
  • What We Expect from Thematic Poster Child Company Amazon
  • Shifting USAT and BETR shares to Hold from Buy
  • Some Quick Tematica Select List Hits on AXTI, MGM, OLED, AMAT and DY

 

With all many plates spinning on sticks this week, thus far we’ve seen a mixed reaction from investors on the most recent developments coming out of Washington, D.C. amid the Affordable Care Act debate and the onslaught of earnings report. As those many details are digested, the market is also weighing what the Fed will say this week when it comes to the tone of the economy as it concludes its latest monetary policy meeting.

As we shared in this week’s Monday Morning Kickoff, we see a low to no probability of the Fed boosting rates near-term, especially given the pending September unwinding of its balance sheet – something we’ve never experienced before. Given that Fed Chairwoman probably doesn’t want to be the one to send the domestic economy into a tailspin, we strongly suspect she and the rest of the Fed heads will stand pat as they offer clues for what is to be had in the coming weeks.

 

Thematic Data Points Revealed in Earnings Thus Far

As we parse through the onslaught of quarterly earnings reports coming at us this week, we continue to find confirming data points for our investing themes. We saw those in spades yesterday as we reviewed Alphabet’s (GOOGL) 2Q 2017 earnings report. If you missed that commentary, you can find it here, but the skinny is Alphabet continues to ride the tailwinds of the Connected Society investment theme and the shares are a core holding on the Tematica Select List.

We expect the same to be true when Facebook (FB) reports its quarterly results after tonight’s market close. Over the last several quarters, Facebook has been incrementally expanding its monetization efforts across all its various platforms and we see more benefits ahead. Just last week the company announced it would be expanding its advertising platform to the company’s Messenger app for smartphones. We expect more details on this, as well as its pending foray into subscription services with newspapers, magazines, and other publishers during the company’s 2Q 2017 earnings conference call. Also on that conference call and earnings release, we’ll be scrutinizing subscriber metrics as well as average revenue per user figures. One of the keys to Facebook’s continued revenue and profit growth will be monetizing non-US users in the coming quarters. Consensus expectations for 2Q 2017 sit at EPS of $1.12 on revenue of $9.2 billion.

  • Even though FB shares have moved past our formal $160 price target, we’ll be putting it under the microscope to determine potential upside to be had based on 2Q 2017 results and the company’s outlook beyond the first half of 2017.
  • Those revisions may not lead to a table pounding “buy” conclusion, but Facebook’s position in our Connected Society investing theme, along with its growing monetization efforts, keep FB shares as a must own for the foreseeable future.

 

What We Expect from Thematic Poster Child Company Amazon

Also later this week, we’ll be getting earnings from the poster child company when it comes to thematic investing – Amazon (AMZN). If you missed our latest Thematic Signals posting that explains this, you can find it here.

Where do we begin with Amazon this week? First, there was the move by Sears (SHLD) to partner with Amazon with regard to selling Kenmore appliances online (including the smart-home ones that include Amazon Alexa). Then there was Amazon debuting its Amazon Pay Places feature, which allows users to utilize their Amazon account like a mobile wallet for a real world version of one-click shopping. Or perhaps you saw the launching of Spark, which allows Prime members to shop a feed of social media-inspired product suggestions. The key takeaway is Amazon continues to flex its muscles, many of which have solid thematic drivers behind them, and it is doing so at a blistering pace. As Tematica Chief Macro Strategy Lenore Hawkins chimed in on a recent episode of Cocktail Investing, “how much coffee does Jeff Bezos drink?”

While we are on the subject of Amazon, late last week, the Federal Trade Commission announced it is investigating Amazon’s discounting policies following a Consumer Watchdog complaint. Candidly, as Amazon continues to expand its footprint, we expect more of such complaints and suspect that will serve only as a distraction. Moreover, given its balance sheet, should any fines be awarded it has ample funds to comply. More sizzle than steak, as it were.

We do NOT expect Amazon to say much with regard to this FTC non-event event when it reports its earnings tomorrow night. Consensus expectations have the company delivering EPS of $1.42 on revenue of $37.18 billion.

We would call out one key concerns ahead of that quarterly report and usually tight-lipped conference call — it seems investors think Amazon can do no wrong and that mindset can lead to excessive whisper expectations. There we said it.

Our concern in the short term remains the potential for Wall Street to have underestimated Amazon’s investment spending in the near term. As we saw above, it has a number of initiatives under way, and given the accelerating shift to digital commerce and potential partnership to be had on top of those with Nike (NKE) and Sears, Amazon may step up its investment spending ahead of the year-end holiday shopping season, thus cutting into its EPS projections.

If we are right, we could see the shares have a cool post-earnings reception. From our perspective, we see that spending as a long-term investment to grow its services and geographic footprint. Any meaningful pullback in the stock would be an opportunity for investors to increase their foothold in the stock in our view.

  • We will remain patient investors with Amazon (AMZN), especially as we enter the holiday spending filled second-half of 2017.
  • Our price target remains $1,150.

 

Shifting USAT and BETR shares to Hold from Buy

Over the last few weeks, shares of Food with Integrity company Amplify Snacks (BETR) and Cashless Consumption play USA Technologies (USAT) have been melting higher.  Amplify Snacks, on the back of merger-and-acquisition interest focused on the “food that is good for you” space, and USAT, following its recent stock offering and bullish transaction volume commentary from Visa (V), JP Morgan (JPM) and others so far this earning season.

  • Those moves either have put BETR and USAT shares over and above or very close to our price targets.
  • We will be mindful of these targets ahead of respective earnings reports, but for now, we are downshifting them to Hold from Buy on the Tematica Select List.

And as a reminder, our Hold rating, it is literally just that, a recommendation for those that own the shares to hold them for the time being. For subscribers who missed these recommendations, we’d be more inclined to revisit this BETR shares below $9.50 given our $11 price target. With USAT shares and our $6 target, we are more inclined to revisit USAT shares at lower levels, and in this case, that means closer to $5.

As we move through this earnings season over the next two weeks, we continue to think we will see opportunities emerge that allow us to capture thematically well-positioned companies at better prices.

 

Some Quick Tematica Select List Hits

 

AXT Inc. (AXTI)

Following an upbeat report for key customer Skyworks (SWKS) last week, we expect solid results this week from Disruptive Technology company AXT Inc. (AXTI). On its earnings call, Skyworks shared it is still in the early innings of a data explosion that is expected to grow sevenfold over the 2016-2021 period, which should benefit wireless semiconductor demand. Connecting the dots, this bodes extremely well for AXT’s substrate business.

  • Consensus expectations for AXTI sit at EPS of $0.05 on revenue of $22.55 million
  • Our price target remains $9 for AXT shares.

 

MGM Resorts International (MGM)

We’re happy to share that Guilty Pleasure company MGM Resorts International (MGM) will be added to the S&P 500 when that index rebalances later today. That should spur incremental buying among mutual funds as well as exchange traded funds that are based on that index.

Getting back to earnings and expectations, the consensus for MGM is EPS of 0.30 on revenue of $2.67 billion. Data of late for gaming in both Las Vegas and Macau have been quite favorable and we view the company’s recent initiation of a quarterly dividend as underscoring management’s confidence in the business over the coming quarters.

  • Given favorable prospects over the medium term, we would look to use any pronounced weakness in MGM shares following the company’s earnings report to scale further into the shares.
  • Our price target remains $37.

 

Universal Display (OLED)

Many investors are focused on Apple’s (AAPL) adoption of organic light emitting diode (OLED) displays for its next iteration of the iPhone, but as subscribers know there is far greater adoption across other smartphone vendors as well as those for TVs, wearables and other applications. That adoption, which is resulting in companies that had previously invested in liquid crystal display technologies shifting their investments to organic light emitting diodes ones.

We’ve seen the ramping demand for OLED equipment at Applied Materials (AMAT), and this week we saw another layer added to the OLED demand/capacity profile when LG Display shared its plan to invest $13.5 billion to boost output of OLED screens over the next three years. Now let’s add that context we always talk about — the investment is roughly 25 percent more than LG Display’s annual capital spending, which likely means it intends to be an aggressive force in the OLED display market. Given that LG is one of Universal’s key customers, with the other being the OLED industry leader Samsung, we see LG’s upsized commitment to OLEDs as a strong tailwind for Universal’s chemical and high margin IP licensing business.

  • Our formal price target of $125 for Universal Display (OLED) shares is under review with a bias to moving it upwards.
  • The company will report its 2Q 2017 results on August 3 and we will adjust that target after that announcement.

 

 

Applied Materials (AMAT)            

The next catalysts for Applied Materials (AMAT) will be earnings from competitor Lam Research (LRCX) later today and Intel (INTC) tomorrow. Inside Lam’s results, we’ll be watching new orders, as well as backlog levels on both a product and geographic basis. In particular, we’ll look for confirmation of data coming out of the recent SemiCon West industry event that pointed to solid memory demand, which bodes well for additional semi-cap equipment demand.

With Intel’s results, we’ll be paying close attention to its capital spending plans for the back half of 2017. Also too, as we mentioned with Universal Display above, LG’s plan to spend $13.5 billion over the next 3 years to ramp its organic light emitting diode capacity bodes rather for Applied’s order book and back log levels over the coming quarters.

  • Our price target on AMAT shares remains $55, which offers ample upside from current levels.

 

 

Dycom Industries (DY)

This week and next will see several of Dycom’s key customers report their earnings, including AT&T (T), Verizon (VZ) and Comcast (CMCSA). Inside those reports, we’ll be looking at not only overall capital spending levels, but in particular, those targeted to mobile and wireline network capacity additions.

Given the continued adoption of streaming services, audio as well as video, we see commentary that networks capacity levels are running at exorbitantly high capacity utilization levels as being very good for Dycom. While we don’t expect any specifics on 5G timetables, we do expect to hear more about testing and beta launches. As Dycom’s key customers issue their quarterly reports, we’ll have much more to say on what it means for DY shares.

  • We continue to rate Dycom (DY) shares a Buy with a $115 price target.

 

 

 

Inflation waning while bonds dispute moves in stocks

Inflation waning while bonds dispute moves in stocks

Wednesday the Federal Reserve, as expected, raised rates, but even more importantly they release an outline of their plans to shrink the Fed’s balance sheet, which you can read here. We must also note that raising rates in a period of falling bond yields and where the 3-month change in core CPI is collapsing is unheard of, but then very little of U.S. monetary policy these days in within the bounds of normal.

Here are just a few reality checks to keep in mind.

Stocks are experiencing below average volatility and volume

  • On average, the S&P 500 experiences around 50 days where the market moves +/- 1 percent, but so far in 2017 we have experienced only 6 such days.
  • The 30-day NYSE average daily volume is down 16 percent from the post-election peak

Concentrated Gains

  • According to Barron’s, Facebook (FB), Apple (AAPL), Amazon (AMZN), Microsoft (MSFT) and Alphabet (GOOGL) collectively account for about 56 percent of the $1.16 trillion gain in the NASDAQ 100 market cap since the start of the year and are responsible for around 40 percent of the gain in the S&P 500 year-to-date: recall that back in 2000 Microsoft, Qualcomm (QCOM), Cisco (CSCO), Intel (INTC) and Oracle (ORCL) represented about 50 percent of the NASDAQ 100.
  • Collectively the FAANG trade trades at a P/E ratio of 39x, (versus 2017 EPS), which represents a 7-point expansion in 2017 alone.
  • 32 percent of actively managed funds are overweight the tech sector
  • 71 percent of actively managed funds are overweight FANG
  • The returns for the S&P 500 equal weight index is over 3 percent below the S&P 500 market cap weighted index year-to-date

Bonds are not telling a growth story

  • US 10-year Treasury yield has fallen from 2.6 percent in March to just over 2.1 percent today.
  • US 30-year Treasury yield has dropped from a peak of over 3.2 percent in the first quarter to less than 2.8 percent for the first time since November.
  • The Treasury curve, which has been flattening for some time, accelerated this trend this week, with the 10-year to 2-year spread falling below 80 basis points for this first time since last September.

10-2 Year Treasury Yield Spread Chart

The Bottom Line

  • Tops never look like tops until after they are well behind you.
  • They typically occur when investors are most confident.
  • They always occur before we are ready.
Even amid cautious outlook we are boosting target price for Facebook

Even amid cautious outlook we are boosting target price for Facebook

In this Alert:

  • We are boosting our price target on Connected Society company Facebook (FB) to $160 from $150.
  • Even so, we are now rating the shares a Hold, and would only commit new capital if the shares move closer to $145 or below.

We are boosting our price target on Connected Society company Facebook (FB) to $160 from $150 following this week’s better than expected 1Q 2017 quarterly results and arguably cautious outlook. That boost to our price target, paired with the share’s retreat since hitting a new 52-week high on Tuesday, offers upside of roughly 6.5 percent, and as such we are changing our rating on the shares from a Buy to a Hold.

We’ve had a remarkable run in the FB shares, climbing more than 24 percent, even after the week’s lift since we added them to the Tematica Select List back in late November. For subscribers that missed our recommendation, we’d suggest nibbling closer to $145 or below or on signs the telegraphed advertising slowdown fails to emerge.

As we started to say above, earlier this week Facebook reported March quarter revenue and EPS that handily beat expectations with EPS coming at $1.04, $0.18 ahead of expectations. Revenue for the quarter rose just over 49 percent year over year, reaching slightly better than $8 billion with advertising comprising 98 percent of total quarterly revenue. Compared to year ago levels, revenue growth was had in all four geographic regions led by Rest of World up 66 percent and Asia-Pacific up 60 percent. Slower growth was had in the US & Canada, which represented 49.4 percent of quarterly revenue vs. 51 percent in the year ago quarter. The continued shift to mobile by consumers in the US and faster growth in Rest of World and Asia-Pacific, which tends to be more mobile first, led mobile advertising to reach 85 percent of Facebook’s total advertising revenue for the quarter, up from 82 percent in the year ago quarter. To us, data like this cements Facebook’s position in our Connected Society investing theme.

After reporting robust results and beating Wall Street expectations, Facebook threw some cold water on things when it shares it view calling for a meaningful slowdown in ad growth revenue, due in part to desktop ad blockers, and expense to rise 40 percent -50 percent year over year. In looking for some perspective on Facebook’s slowing ad growth claim, we scoured for some perspective and found that eMarketer sees digital advertising hitting $83 billion in the US this year (up more than 15 percent year over year) of which $58.4 billion will be derived from mobile advertising (up 25 percent year over year). This suggests to us at least that Facebook’s claim for slowing ad revenue growth is likely to be conservative, but in the here and now, Wall Street is reacting to management’s outlook.

Over time, we’ll be checking the data and if eMarketers forecast looks to ring true we’ll plan on revisiting our Facebook price target and rating. Even as we remove our Buy rating, we would argue that jus like Amazon (AMZN) and Alphabet (GOOGL), Facebook with its various digital properties that are embracing monetization strategies are shares to own, not to trade as consumers, businesses and other entities migrate deeper into our increasingly Connected Society.