WEEKLY ISSUE: Taking Positions Off the Board and Reallocating Into Existing Positions

WEEKLY ISSUE: Taking Positions Off the Board and Reallocating Into Existing Positions

Key points from this issue

  • We are exiting the shares of Paccar (PCAR), which had an essentially neutral impact on the Select List;
  • We are exiting the shares of Rockwell Automation (ROK), which were a drag of more than 11% on the Select List;
  • We are exiting the shares of GSV Capital (GSVC), which in full returned a modest decline since we added the shares back in April.
  • We are scaling into shares of Applied Materials (AMAT) at current levels and keeping our long-term price target of $70 intact.
  • We are scaling into shares of Netflix (NFLX) at current levels and keeping our long-term price target of $500 in place.


After the S&P 500 hit an all-time high yesterday, if the stock market finishes higher today it will mean the current bull market will be 3,453 days old, which will make it the longest on record by most definitions. For those market history buffs, as of last night’s market close, it tied the one that ran from October 1990 to March 2000.

Even as the S&P 500 hit an all-time high yesterday thus far in 2018 it’s up 7.1%. By comparison, we have a number of positions on the Tematica Investing Select List that are up considerably more. Among them are Amazon (AMZN), Apple (AAPL), Costco Wholesale (COST), ETFMG Prime Cyber Security ETF (HACK), Habit Restaurant (HABT), McCormick & Co. (MKC), and USA Technologies (USAT). Not that I’m prone to bragging, rather I’m offering a gentle reminder of the power to be had with thematic investing vs. the herd and sector-based investing.

Over the last few weeks, I’ve been recasting our investing themes, which in some cases has given rise to a new theme like Digital Infrastructure, combined a few prior themes into the more cohesive Digital Lifestyle and Middle-Class Squeeze ones, and expanded the scope of our Clean Living theme. In the next few weeks, I’ll finish the task at hand as well as ensure we have a stock recommendation for each of what will be our 10 investment themes.

As part of that effort, I’m re-classifying USA Technologies (USAT) shares as part of our Digital Infrastructure investing theme. The shares join Dycom Industries (DY) in this theme.


Pruning PCAR, ROK and GSVC shares

Once we pass the approaching Labor Day holiday, we will be off to the races with the usual end of the year sprint. For that reason, we’re going to take what is normally the last two relatively quiet weeks of August to do some pruning. This will go hand in hand with the ongoing investment theme reconstitution that will eliminate the stand-alone Economic Acceleration/Deceleration and Tooling & Re-tooling investment themes. As such, we’re saying goodbye to shares of Paccar (PCAR) and Rockwell Collins (ROK). We’ll also shed the shares of GSV Capital (GSVC), which are going to be largely driven by share price movements in Spotify (SPOT) and Dropbox (DBX). As the lock-up period with both of those newly public companies come and go, I’ll look to revisit both of them with an eye to our Digital Lifestyle and Digital Infrastructure investing themes.

  • We are exiting the shares of Paccar (PCAR), which had an essentially neutral impact on the Select List;
  • We are exiting the shares of Rockwell Automation (ROK), which were a drag of more than 11% on the Select List;
  • We are exiting the shares of GSV Capital (GSVC), which in full returned a modest decline since we added the shares back in April.


Scaling into Applied Materials and Netflix shares

We’ll use a portion of that returned capital to scale into shares of Applied Materials (AMAT), which approached their 52-week low late last week following the company’s quarterly earnings report that included an earnings beat but served up a softer than expected outlook.

Applied’s guidance called for sales of $3.85-$4.15 billion vs. analyst consensus outlook of $4.45 billion. On the company’s earnings conference call, CEO Gary Dickerson confirmed worries that slower smartphone growth could cause chipmakers to rein in capital spending and reduce demand for chipmaking equipment in the near- term. That’s the bad news, the good news is Applied sees double-digit growth in 2019 for each of its businesses and remains comfortable with its 2020 EPS forecast of $5.08.

From my perspective, I continue to see the several aspects of our Disruptive Innovators investing theme – augmented and virtual reality, 5G, artificial intelligence, Big Data and others – as well as growing storage and memory demands for connected devices driving semiconductor capital equipment demands. There is also the rising install base of semiconductor capital equipment inside China, and with Apple turning to China suppliers over Taiwanese ones to contain costs it likely means a rebound in China demand when the current US-China trade imbroglio ends.

As we wait for that, I suspect Applied will continue to use its stock buyback program During its recently closed quarter, Applied repurchased $1.25 billion or 25 million shares of stock and the company has about $5 billion remaining in buyback authorization. Applied’s next quarterly dividend of $0.20 per share will be paid on Sept. 13 to shareholders of record on Aug. 23.

  • We are scaling into shares of Applied Materials (AMAT) at current levels and keeping our long-term price target remains $70 intact.

Turning to Netflix (NFLX) shares, they are down some just under 20% from where I first added them to the Select List several weeks ago. My thesis on the shares remains unchanged, and I continue to see its streaming video service and original content as one of the cornerstones of our Digital Lifestyle investing theme. Adding to the shares at current levels will serve to reduce our cost basis from just under $420 to just under $380.

  • We are scaling into shares of Netflix (NFLX) at current levels and keeping our long-term price target of $500 in place.



WEEKLY ISSUE: Scaling deeper into Dycom shares

WEEKLY ISSUE: Scaling deeper into Dycom shares

Key points from this issue:

  • We are halfway through the current quarter, and we’ve got a number of holdings on the Tematica Investing Select List that are trouncing the major market indices.
  • We are using this week’s pain to improve our long-term cost basis in Dycom Industries (DY) shares as we ratchet back our price target to $100 from $125.
  • Examining our Middle-Class Squeeze investing theme and housing.
  • A Digital Lifestyle company that we plan on avoiding as Facebook attacks its key market.


As the velocity of June quarter earnings reports slows, in this issue of Tematica Investing we’re going to examine how our Middle-Class Squeeze investing theme is impacting the housing market and showcase a Digital Lifestyle theme company that I think subscribers would be smart to avoid. I’m also keeping my eyes open regarding the recent concerns surrounding Turkey and the lira. Thus far, signs of contagion appear to be limited but in the coming days, I suspect we’ll have a much better sense of the situation and exposure to be had.

With today’s issue, we are halfway through the current quarter. While the major market indices are up 2%-4% so far in the quarter, by comparison, we’ve had a number of strong thematic outperformers. These include Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), AXT Inc. (AXTI), Costco Wholesale (COST),  Habit Restaurant (HABT), Walt Disney (DIS), United Parcel Service (UPS), Universal Display (OLED) and USA Technologies (USAT).  That’s an impressive roster to be sure, but there are several positions that have lagged the market quarter to date including GSV Capital (GSVC), Nokia (NOK), Netflix (NFLX), Paccar (PCAR) and Rockwell Automation (ROK). We’ve also experienced some pain with Dycom (DY) shares, which we will get to in a moment.

Last week jettisoned shares of Farmland Partners (FPI) following the company taking it’s 3Q 2018 dividend payment and shooting it behind the woodshed. We also scaled into GSVC shares following GSV’s thesis-confirming June quarter earnings report, and I’m closely watching NFLX shares with a similar strategy in mind given the double-digit drop since adding them to the Tematica Investing Select List just over a month ago.


Scaling into Dycom share to improve our position for the longer-term

Last week we unveiled our latest investing theme here at Tematica – Digital Infrastructure. Earlier this week, Dycom Industries (DY), our first Digital Infrastructure selection slashed its outlook for the next few quarters despite a sharp rise in its backlog. Those shared revisions are as follows:

  • For its soon to be reported quarter, the company now sees EPS of $1.05-$1.08 from its previous guidance of $1.13-$1.28 vs. $1.19 analyst consensus estimate and revenues of $799.5 million from the prior $830-$860 million vs. the $843 million consensus.
  • For its full year ending this upcoming January, Dycom now sees EPS of $2.62-$3.07 from $4.26-$5.15 vs. the $4.63 consensus estimate and revenues of $3.01-$3.11 billion from $3.23-$3.43 billion and the $3.33 billion consensus.


What caught my eyes was the big disparity between the modest top line cuts and the rather sharp ones to the bottom line. Dycom attributed the revenue shortfall to slower large-scale deployments at key customers and margin pressure due to the under absorption of labor and field costs – the same issues that plagued it in its April quarter. Given some of the June quarter comments from mobile infrastructure companies like Ericsson (ERIC) and Nokia (NOK), Dycom’s comments regarding customer timing is not that surprising, even though the magnitude to its bottom line is. I chalk this up to the operating leverage that is inherent in its construction services business, and that cuts both ways – great when things are ramping, and to the downside when activity is less than expected.

We also know from Ericsson and Dycom that the North American market will be the most active when it comes to 5G deployments in the coming quarters, which helps explain why Dycom’s backlog rose to $7.9 billion exiting July up from $5.9 billion at the end of April and $5.9 billion exiting the July 2017 quarter. As that backlog across Comcast, Verizon, AT&T, Windstream and others is deployed in calendar 2019, we should see a snapback in margins and EPS compared to 2018.

With that in mind, the strategy will be to turn lemons – Monday’s 24% drop in DY’s share price – into long-term lemonade. To do this, we are adding to our DY position at current levels, which should drop our blended cost basis to roughly $80 from just under $92. Not bad, but I’ll be inclined to scale further into the position to enhance that blended cost basis in the coming weeks and months on confirmation that 5G is moving from concept to physical network. Like I said in our Digital Infrastructure overview, no 5G network means no 5G services, plain and simple. As we scale into the shares and factor in the revised near-term outlook, I’m also cutting our price target on DY shares to $100 from $125.

  • We are using this week’s pain to improve our long-term cost basis in Dycom Industries (DY) shares as we ratchet back our price target to $100 from $125.


Now, let’s get to how our Middle-Class Squeeze investing theme is hitting the housing market, and review that Digital Lifestyle company that we’re going to steer clear of because of Facebook (FB). Here we go…


If not single-family homes, where are the squeezed middle-class going?

To own a home was once considered one of the cornerstones of the American dream. If we look at the year to date move in the SPDR S&P Homebuilders ETF (XHB), which is down nearly 16% this year, one might have some concerns about the tone of the housing market. Yes, there is the specter of increasing inflation that has and likely will prompt the Federal Reserve to boost interest rates, and that will inch mortgage rates further from the near record lows enjoyed just a few years ago.

Here’s the thing:

  • Higher mortgage rates will make the cost of buying a home more expensive at a time when real wage growth is not accelerating, and consumers will be facing higher priced goods as inflation winds its way through the economic system leading to higher prices. During the current earnings season, we’ve heard from a number of companies including Cinemark Holdings (CNK), Hostess Brands (TWNK), Otter Tail (OTTR), and Diodes Inc. (DIOD) that are expected to pass on rising costs to consumers in the form of price increases.
  • Consumers debt loads have already climbed higher in recent years and as interest rates rise that will get costlier to service sapping disposable income and the ability to build a mortgage down payment



And let’s keep in mind, homes prices are already the most expensive they have been in over a decade due to a combination of tight housing supply and rising raw material costs. According to the National Association of Home Builders, higher wood costs have added almost $9,000 to the price of the average new single-family since January 2017.



Already new home sales have been significantly lower than over a decade ago, and as these forces come together it likely means the recent slowdown in new home sales that has emerged in 2018 is likely to get worse.


Yet our population continues to grow, and new households are being formed.


This prompts the question as to where are these new households living and where are they likely to in the coming quarters as homeownership costs are likely to rise further?

The answer is rental properties, including apartments, which are enjoying low vacancy rates and a positive slope in the consumer price index paid of rent paid for a primary residence.


There are several real estate investment trusts (REITs) that focus on the apartment and rental market including Preferred Apartment Communities, Inc. (APTS) and Independence Realty Trust (IRT). I’ll be looking at these and others to determine potential upside to be had in the coming quarters, which includes looking at their attractive dividend yields to ensure the underlying dividend stream is sustainable. More on this to come.


A Digital Lifestyle company that we plan on avoiding as Facebook attacks its key market

As important as it is to find well-positioned companies that are poised to ride prevailing thematic tailwinds that will drive revenue and profits as well as the share price higher, it’s also important to sidestep those that are running headlong into pronounced headwinds. These headwinds can take several forms, but one of the more common ones of late is the expanding footprint of companies like Alphabet (GOOGL), Amazon (AMZN) and Facebook (FB) among others.

We’ve seen the impact on shares of Blue Apron (APRN) fall apart over the last year following the entrance of Kroger (KR) into the meal kit business with its acquisition of Home Chef and investor concerns over Amazon entering the space following its acquisition of Whole Foods Market. That changing landscape highlighted one of the major flaws in Blue Apron’s subscription-based business model –  very high customer acquisition costs and high customer churn rates. While we warned investors to avoid APRN shares back last October when they were trading at north of $5, those who didn’t heed our advice are now enjoying APRN shares below $2.20. Ouch!

Now let’s take a look at the shares of Meet Group (MEET), which have been on a tear lately rising to $4.20 from just under $3 coming into 2018. The question to answer is this more like a Blue Apron or more like USA Technologies (USAT) or Habit Restaurant (HABT). In other words, one that is headed for destination @#$%^& or a bona fide opportunity.

According to its description, Meet offers  applications designed to meet the “universal need for human connection” and keep its users “entertained and engaged, and originate untold numbers of casual chats, friendships, dates, and marriages.” That sound you heard was the collective eye-rolling across Team Tematica. If you’re thinking this sounds similar to online and mobile dating sites like Tinder, Match, PlentyOfFish, Meetic, OkCupid, OurTime, and Pairs that are all part of Match Group (MTCH) and eHarmony, we here at Tematica are inclined to agree. And yes, dating has clearly moved into the digital age and that falls under the purview of our Digital Lifestyle investing theme.

Right off the bat, the fact that Meet’s expected EPS in 2018 and 2019 are slated to come in below the $0.39 per share Meet earned in 2017 despite consensus revenue expectations of $181 in 2019 vs. just under $124 million in 2017 is a red flag. So too is the lack of positive cash flow and fall off in cash on the balance sheet from $74.5 million exiting March 2017 to less than $21 million at the close of the June 2018 quarter. A sizable chunk of that cash was used to buy Lovoo, a popular dating app in Europe as well as develop the ability to monetize live video on several of its apps.

Then there is the decline in the company’s average total daily active users to 4.75 million in the June 2018 quarter from 4.95 million exiting 2017. Looking at average mobile daily active users as well as average monthly active user metrics we see the same downward trend over the last two quarters. Not good, not good at all.

And then there is Facebook, which at its 2018 F8 developer conference in early May, shared it was internally testing its dating product with employees. While it’s true the social media giant is contending with privacy concerns, CEO Mark Zuckerberg shared the company will continue to build new features and applications and this one was focused on building real, long-term relationships — not just for hookups…” Clearly a swipe at Match Group’s Tinder.

Given the size of Facebook’s global reach – 1.47 billion daily active users and 2.23 billion monthly active users – it has the scope and scale to be a force in digital dating even with modest user adoption. While Meet is enjoying the monetization benefits of its live video offering, Facebook has had voice and video calling as well as other chat capabilities that could spur adoption and converts from Meet’s platforms.

As I see it, Meet Group have enjoyed a nice run thus far in 2018, but as Facebook gears into the digital dating and moves from internal beta to open to the public, Meet will likely see further declines in user metrics. So, go user metrics to go advertising revenue and that means the best days for MEET shares could be in the rearview mirror. To me this makes MEET shares look more like those from Blue Apron than Habit or USA Technologies. In other words, I plan on steering clear of MEET shares and so should you.



WEEKLY ISSUE: The Potential Impact Tariffs Will Have on 2nd Half Earnings

WEEKLY ISSUE: The Potential Impact Tariffs Will Have on 2nd Half Earnings


Given the way the Fourth of July holiday falls this year, we strongly suspect the back of the week will be quieter than usual. For those reasons, we’re coming at you earlier than usual this week. And while we have your attention, Tematica will be dark next week as we recharge our batteries ahead of the 2Q 2018 earnings onslaught that kicks off on July 16.

With the housekeeping stuff out of the way, let’s get to this week’s issue…

Closing the bookS on 1Q 2018

Last Friday, we closed the books on the second quarter, and while it’s true all four major US stock market indices delivered positive returns, the last three months were far more volatile than most expected back in January. Year to date, the Dow Jones Industrial Average remains modestly in the red and the S&P 500 modestly in the green. By comparison, despite being overshadowed in the second quarter by the small-cap heavy Russell 2000, the Nasdaq Composite Index finished the first half of the year with a 9% gain.

From a Tematica Investing Select List perspective, there we a number of outperformers to be had including Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Costco Wholesale (COST), ETFMG Prime Cyber Security ETF (HACK), McCormick & Co. (MKC), USA Technologies (USAT). To paraphrase one of team Tematica’s favorite movies, Star Wards, our themes are strong with those companies. As much as we like the accolades to be had with performing positions, there are ones such as Dycom Industries (DY), Nokia (NOK), AXT Inc. (AXTI) and Applied Materials (AMAT) that had a challenging few months but they too should be seeing the benefits of thematic tailwinds in the coming months.

During the quarter, we did some fine tuning with the Select List, adding shares of GSV Capital (GSVC), Habit Restaurant (HABT) and Farmland Partners (FPI). We also shed our positions in Starbucks (SBUX), LSI Industries (LYTS), Corning (GLW) and International Flavors & Fragrances (IFF) during the second quarter. In making those moves, we’ve enhanced the Select List’s position for the back half of 2018 as the focus for investors centers on the impact of trade and tariffs on revenue and earnings. Let’s discuss…


First Harley Davidson, then BMW and General Motors

Last week we were reminded that trade wars and escalating tariffs increasingly are on the minds of investors. Something that at first was thought would be short-lived has grown into something far more pronounced and widespread, with tariffs potentially being exchanged among the U.S., China, the European Union, Mexico and Canada. As we discussed Harley-Davidson (HOG) shared that its motorcycle business will be whacked by President Trump’s decision to impose a new 25% tariff on steel imports from the EU and a 10% tariff on imported aluminum.

We soon heard from BMW (BMWG) that U.S. tariffs on imported cars could lead it to reduce investment and cut jobs in the United States due to the large number of cars it exports from its South Carolina plant. Soon thereafter, General Motors (GM) warned that if President Trump pushed ahead with another wave of tariffs, the move could backfire, leading to “less investment, fewer jobs and lower wages” for its employees. Then yesterday, citing a state-by-state analysis, the new campaign argues that Trump is risking a global trade war that will hit the wallets of U.S. consumers,  the U.S. Chamber of Commerce shared it would launch a campaign to oppose Trump’s trade tariff policies.

With up to $50 billion in additional tariffs being placed on Chinese goods after July 6, continued tariff retaliation by China and others could lead to a major reset of earnings expectations in the back half of 2018. And ahead of that potential phase-in date, Canada’s foreign minister announced plans to impose about $12.6 billion worth of retaliatory tariffs on U.S. goods beginning yesterday. Not all companies may swallow the tariffs the way Harley Davidson is choosing to, which likely means consumers and business will be paying higher prices in the coming months. That will show up in the inflation metrics, and most likely lead to the Fed being more aggressive on interest rate hikes than previously thought.

As part of our Middle-Class Squeeze investing theme, a growing number of consumers are already seeing their buying power erode, and if the gaming out of what could come it means more folks will be shopping with Amazon (AMZN) and Costco Wholesale (COST) and consumer McCormick & Co. (MKC) products.


Falling investor sentiment sets the stage for 2Q 2018 earnings

All of this, is weighing on the market mood and investor sentiment as we get ready for the 2Q 2018 earnings season. Remember that earlier this year, investors were expecting earnings to rise as the benefits of tax reform were thought to jumpstart the economy and if Harley Davidson is the canary in the coal mine, we are likely going to see those expectations reset lower. We could see management teams offer “everything and the kitchen sink” explanations should they rejigger their outlooks to factor in potential tariff implications, and their words are likely to be met with a “shoot first, ask questions later” mentality by investors.

Helping fan the flames of that investor mindset, the Citibank Economic Surprise Index (CESI) has dropped into negative territory. We’ve discussed this indicator before as has Tematica’s Chief Macro Strategist Lenore Hawkins, but as a quick reminder CESI tracks the rate that U.S. economic indicators come in better or worse than estimates over a rolling three-month period. When indicators are better than expected, the CESI is in positive territory and when indicators disappoint, it is negative.

As Lenore pointed out in last week’s Weekly Wrap:

While the CESI has just dropped into negative territory, let’s add some context and perspective — the index has had an impressive run of 188 trading days of positive readings, the longest such streak by 37 days in the 15-year history of the index. Now some of that reflects the enthusiasm surrounding tax reform and its economic prospects from the start of the year, but economic reality is now hitting those earlier expectations. Odds are the reality as seen through the trade and tariff glasses will continue to weigh on the CESI in the coming weeks, adding to investor anxiety.

I’d point out the level of anxiety hit Fear last week on the CNNMoney Fear & Greed Index, down from Neutral a month ago. But there is reason to think it will not rebound quite so quickly…


Here’s the question investors are pondering

The growing question in investors’ minds is likely to center on the potential impact in the second half of 2018 from these tariffs if they are enacted for something longer than a short period. While GDP expectations for the current quarter have climbed, the concern we have is the cost side of the equation for both companies and consumers, thanks in part to Harley-Davidson’s recent comments.

We have yet to see any meaningful change to the 2018 consensus earnings forecast for the S&P 500 this year, which currently sits around $160.85 per share, up roughly 12% year over year. But we will soon be entering second-quarter earnings season and could very well see results and comments lead to expectation changes that run the risk of weighing on the market. Given the upsizing of corporate buyback programs over the last few months due in part to tax reform, any potential pullback could be muted as companies scoop up shares and pave the way for further EPS growth as they shrink their share count. That means we’ll be increasingly focused on the internals of earnings reports as well as new order and backlog metrics.

There are roughly a handful of companies reporting this week, and next week sees a modest pick-up in reports, with roughly 25 companies issuing their latest quarterly results. It’s the week after, that sees the number of earnings reports mushroom to more than 220. We’ll enjoy the slower pace over the next two weeks as we get ready for that onslaught, but we will be paying close attention to comments on potential tariff impacts in the second half of 2018 and what that means for earnings expectations for both the market as well as companies on the Select List.



Weekly Issue: Closing Out 2 Positions While Focusing On Yet Another Pain Point

Weekly Issue: Closing Out 2 Positions While Focusing On Yet Another Pain Point

  • We are closing out our position in the Wayfair (W) June 80 calls (W180615C00080000), which closed last night at 6.30, delivering a return of more than 150% over the last week.
  • We are also closing out our position in GSV Capital (GSVC) Jun 2018 10.000 calls (GSVC180615C00010000), which have been hard hit despite the monetization of key holdings Spotify (SPOT) and Dropbox (DBX).
  • We are issuing a Buy on the Cummins Inc. June 2018 150.00 calls (CMI180615C00150000)that closed last night at 2.64 and setting a stop loss at 1.70.
  • As a reminder, Funko (FNKO), a short position on the Tematica Options+ Select List will report its quarterly results after tonight’s market close. We continue to have our buy stop order set at 10.00
  • The next date to watch for our short position in Target shares will be May 15, when the Commerce Department publishes the April Retail Sales report. We expect to see signs of the retail apocalypse continue as consumers continue to shift toward digital shopping

Closing out our trades in Wayfair and GSV Capital call for a net positive

Last week we added the June 2018 80.00 call position in Wayfair (W), a digital commerce company focused on home décor, furniture and housewares. Over the last few days, following the upbeat earnings report that was had last week, which led to several price target increases, our call position gapped up more than 150% as of last night’s close. Not bad for one week of trading, but rather than get all heady over that success let’s remember that paper profits aren’t tangible ones until the exit trade is made.

As Tematica’s Chief Macro Strategist, Lenore Hawkins, and I talked about on this week’s Cocktail Investing Podcast, near-term the investing teeter-totter appears to be slanted toward the risk side. Therefore, my recommendation is to turn that hefty paper profit in the Wayfair calls and turn it into realized gains. As we exit that position, we’re going to exit the GSV Capital June 2018 10.00 calls as well. It’s no secret these have been hard hit, and even after the company’s March quarter results that I touched on yesterday I don’t see the shares cracking the 8.00 level let alone the 10.00 in the short-term. Longer-term as GSV monetizes more of its investment portfolio, I strongly suspect its net asset value per share will continue to rise – this keeps the GSVC shares on the Tematica Investing Select List.


With trucking order numbers strong, we are adding a derivative engine call option play

In mid-February, we added shares of heavy and medium duty truck company, Paccar (PCAR) to the Tematica Investing Select List given rising order levels for its products due to both an improving economy and the current truck shortage. Since then, we’ve seen robust year over year order growth for heavy and medium duty trucks in both March and April.

Last week, heavy truck component supplier Eaton (ETN) upsized its NAFTA heavy duty truck production forecast to 295,000 this year, up from the 275,000 it had at the start of 2018. Engine company Cummins (CMI) also boosted its expectation for North American heavy truck industry production this year to 286,000 units, up 29% vs. 2017 and above its prior guidance of 266,000 units.

This week several companies talked about the current truck shortage, including Knight Swift (KNX), RPM International (RPM), and several other. Comments like the following from PotlatchDeltic Corp. (PCH) – “It appears that the transportation shortage largely linked to truck and rail issues is not going to be short-lived” suggest the current truck shortage has legs.

Moreover, data from Statista points to the average age of heavy trucks is around 14 years old, which means truck owners and lessors have aged equipment on their hands. This is another factor that could spur continued growth in truck orders over the coming months especially given the changes put in place with tax reform pertaining to depreciation.

As tempted as I am to add a call option position in Paccar, the reality is though call options are thinly traded and half modest open contract sizes. This has us looking into the food chain for a supplier that derives a hefty piece of its sales and profits from the heavy and medium duty truck industry. That brings us to Cummins, which is not only seeing robust engine demand from the trucking industry but also from the construction equipment one as well. What makes Cummins even more attractive is that despite the positive engine fundamentals, its shares are down nearly 18% in 2018 even though the company is posed to grow its earnings by almost 25% year over year this year. And when we look at the technical chart below, we see CMI shares are oversold.



One of the strategies that we love to capitalize on is pain points, and the current truck shortage is one that will hit profits. Moreover, newer trucks have far better fuel economies that ones that were built more than 10 years ago. To capitalize on this, as well as the oversold nature of CMI shares, I’m the Cummins Inc. June 2018 150.00 calls (CMI180615C00150000) that closed last night at 2.64 to the Tematica Options+ Select List. As we do this, I’ll factor in my comments above about the skewing of potential risk in the market over the coming weeks, and that has me setting a protective stop loss for this position at 1.70.






Weekly Issue: Shift in Consumer Spending Continues

Weekly Issue: Shift in Consumer Spending Continues



  • We continue to have a Sell rating in Funko (FNKO) shares, and a short position on the Tematica Options+ Select List. Our buy stop for FNKO shares remains at $10.
  • We continue to have a Sell rating on Target (TGT) shares and a short position in them on the Tematica Options+ Select List. We continue to have our buy-stop set at $85.
  • We continue to have a Buy rating on the GSV Capital (GSVC) Jun 2018 10.000 calls (GSVC180615C00010000).
  • We will continue to hold the Paccar (PCAR) May 2018 70.00 calls (PCAR180518C00070000)ahead of the company’s April 24 earnings report. We are increasing our stop loss to 2.00 from 0.60.


Before we get started with this week’s issue of Tematica Options+, I would suggest you read yesterday’s weekly issue of Tematica Investing. Why? Not because I think the words are so full of wisdom, even though they are, but rather because of the discussion surrounding the March Retail Sales Report, especially the segments that underperformed – Department stores, general merchandise stores and  Sporting Goods, hobby, book & music stores.

As I mentioned yesterday, the Sporting Goods, hobby, book & music stores category was hardest hit during 1Q 2018 as those retail sales fell 4% year over year, and we’ve yet to see the impact of the Toys R Us bankruptcy and subsequent liquidation sales. This keeps our short position on Funko (FNKO) shares in place, and next week’s earnings reports from Mattel (MAT) and Hasbro (HAS), two leading toy companies, should shed some light on the challenging 1Q 2018 toy environment and what they expect the Toys R Us impact to be. As I shared recently, I continue to see this playing out the way the Sports Authority bankruptcy and liquidation sales did on Nike (NKE) and Under Armour(UAA).

  • We continue to have a Sell rating in Funko (FNKO) shares, and a short position on the Tematica Options+ Select List. Our buy stop for FNKO shares remains at $10.


The outlook for Target gets even more challenging

That same March Retail Sales Report also showed General merchandise retail sales rose 3% year over year during 1Q 2018, lagging behind overall year over year 1Q 2018 retail sales growth of 4.3%. Department stores didn’t fare much better as their sales for the quarter fell 0.6% year over year. By comparison, Costco Wholesale (COST) delivered stellar 1Q 2018 same store comp sales, and COST shares on the Tematica Investing Select List have soared closing last night at more than $196 vs. roughly $185 a year ago. As a reminder, I boosted our target on COST shares yesterday to $210 from $200.

What the above paragraph points out is consumers continue to shift where they spend, and that even before we factor in the 9.7% year over year increase in Nonstore retail sales during 1Q 2018. Yes… that means Amazon (AMZN) and others that are embracing digital shopping. In yesterday’s annual shareholder letter, Amazon CEO Jeff Bezos shared the company has 100 million Amazon Prime members. As Amazon continues to expand its offerings, odds are that means we’ll be seeing more pain for brick & mortar retailers especially since for the 8thyear in a row Amazon was ranked #1 on the American Customer Satisfaction. In fact, this past week it was announced that Bon-Ton Stores (BONT), which operates 260 locations is expected to go out of business with liquidation sales to follow.

Put it all together, and it’s more than a little worrisome when it comes to Target (TGT) growing its sales 3% plus year over year in 1Q 2018, which is exactly what Wall Street expects it to do. Over the last several weeks, we’ve seen EPS forecasts for the quarter start to move lower and in examining those expectations we see that Wall Street expects Targets revenue growth to slow as we move through 2018. Based on what I am seeing, it looks like that slowdown is poised to appear sooner than the herd thinks it will.

  • We continue to have a Sell rating on Target (TGT) shares and a short position in them on the Tematica Options+ Select List. We continue to have our buy-stop set at $85.


The expected positives for GSV’s portfolio are starting to emerge

Let’s turn to our call position in GSV Capital, the GSV Capital (GSVC) Jun 2018 10.000 calls (GSVC180615C00010000), which we scaled into last week and have since traded lower. Very frustrating to say the least, but as expected following the IPO of Dropbox (DBX) the underwriters are issuing Buy and Overweight ratings with price targets in the range of $35-$40. This led DBX shares, one of GSV’s larger positions in its investment portfolio, to rebound off its lows last week. We’re also seeing price targets for streaming music service Spotify (SPOT), another large position in GSV’s investment portfolio emerge. Canaccord Genuity started SPOT shares with a Buy rating and a $200 price target (up 29% from last night’s close) while Stifel has a $180 target on the shares.

In the coming weeks, Dropbox and Spotify will report their quarterly results and odds are pretty high they will at least meet expectations and likely beat them. As simple as it may sound, companies tend not to become public if their business is softening. Given our June expiration for our GSV Capital calls, even though the recent disconnect between the DBX and SPOT price targets and GSV shares is maddening, let’s be patient and let this run its course.


Our Paccar calls keep on trucking

On the positive, our call option position in heavy truck company Paccar, the Paccar (PCAR) May 2018 70.00 calls (PCAR180518C00070000), finished last night up 52% from our April 5 entry. Yesterday’s March Industrial Production Report, which revealed a month over month increase in manufacturing following an upwardly revised figure for February to +1.5%, bodes very well for additional truck orders. As a reminder, heavy truck orders for 1Q 2018 were the highest they have been in over a decade. Ahead of Paccar reporting its 1Q 2018 results on April 24, let’s continue to hold the calls, but boost our stop loss to 2.00 from $0.60, which will lock in a modest profit on the position.




Betting against Facebook’s Outlook and Scaling into a call option position

Betting against Facebook’s Outlook and Scaling into a call option position





Adding a short-term short position in Facebook ahead of 1Q 2018 earnings

You probably read my comments on Facebook (FB) in yesterday’s weekly Tematica Investing issue and thought to yourself, “rising expenses paired with a likely disruption in revenue and user metrics sure sounds like a short opportunity, especially after running back up some 10% over the last two weeks.”

My answer would be “yes” but we don’t short stocks in Tematica Investing – we save that for the more aggressive service that is Tematica Options+.”

Granted FB shares were oversold soon after we removed them from the Tematica Investing Select List, but sometimes the charts do not tell the full story, especially when the fundamentals have yet to be reflected in the share price. In this case, I’m referring to how Wall Street expectations for 1Q 2018 and 2Q 2018 have not budged despite all that that has happened over the recent weeks and the telegraphed step up in spending that is coming at Facebook. Again, I covered all of this in yesterday’s issue of Investing.

Given this combination, I’m making a short-term short call on Facebook shares ahead of the company’s April 25 1Q 2018 earnings report. This means that soon after Facebook’s report – good or bad – we’ll likely exit this short position. Full well knowing that higher beta stocks can trade quickly higher as well as lower, I’m recommending a protective buy stop order at $185.

  • We are adding a short-term Sell recommendation on Facebook (FB) shares and adding a short position to the Tematica Options+ Select List with a buy stop order at $185.



Scaling into our GSV Capital calls

Over the last week, shares of cloud storage company Dropbox moved 5% higher, while shares of music streaming service Spotify (SPOT) climbed 4%. These moves higher bode very well for the net asset value of GSV’s investment portfolio, and let’s remember that GSV’s positions are priced well below current levels. I’ll admit it’s frustrating not to see GSV’s shares move up in lockstep with these two holdings, but we have to remember that GSV Capital is a far smaller company than those two and has next to no analyst coverage.

As we remain patient given the June expiration associated without GSVC calls, let’s remember that in the coming weeks the underwrites and advisors for these two going public transaction will soon be issuing equity research coverage on DBX and SPOT shares. In my view, this is looking like yet another time when the herd will catch up to our forward view, but we’ll use the sharp fall in our GSV calls – down more than 60% since we added them in mid-January – to improve our cost basis.



Sticking with our Paccar calls

In yesterday’s weekly issue of Tematica Investing, I reiterated the stellar truck orders that were recorded for 1Q 2018 that I shared here last week. Despite that huge increase in orders for both heavy and medium-duty trucks, there has been no increase in earnings expectations for Paccar (PCAR) for either the June quarter or for all of 2018. In my book, given the magnitude of the year over year order increase for the industry, Wall Street expectations will need to move higher to match the demand pattern of the last several months.

The next point of confirmation will be had in next week’s March Industrial Production report, which is a leading indicator of truck demand.



Next up for Target (TGT) and Funko (FNKO), the March Retail Sales Report

Over the last few weeks, we added a short position in the shares of retailer Target and pop-culture and toy company Funko (FNKO) reflecting my concerns over the financial health of consumers as well as the pending fallout from the Toys”R”Us Bankruptcy. Recently, Telsey Advisory noted the closing of more than 800 US Toys”R”Us stores is underway, with discounts up to 30% off. Per Telsey, this inventory clearance and closeout activity should pressure toy and baby product sales across retail for the next few months

Since those additions to the Select List, both shares have vacillated back and forth as we wait for a true catalyst to emerge. One of them will be had this coming Monday in the form of March Retail Sales.

I’ll be watching the general merchandise and the sporting goods, hobby, book & music stores line items in this March report. Department sales over the last three months through February have been running behind the prior three months, which is no surprise given the seasonal downtick in spending.  Sporting goods, hobby, book & music stores sales, on the other hand, were down 4.8% year over year for the three months ending this past February.

  • Ahead of next week’s March Retail Sales report, we continue to have a Sell rating and short position in the shares of both Target (TGT) and Funko (FNKO).




Booking a win on Mattel puts, adding a truck call option play

Booking a win on Mattel puts, adding a truck call option play


Key Points from this Alert:


If there was any question over the volatility that has returned in the stock market, all we have to do is look at yesterday’s trading. The market opened with Dow falling several hundred points on the news of China second set of tariffs, but closed the day up essentially 1% as it became clear that it will be some time before the announced tariffs by China and the U.S. are enacted. Odds are this means we are entering a period of negotiation between these two countries that will result in further sparks before coming to a final resolution.



As we can observe from the above chart, over the last few months, we’ve seen far greater swings in the market than all of 2017. As I’ve shared in recent weeks, this can make for a challenging environment for options trading, and we’ve had our share of hits and misses so far this year. In yesterday’s Tematica Investing, I shared that we will remain loyal with our thematic investing strategy because over time the tailwinds will resurface and that means utilizing a longer time frame with our options as well as employing short positions for companies hitting pronounced tailwinds and other pain points.

Even as we contemplate those time horizons, we have just a few weeks until our Mattel (MAT) April 2018 13.00 put (MAT180420P00013000) expire. As of last night, the puts closed up 54.5% from our initial buy in just a few short weeks ago, and while it is tempting to stay the course, given the market swings, I’m making the call to book these gains now. Therefore, we will sell these MAT puts and close the position.


Even as we book that win, we have yet to see the full impact of the Toys R Us fallout. According to data published by the NPD Group, Toy R Us accounted for 12% of that industry and that liquidation is poised to weigh on toy suppliers. At the same time, per the January and February data for Personal Consumption consumers have been dialing their spending back compared to 4Q 217 levels, preferring instead to save. These data points have us keeping our short positions intact for both Funko (FNKO) as well as Target (TGT).


Sticking with our GSV Calls

In yesterday’s Tematica Investing weekly issue, I added GSV Capital (GSVC) shares to the Tematica Investing Select List with an $11 price target. The catalyst for that Asset Lite addition was the successful offerings in the last few weeks by Dropbox (DBX) and now Spotify (SPOT) that should drive GSV’s net asset value (NAV) per share higher. Those comments also hold for our GSV Capital (GSVC) Jun 2018 10.000 calls (GSVC180615C00010000).



Adding Paccar calls on record first quarter truck orders

Also on the Tematica Investing Select List, we have shares of heavy and medium duty truck company Paccar (PCAR). Despite the slump in the shares over the last few weeks, we’ve continued to hear of the truck shortages that led us to add the shares to the Select List. We’ve also seen strong year over year improvement in heavy truck orders. Late yesterday, it was reported by FTR Transportation Intelligence that 1Q 2018 orders for heavy-duty trucks came in at 133,900 – a 98% gain year over year and the highest level since 2006.

This data sets the stage for a very strong 1Q 2018 earnings report from Paccar, and with that in mind, we are adding the Paccar (PCAR) May 2018 70.00 calls (PCAR180518C00070000) that closed last night at 1.36. Given the current market volatility, which could persist into the upcoming earnings season we’ll set an initial stop loss at 0.60 and look to raise it in the coming weeks as the calls move higher. We should be buyers of these calls up to the 2.00 level.


Positioning for more Toys R Us fallout to be had


While the market’s eyes were waiting for the Fed’s March monetary policy meeting, which concluded yesterday afternoon, it’s been a busy week for the holdings on the Tematica Options+ Select List. Lenore Hawkins and I tackled the key points to be had from the Fed meeting fallout here, so let’s cut to the quick and move on to the week’s happenings and add a new short position to the Tematica Options+ Select List.


Dropbox boosts IPO share price

One of the reasons we added call option position in GSV Capital (GSV) was the company’s investment in cloud storage company Dropbox, which is set to price its IPO later this week. As we get closer to that event, it’s being reported that reception for the offering is strong and that has led the company to boost its offering price by $2 to the $18-$20 range from the prior $16 to $18. This is a positive for GSV’s investment portfolio as it increases its holdings in Dropbox by more than 11%, and that paves the way for a step up in GSV’s net asset value per share. In short, that’s a positive for our GSV calls, which closed last night up 25% from our initial buy-in price of 0.56 in mid-January.

Soon after Dropbox prices its IPO, we’ll get more details on the Spotify offering ahead of its first trade as a public company in early April. Given the shift toward digital streaming services like Spotify that are part of the intersection of our Connected Society and Content is King investing themes, and Spotify’s pure-play status on streaming music we suspect a favorable reception that should also help elevate GSV’s net asset value per share.


Sticking with Mattel puts

Last week we talked about the fallout to be had with the bankruptcy and eventual liquidation of Toy R Us on its competitors as well as key suppliers such as Mattel (MAT). That led us to add a put position on Mattel shares and so our short thesis on that toy company is panning out rather well as our Mattel (MAT) April 2018 13.00 put (MAT180420P00013000)position has risen more than 35%, closing last night at 0.75.

Given the move, let’s look to minimize any downside to be had by boosting our stop loss to 0.55, which is in line with our entry point for the puts, from 0.30. As we do this, there will likely be some question as to whether our bearish conviction has abated but with Toys ‘R’ Us asking the U.S. Bankruptcy Court for approval to stop paying all of its suppliers while it tries to line up buyers for its international business ahead of a planned liquidation of its U.S. operations my answer is a firm “no.”


Funko shares – We’re not falling in love with this collectibles company

One other company that could come under pressure is pop culture consumer products company Funko (FNKO). For those unfamiliar with the company, Funko designs, sources and distributes licensed pop culture products across multiple categories, including vinyl figures, action toys, plush, apparel, housewares and accessories for consumers who seek tangible ways to connect with their favorite pop culture brands and characters.

FNKO shares became public in November 2017 at $12 per share and quickly fell to the trading range between $6-$10. As one might expect the company simply knocked the cover off the earnings ball for its debut quarter as a newly public company as well as the follow up one. From our perspective, reading the tea leaves of pop culture can be a challenge given the arguably fickle nature of consumers. As we pointed out last week, toy sales associated with Disney’s (DIS) most recent Star Wars film fell short of expectations. This could make for a volatile business quarter to quarter for Funko, especially if its content partners have a dry content spell. Case in point, last year Disney had a dry spell with its film business between June and November of last year.

Digging into the company’s business we find its licensing relationships include a number of well-established content providers, such as Disney, HBO, LucasFilm, Blizzard Entertainment (ATVI), Marvel, the National Football League and Warner Brothers (TWX). On a positive note, no one licensee accounted for more than 10% of Funko’s revenue last year.

In terms of its revenue, Funko’s products break down into two categories – Figures (81% of 4Q 2017 sales), which includes ones that celebrate pop culture icons in the form of stylized vinyl, bobble heads, blind-packed miniatures and action figures, and Other (19% of 4Q 2017 sales) that is primarily plush products. These products are sold across a variety of retail customers that include Amazon (AMZN), Barnes & Noble (BKS), Entertainment Earth, GameStop (GME), Hot Topic, Target (TGT) and Walmart (WMT) in the United States, and Smyths Toys and Tesco internationally. As noted in the company’s recently filed 10-K, Hot Topic was roughly 9% of sales in 2017 followed by GameStop and Underground Toys at 8% each. Keeping in mind our Connected Society investment theme and the shift to digital commerce, having these three as key customers is not exactly a positive.

And this brings us full circle to the Toys R Us liquidation. While Funko’s list of top customers in its 10-K didn’t mention Toys R Us, the reality is ToysRUs.comlists over 600 different Funko products, 90 of which are exclusive to Toys R Us. This means that while Toys R Us may not have been one of Funko’s larger customers, it was still a customer and that is bound to have an impact on Funko’s business in near-term. Given the timing, it looks to fall in the seasonally weakest part of the year for Funko – the first half of the calendar year. Moreover, we have yet to see any of the 8 analysts covering FNKO shares adjust their 2018 EPS forecasts in the last 30 days to account for the Toys R Us factor.

Toys ‘R’ Us Inc on Thursday asked the U.S. Bankruptcy Court for approval to stop paying all of its suppliers while it tries to line up buyers for its international business ahead of a planned liquidation of its U.S. operations.

Aside from the Toys R Us related fall out, given the continued increased in consumer credit card debt, which has now eclipsed $1 trillion, is likely to weigh on discretionary purchases, particularly in rising rate environment that thus far has been characterized by tepid wage growth. If consumers look to cut back spending, we could see the dollars allocated to collectibles come under some pressure.

For those avid collectible fans, we are also seeing the collectibles market get in tune with our Connected Society investing theme as it leverages Blockchain, one aspect of our Disruptive Technologies investing theme. Last night it was reported that rise of virtual collectible company CryptoKitties is on the receiving end of a $12 million funding round led by Andreessen Horowitz and Union Square Ventures. Currently, CrytoKitties offers virtual collectible kitten game built on top of the Ethereum Blockchain and its widely expected the company will use proceeds from this investment round to expand into other collectibles. While this may sound somewhat far-fetched, let’s not forget the shift we have seen in the kinds of toys being played with by children of all ages these days compared to just a few years ago.

As if those concerns weren’t enough, FNKO shares are also staring down the pending IPO lock up expiration that lands on May 1, 2018.

From an options perspective, the puts associated with FNKO shares are very thin in terms of trading volume and this means to capitalize on the expected challenges to be had at the company we’ll enact a short position in FNKO shares. Understanding that even though we can be right on the thesis, but a market rally can move the shorted shares in the wrong direction, we’ll set a buy-stop order at $10.00.

  • We are issuing a Sell rating and instilling a short position in Funko (FNKO) shares and setting a protective buy-stop order at $10.00.


Keeping our Target short position in play

Given the Toys R Us fallout, ongoing challenges being faced by brick and mortar retail, and concerns over consumers ability to spend as described above, I’m keeping the Target (TGT) short position in play on the Tematica Options+ Select List.


Weekly Issue / Trade Alert: A New Put Play as Kids Stop Playing with Toys

Weekly Issue / Trade Alert: A New Put Play as Kids Stop Playing with Toys

Key Points from this Alert:

  • We are adding the Mattel (MAT) April 2018 13.00 put (MAT180420P00013000) that closed last night at 0.50 to the Tematica Options+ Select List. We are setting a buy stop order at 0.30 to limit potential downside associated with this trade.
  • Given spillover concerns for Toys R Us and the findings in the February Retail Sales Report, we are keeping our short trade in Target (TGT) shares intact.
  • We are also adjusting our buy stop order to $75 from $80.
  • We continue to have a Buy rating on GSV Capital (GSVC) Jun 2018 10.000 calls (GSVC180615C00010000) that closed last night at 0.65.
  • We continue to have a Buy rating on microcap Cashless Consumption company MoneyOnMobile (MOMT).


As I alluded to in yesterday’s weekly issue of Tematica Investing, volatility remains with us, stoked by investor concerns over a potential trade war with China. My perspective remains unchanged as I see this as more saber rattling on the part of President Trump to negotiate new trade deals.

Over the coming days, as attention is refocused on the Fed’s next monetary policy meeting that concludes next Wednesday, I expect the investment community will be parsing even more closely comments to be had from new Fed Chair Jerome Powell on the economy, interest rates, and how the Fed has updated its view on tax reform benefits and a potential trade war. While we may see a calm day or two between now and next Wednesday, odds are we are far more likely to see the recent market choppiness continue. This can make for a challenging market for stocks in the short-term, and even more so for options, particularly call options.


Adding a put play on Mattel

Today, we are adding a put option on the shares of beleaguered Mattel (MAT). As I pointed out in yesterday’s Tematica Investing, Mattel shares are staring down the bankruptcy of a key customer – Toys R Us – and the likely liquidation will cause problems for other key customers, such as Walmart (WMT) and Target (TGT). We’ve seen this before with Nike (NKE) and Under Armour (UAA) when Sports Authority went out of business.

The second challenge Mattel is facing comes from our Connected Society and Content is King investment themes in the form of digital entertainment and gaming that are replacing traditional action figures, dolls, board games and related items. It seems this is not lost on Wall Street as MAT shares have been racking up downgrades following Toy Fair 2018, one of the preeminent events in the toy industry. In my view, the comments from the analyst at D.A. Davidson summed up what many saw from Mattel at the event – “We came away from MAT’s analyst meeting and Toy Fair booth with no incremental positive data points.”

With Toy Fair 2018, a key event for the toy industry, behind us by several weeks, we are in a no man’s land for toy sales at least until Disney’s next Avenger’s movie hits theaters in late April. That leaves few positive surprises to offset the potential negative to be had by Toys R Us going belly up. Given prospects for greater harm in the near-term, I’m adding the Mattel (MAT) April 2018 13.00 put (MAT180420P00013000) that closed last night at 0.50 to the Tematica Options+ Select List.

For those wondering why Mattel vs. Hasbro (HAS), Hasbro has the licenses for Star Wars and several other high profile properties as well as a dividend stream that should help support the shares. By comparison, Mattel has arguably dated franchises (sorry to say that to all you Barbie fans out there) and no dividend.

As I put this put option into play, I’m setting a buy stop order at 0.25, which will contain any potential losses should the rumor mill begin chatter of a bid to save Toys R Us.


Remaining bearish on Target shares

Given my comments on the spillover to be had from Toys R Us as well as the findings in the February Retail Sales Report that showed sales at general merchandise stores like Target falling month over month. The same report also showed continued year over year declines at sporting goods stores during February. In keeping with our bearish thesis on Target shares, as well as our bullish one on Amazon (AMZN), nonstore retail sales rose more than 10% year over year in February and also by more than 10% year over year for the Dec. 2017-Feb. 2018 period – both were more than double comparative results for retail and even more so vs. general merchandise stores for the same periods. In my view, this confirms that consumers continue to migrate toward digital shopping rather than wander the aisles at Target stores and others.

In short, I see more pain ahead for TGT shares, which have already fallen more than 5% since put the position into play a few weeks ago. This is leading me to move our buy stop order for this short position to $75 from $80, just above our $74.66 entry point for this short trade.

  • Given spillover concerns for Toys R Us and the findings in the February Retail Sales Report, we are keeping our short trade in Target (TGT) shares intact.
  • We are also adjusting our buy stop order for this short trade to $75 from $80.


GSV Capital reports its December quarter – what does it mean?

On Tuesday night GSV Capital, an Asset-Lite investment theme company that invests in private technology companies reported its December quarter results with EPS smashing through expectations even though its revenue slightly missed expectations. Candidly, the December quarter saw a lot of fine tuning in the investment portfolio, but also the adoption of a lower management fee structure by the company as well as efforts to streamline its investment portfolio and investment focus. In my opinion, this is a positive step that should lead to better returns and greater earnings to GSV’s bottom line.

The key driver to our thesis on the shares is the monetization of its Dropbox and Spotify shares as well as the potential for its largest holding in big data company Palantir to go public in the coming quarters. While GSV didn’t spill the beans, it reminded us that Spotify will hold its Investor Day today ahead of going public in late March or early April. Also this week Dropbox announced a price range for its pending IPO of $16-$18.

All in all, the timetable for these IPOs rest well within the June expiration for our GSV Capital (GSVC) Jun 2018 10.000 calls (GSVC180615C00010000).While the underlying shares are trading off in response to the quarterly report, I expect the focus to return to the windshield instead of the rearview mirror following Spotify’s analyst meeting and as these two transactions move closer to reality. If one is successful, we should see a nice move up in the net asset value (NAV) for GSV’s investment portfolio, which stood at $9.64 exiting December. If both IPOs are successful, then we are likely to see a more pronounced move in GSV’s NAV, which should boost the underlying share price for our GSV calls.



Later this week the Utilities Select Sector SPDR ETF (XLU) March 16, 2018 54.00 calls (XLU180316C000540000) will expire. Unless you have several thousand of these calls, odds are it will cost you more to trade out of them than simply letting them expire. My advice is to do the latter. Win some, lose some as they say and this winter season despite the record cold, our trades on XLU shares did not pan out for us this year.

With MoneyOnMobile (MOMT) shares, it has been a quiet week following the LD Micro Virtual Conference. That said, there was a good article on the company and the opportunity to be had in India that ran on PaymentsSource, which you can find here.Of particular note, CEO Harold Montgomery reiterated the timetable for MoneyOnMobile to move into profitability later this year. The larger opportunity as well as the transition into the black, keep my Buy rating intact on this microcap Cashless Consumption play.



Weekly Issue: Waiting on Trump to make an official move on the tariffs


Key Points from This Alert:

  • We continue to have a Sell rating and a short position on Target (TGT) shares. We’re adjusting our protective buy stop order to $78 from $80
  • We continue to have a Buy rating on MoneyOnMobile (MOMT) shares.
  • We continue to have a Buy on GSV Capital (GSVC) Jun 2018 10.000 calls (GSVC180615C00010000)that closed last night at 0.35.
  • On the housekeeping front, the market’s gyration stopped out the Cummins CMI March 2018 170 calls (CMI180316C00170000).


As you’ve no doubt noticed, the stock market has shifted gears from being focused on Fed Chair Jerome Powell’s testimony before Congress and what it would mean for the Fed and interest rates last week, to this week and President Trump’s proposed tariffs on steel and aluminum. Earlier this week I shared my views on these tariffs, including why I think what we’ve seen is simply part of Trump’s negotiation tactics, but I also gamed out what it could all mean if Trump moves forward.  For our institutional clients, we put together a detailed report combining all of our commentary, which if you would like to take a look you can download that report by clicking here.

All in all, over the last week, we’ve had some twists (like Gary Cohn’s resignations) and turns (like Commerce Secretary Wilbur Ross coming out to calm market fears) that have reminded us what volatility feels like.  It’s kind of like returning to the open seas after cruising in the calm waters of a bay for so long — takes a little while to get used to, but eventually, investors will get their sea legs back.

With all the tariff talk, the underlying shares of engine manufacturer Cummins Inc. (CMI) came under pressure, and that led to our CMI March 2018 170 calls (CMI180316C00170000) getting stopped out even though February heavy truck orders were up gangbusters.

With the expectation that Trump could authorize his proposed tariffs as soon as late this week – key word being “could” —  the reality is we very well could see the market move quickly higher or sharply lower in response depending on the outcome. How’s that for analysis?

I wish I could offer some clearer insight, but the reality, however, is that no one ones exactly what will happen and exactly how the market will respond. Frankly, it all comes down to what the market thinks it hears, rather than reality these days. Ahead of Trump making an official move on the tariffs, it’s simply prudent investing in my view to hold off in terms of adding a new position. No need to get whipsawed out of the gate.


Adjusting our buy stop level on Target shares

Earlier this week, Target (TGT) reported its fourth-quarter results.  Those results came in mixed, as the company missed EPS by $0.01 but served up solid revenue and same-store sales. As expected, however, the company reminded investors that it is increasing its minimum wage to $12 per hour this year (on its way to $15 by 2020) and tripling its remodeling budget as it updates more than 300 stores in the U.S.

I hear those expanse numbers from Target and think “wow, that is going to lead to a big time jump in costs” at a time when consumer debt levels and the lack of real wage growth have led charge-off rates at smaller banks to hit 7.2% in 4Q 2017, up from 4.5% in the year ago quarter. Tematica’s Chief Macro Strategist and I talked about this toward the end of this week’s podcast (around the 46-minute mark), which you can listen to here, but the down and dirty is the outlook for the consumer, especially those consumers that fall under our Cash-Strapped Consumer investment theme, remains rather dire.

Amid this backdrop that is only adding to retailer woes, I continue to favor on the Tematica Select List both Amazon (AMZN) and Costco Wholesale (COST), with the latter of the two having reported solid quarterly results last night, as Cash-Strapped Consumers look to stretch what disposable spending dollars they do have. For Options+ readers, I continue to see Target’s business and its shares as challenged. Therefore, we will continue to keep our short position on TGT shares intact but given the recent move lower in their price we will amend our protective buy top order placing it at $78, down from $80.

  • We continue to have a Sell rating and a short position on Target (TGT) shares. We’re adjusting our protective buy stop order to $78 from $80


Remaining Patient with MoneyOnMobile Shares

Amid all the trade and tariff talk this week, MoneyOnMobile CEO Harold Montgomery gave an upbeat presentation about the company’s prospects at the LD Micro Conference. Part of the presentation talked about the underbanked population in India and MoneyOnMobile’s ability to capitalize on that pain point. Another part of Montgomery’s presentation touched on the company’s new partnership with Maharashtra State Road Transport Corporation (MSRTC). That partnership allows MoneyOnMobile’s participating retailers to book bus tickets to the approximately 7 million passengers that ride the MSRTC buses in India per day. I see this as the company expanding how it monetizes its platform, and we’ve seen that strategy pave the way for revenue and earnings growth at other companies.

  • We continue to have a Buy rating on MoneyOnMobile (MOMT) shares.


Checking in on GSV Capital Calls as GSVC Shares Soar

Over the last few weeks, shares of GSV Capital (GSVC) have soared some 25% as IPO documents for both Spotify and Dropbox have been filed with the SEC. Also, too, the GSV’s largest investment in big data company Palantir hinted that it too was preparing itself for a monetization event. Historically, when holdings in GSV’s portfolio go public, it drives the company’s overall net asset value higher especially when those names are set to have high-profile IPOs such as Spotify and Dropbox.

That’s the good news.

The not so good news is our GSVC Jun 2018 10.000 calls (GSVC180615C00010000) have been little changed, even though the underlying shares have soared. I attribute the bulk of that to the June strike date, which is several months away. Let’s remember that I chose that June date in order to capture the IPOs for both Spotify and Dropbox. My advice is let’s be patient with this call option.