Weekly Issue: Amid Impeachment Noise, Adding V Shares to Select List

Weekly Issue: Amid Impeachment Noise, Adding V Shares to Select List

Key points inside this issue

  • We are adding shares of Visa (V) to the Tematica Select List with a $200 price target as part of our Digital Lifestyle investing theme. 
  • We are adding to Living the Life Thematic Leader Farfetch Ltd. (FTCH) at current levels; our price target remains $16
  • We remain bullish on shares of Thematic King Amazon (AMZN) heading into the holiday season, and subscribers that are underweight AMZN should be buyers at current levels. Our price target remains $2,250.

Visa: Where we want to be for more than just the holidays

We are using the recent pullback in Visa (V) shares to add them to the Tematica Select List as part of our Digital Lifestyle investing theme given the accelerating shift to digital commerce as well as the movement away from cash and check usage.

While most tend to think of online and mobile shopping when it comes to digital commerce, we also are seeing increases in online grocery, ridesharing and ride services, digital forms of payment for metros and subways, and other changes in spending that require a debit or credit card. And while this may come as a surprise to some, roughly $17 trillion of payments were conducted in cash and by check in 2018.

To me, that means there is ample room for growth ahead and transaction share gains ahead to be had. Unlike American Express (AXP), Visa also stands to be an indirect beneficiary from consumers looking to stretch their spending dollars by shifting their payments to credit from debit or charge cards that must be paid in full. In other words, our Middle Class Squeeze investing theme. Also unlike banks such as Bank of America (BAC)Wells Fargo (WFC) and other credit card issuers, Visa is paid for each transaction and is far less susceptible by rising credit card delinquencies. Moreover, if consumers shift to debit cards, those transactions still have to be processed over a payment network.

Visa’s global scale and reach are made possible by a network of more than 15,900 financial institution clients that issue Visa-branded products. During fiscal 2018, Visa’s total payments and cash volume grew to $11.2 trillion and more than 3.3 billion cards were available worldwide to be used at nearly 54 million business and merchant locations that span over 160 currencies. For that entire fiscal year, Visa processed 124.3 billion transactions, and through the first half of 2019 those transaction volumes are up more than 11% as its install base of cards has continued to grow. As that install base grows and more physical card swipes, chip insertions and online or mobile ordering take place, Visa’s processing volumes grow.

With operating margins of more than 60%, Visa’s incremental margins on each transaction are significant. This has allowed the company to drive robust earnings growth and cash flow, all while continuing to invest in its payment network and layer on security in today’s increasingly cyber-conscious world. That cash flow has also allowed Visa to increase its quarterly dividend to the current $0.25 per share, up from $0.14 per share in late 2015, as well as fund its share repurchase program. Visa has been an active repurchase of its shares, scooping up almost 44 million shares valued at $6.5 billion. That compares to $8.7 billion in cash generated from operations over the same period. Exiting the June 2019 quarter Visa still had $6.2 billion under its current buyback authorization and $8.8 billion in cash and equivalents on its balance sheet.

And let’s not forget about holiday shopping…

While there is an ongoing shift toward non-cash, non-check transactions, there is also the seasonal nature of shopping and consumer spending that tends to rise during the year-end holidays. More transaction volume means more revenue, profits and cash flow for Visa during this time period. To that, we can add the steady year-over-year climb in online and mobile shopping as it has continued to take wallet share during the holiday shopping season. And yes, it is expected to happen once again this year. According to a new online survey from The Harris Poll and ad exchange network OpenX, shoppers are not only expected to spend more year over year but spend more digitally. Per the survey’s findings consumer expect to increase their holiday shopping by 5% more this year with 53% of their holiday shopping to be done digitally. 

These transactional shifts in how consumers around the globe are spending have enabled Visa to grow its earnings on a steady basis. Even during the financial crisis, Visa continued to grow its revenues, which in our view is evidence of the power behind those structural shifts. Over the last several years, Visa has been growing its annual EPS at a double-digit clip, with prospects for that rate to continue this year and next. By applying a price-to-earnings-to-growth (PEG) multiple of 2.0 to expected EPS growth of 16% in the coming year, where the consensus EPS forecast is $6.27 for 2020, we derive our $200 price target. That offers roughly X% upside from current levels. My recommendation would be to add to the shares at better prices, but even so, we’ll get started on this as the consumer get ready to begin shopping for not only the approaching year-end holiday season but also Halloween and Thanksgiving as well. 

  • We are adding shares of Visa (V) to the Tematica Select List with a $200 price target as part of our Digital Lifestyle investing theme. 

Adding to Living the Life Thematic Leader Farfetch Ltd. shares

Since we added shares of Farfetch Ltd. (FTCH) to the Thematic Leader board for out Living the Life investment theme, the shares have come under pressure and have entered oversold territory.

This likely has to do with the financing for Farfetch’s New Guard acquisition that will tally $675 million and be equally between cash and stock. We’ll take it as an opportunity to improve our cost basis as we get ready to move into the year-end shopping season, which as noted above will rise nicely year over year and favor digital platforms like Thematic King Amazon (AMZN) and Farfetch. 

  • We are adding to Living the Life Thematic Leader Farfetch Ltd. (FTCH) at current levels; our price target remains $16
  • We remain bullish on shares of Thematic King Amazon (AMZN) heading into the holiday season, and subscribers that are underweight AMZN should be buyers at current levels. Our price target remains $2,250.

 

Weekly Issue: Looking Around the Bend of the Current Rebound Rally

Weekly Issue: Looking Around the Bend of the Current Rebound Rally

 

Stock futures are surging this morning in a move that has all the major domestic stock market indices pointing up between 1.5% for the S&P 500 to 2.2% for the Nasdaq Composite Index. This surge follows the G20 Summit meeting of President Trump and Chinese President Xi Jinping news that the US and China will hold off on additional tariffs on each other’s goods at the start of 2019 with trade talks to continue. What this means is for a period of time as the two countries look to hammer out a trade deal during the March quarter, the US will leave existing tariffs of 10% on more than $200 million worth of Chinese products in place rather than increase them to 25%.  If after 90 days the two countries are unable to reach an agreement, the tariff rate will be raised to 25% percent.

In my view, what we are seeing this morning is in our view similar to what we saw last week when Fed Chair Powell served up some dovish comments regarding the speed of interest rate hikes over the coming year – a sigh of relief in the stock market as expected drags on the economy may not be the headwinds previously expected. On the trade front, it’s that tariffs won’t escalate at the end of 2018 and at least for now it means one less negative revision to 2019 EPS expectations. In recent weeks, we’ve started to see the market price in the slowing economy and potential tariff hikes as 2019 EPS expectations for the S&P 500 slipped over the last two months from 10%+ EPS growth in 2019 to “just” 8.7% year over year. That’s down considerably from the now expected EPS growth of 21.6% this year vs. 2017, but we have to remember the benefit of tax reform will fade as it anniversaries. I expect this to ignite a question of what the appropriate market multiple should be for the 2019 rate of EPS growth as investors look past trade and the Fed in the coming weeks. More on that as it develops.

For now, I’ll take the positive performance these two events will have on the Thematic Leaders and the Select List; however, it should not be lost on us that issues remain. These include the slowing global economy that is allowing the Fed more breathing room in the pace of interest rate hikes as well as pending Brexit issues and the ongoing Italy-EU drama. New findings from Lending Tree (TREE) point to consumer debt hitting $4 trillion by the end of 2018, $1 trillion higher than less five years ago and at interest rates that are higher than five years ago. Talk about a confirming data point for our Middle-class Squeeze investing theme. And while oil prices have collapsed, offering a respite at the gas pump, we are seeing more signs of wage inflation that along with other input and freight costs will put a crimp in margins in the coming quarters. In other words, headwinds to the economy and corporate earnings persist.

On the US-China trade front, the new timeline equates to three months to negotiate a number of issues that have proved difficult in the past. These include forced technology transfer by U.S. companies doing business in China; intellectual-property protection that the U.S. wants China to strengthen; nontariff barriers that impede U.S. access to Chinese markets; and cyberespionage.

So, while the market gaps up today in its second sigh of relief in as many weeks, I’ll continue to be prudent with the portfolio and deploying capital in the near-term.  At the end of the day, what we need to see on the trade front is results – that better deal President Trump keeps talking about – rather than promises and platitudes. Until then, the existing tariffs will remain, and we run the risk of their eventual escalation if promises and platitudes do not progress into results.

 

The Stock Market Last Week

Last week we closed the books on November, and as we did that the stock market received a life preserver from Federal Reserve Chair Powell, which rescued them from turning in a largely across-the-board negative performance for the month. Powell’s comments eased the market’s concern over the pace of rate hikes in 2019 and the subsequent Fed November FOMC meeting minutes served to reaffirm that. As we shared Thursday, we see recent economic data, which has painted a picture of a slowing domestic as well as global economy, giving the Fed ample room to slow its pace of rate hikes. 

While expectations still call for a rate increase later this month, for 2019 the consensus is now looking for one to two hikes compared to the prior expectation of up to four. As we watch the velocity of the economy, we’ll also continue to watch the inflation front carefully given recent declines in the PCE Price Index on a year-over-year basis vs. wage growth and other areas that are ripe for inflation.

Despite Powell’s late-month “rescue,” quarter to date, the stock market is still well in the red no matter which major market index one chooses to look at. And as much as we like the action of the past week, the decline this quarter has erased much of the 2018 year-to-date gains. 

 

Holiday Shopping 2018 embraces the Digital Lifestyle

Also last week, we had the conclusion of the official kickoff to the 2018 holiday shopping season that spanned Thanksgiving to Cyber Monday, and in some cases “extended Tuesday.” The short version is consumers did open their wallets over those several days, but as expected, there was a pronounced shift to online and mobile shopping this year, while bricks-and-mortar traffic continued to suffer. 

According to ShopperTrak, shopper visits were down 1% for the two-day period compared to last year, with a 1.7% decline in traffic on Black Friday and versus 2017. Another firm, RetailNext, found traffic to U.S. stores fell between 5% and 9% during Thanksgiving and Black Friday compared with the same days last year. For the Thanksgiving to Sunday 2018 period, RetailNext’s traffic tally fell 6.6% year over year. 

Where were shoppers? Sitting at home or elsewhere as they shopped on their computers, tablets and increasingly their mobile devices. According to the National Retail Federation, 41.4 million people shopped only online from Thanksgiving Day to Cyber Monday. That’s 6.4 million more than the 34.7 million who shopped exclusively in stores. Thanksgiving 2018 was also the first day in 2018 to see $1 billion in sales from smartphones, according to Adobe, with shoppers spending 8% more online on Thursday compared with a year ago. Per Adobe, Black Friday online sales hit $6.22 billion, an increase of 23.7% from 2017, of which roughly 33% were made on smartphones, up from 29% in 2017.

The most popular day to shop online was Cyber Monday, cited by 67.4 million shoppers, followed by Black Friday with 65.2 million shoppers. On Cyber Monday alone, mobile transactions surged more than 55%, helping make the day the single largest online shopping day of all time in the United States at $7.9 billion, up 19% year over year. It also smashed the smartphone shopping record set on Thanksgiving as sales coming from smartphones hit $2 billion.

As Lenore Hawkins, Tematica’s Chief Macro Strategist, and I discussed on last week’s Cocktail Investing podcast, the holiday shopping happenings were very confirming for our Digital Lifestyle investing theme. It was also served to deliver positive data points for several positions on the Select List and the Thematic Leader that is Amazon (AMZN). These include United Parcel Service (UPS), which I have long viewed as a “second derivative” play on the shift to digital shopping, but also Costco Wholesale (COST) and Alphabet/Google (GOOGL). Let’s remember that while we love McCormick & Co. (MKC) for “season’s eatings” the same can be said for Costco given its food offering, both fresh and packaged, as well as its beer and wine selection. For Google, as more consumers shop online it means utilizing its search features that also drive its core advertising business.

As we inch toward the Christmas holiday, I expect more data points to emerge as well as more deals from brick & mortar retailers in a bid to capture what consumer spending they can. The risk I see for those is profitless sales given rising labor and freight costs but also the investments in digital commerce they have made to fend off Amazon. Sales are great, but it has to translate into profits, which are the mother’s milk of EPS, and that as we know is one of the core drivers to stock prices.

 

Marriott hack reminds of cyber spending needs

Also last week, we learned of one of the larger cyber attacks in recent history as Marriott (MAR) shared that up to 500 million guests saw their personal information ranging from passport numbers, travel details and payment card data hacked at its Starwood business. As I wrote in the Thematic Signal in which I discussed this attack, it is the latest reminder in the need for companies to continually beef up their cybersecurity, and this is a profound tailwind for our Safety & Security investing theme as well as the  ETFMG Prime Cyber Security ETF (HACK) shares that are on the Select List.

 

The Week Ahead

Today, we enter the final month of 2018, and given the performance of the stock market so far in the December quarter it could very well be a photo finish to determine how the market finishes for the year. Helping determine that will not only be the outcome of the weekend’s G-20 summit, but the start of November economic data that begins with today’s ISM Manufacturing Index and the IHS Markit PMI data, and ends the week with the monthly Employment Report. Inside those two reports, we here at Tematica be assessing the speed of the economy in terms of order growth and job creation, as well as inflation in the form of wage growth. These data points and the others to be had in the coming weeks will help firm up current quarter consensus GDP expectations of 2.6%, per The Wall Street Journal’s Economic Forecasting Survey that is based on more than 60 economists, vs. 3.5% in the September quarter.

Ahead of Wednesday’s testimony by Federal Reserve Chair Powell on “The Economic Outlook” before Congress’s Joint Economic Committee, we’ll have several Fed heads making the rounds and giving speeches. Odds are they will reinforce the comments made by Powell and the November Fed FOMC meeting minutes that we talked about above. During Powell’s testimony, we can expect investors to parse his words in order to have a clear sense as to what the Fed’s view is on the speed of the economy, inflation and the need to adjust monetary policy, in terms of both the speed of future rate hikes and unwinding its balance sheet. Based on what we learn, Powell’s comments could either lead the market higher or douse this week’s sharp move higher in the stock market with cold water.

On the earnings front this week, we have no Thematic Leaders or Select List companies reporting but I’ll be monitoring results from Toll Brothers (TOL), American Eagle (AEO), Lululemon Athletica (LULU), Broadcom (AVGO) and Kroger (KR), among others. Toll Brothers should help us understand the demand for higher-end homes, something to watch relating to our Living the Life investing theme, while American Eagle and lululemon’s comments will no doubt offer some insight to the holiday shopping season. With Broadcom, we’ll be looking at its demand outlook to get a better handle on smartphone demand as well as the timing of 5G infrastructure deployments that are part of our Disruptive Innovators investing theme. Finally, with Kroger, it’s all about our Clean Living investing theme and to what degree Kroger is capturing that tailwind.

 

Behind Powell’s comments and digital shopping reigns supreme

Behind Powell’s comments and digital shopping reigns supreme

Key points inside this issue:

Coming into this week with a clean slate following the pre-Thanksgiving stop out of our Consumer Staples Select Sector SPDR ETF (XLP) January 2019 58.00 (XLP190118C00058000) calls at 0.35.  Yesterday, the stock market put in its best one-day performance in months following the report that Fed Chairman Powell said aid interest rates are close to neutral, a change in tone from remarks the central bank chief made nearly two months ago. To be clear, “neutral” means neither speed up nor slowing down growth. This comment was warmly received by investors as they perceived it as removing one of their concerns – the number of interest rate hikes to be had over the coming 13 months, which as of last week totaled five.

Here’s the thing, over the last few months we’ve seen a number of data points suggesting a slowdown in both the global economy as well as the domestic one. Whether it’s the sharp drop in oil prices that suggest weak demand for crude, which is also helping mitigate some related inflation concerns, the continued weakness in the housing market due in part to higher interest rate or other economic indicators (Industrial Production, Durable Orders or the ISM manufacturing), the speed of the US economy is slowing. Moreover, consensus expectations point to that continuing over the coming quarters with sequential declines in GDP expected between now and the end of 2019.

What this more than likely means is the Fed is digesting this data and resetting its interest rate expectations. Great that they may not move as high in the coming 13 months, but the probable reason is the speed of the economy could not handle that degree – 5 additional rate hikes. Let’s remember that monetary policy is not a fixed formula, but is one that has to remain flexible to react to global economic and geopolitical events, and we have to focus on the reason behind that shift in monetary policy.  Later today, we’ll receive the Fed’s meeting minutes from its November monetary policy meeting, which should offer further insight into this shifting view inside the central bank.

While Powell’s comments may have offered some relief to investors, we have to remember that in addition to a slowing economy several other risks remain. These include the upcoming US-China trade conversations at this week’s G20 summit, Brexit and Italy-eurozone issues. Just this morning, Italian Deputy Prime Minister Matteo Salvini said the populist government is not considering cutting next year’s budget deficit target to below 2.2%.  In my view, once we clear the G20 meeting we’ll have a much better sense as to the playing field that will close out 2018 and be with us when we enter 2019. Despite the stock market ripping higher yesterday, caution and prudence remain the mantra in the very near term as we wait for these other shoes to drop and investors to recognize the reason behind the Fed’s shifting view on the speed of monetary policy.

 

Circling back to UPS calls following Thanksgiving-Cyber Monday shopping

On this week’s Cocktail Investing Podcast, Tematica’s Lenore Hawkins and I sift through all the data that was had coming out of the official kickoff to the 2018 holiday shopping season that span Thanksgiving to Cyber Monday, and in some cases “extended Tuesday.” The short version is consumers did open their wallets over those several days, but in keeping with our Digital Lifestyle investing theme, we saw a pronounced shift to online and mobile shopping this year, while brick & mortar traffic continued to suffer.

According to ShopperTrak, shopper visits were down 1% for the two-day period compared to last year, with a 1.7% decline in traffic on Black Friday and a versus 2017. Another firm, RetailNext, found traffic to U.S. stores fell between 5% and 9%  during Thanksgiving and Black Friday compared with the same days last year. For the Thanksgiving to Sunday 2018 period, RetailNext’s traffic tally fell 6.6% year over year.

Where were shoppers? Sitting at home or elsewhere as they shopped on their computers, tablets and increasingly their mobile devices. According to the National Retail Federation, 41.4 million people shopped only online from Thanksgiving Day to Cyber Monday. That’s 6.4 million more than the 34.7 million who shopped exclusively in stores.

Thanksgiving 2018 was also the first day in 2018 to see $1 billion in sales from smartphones, according to Adobe, with shoppers spending 8 percent more online on Thursday compared with a year ago. Per Adobe, Black Friday online sales hit $6.22 billion, an increase of 23.7% from 2017, of which roughly 33% were made on smartphones, up from 29% in 2017.

The most popular day to shop online was Cyber Monday, cited by 67.4 million shoppers, followed by Black Friday with 65.2 million shoppers. That day alone mobile transactions surged more than 55%, helping make the day the single largest online shopping day of all time in the United States at $7.9 billion, up 19% year over year. It also smashed the smartphone shopping record set on Thanksgiving as sales coming from smartphones hit $2 billion.

As I have long said, as consumers increasingly shift to digital shopping, a key tenant of our Digital Lifestyle investing theme, these goods will need to reach the intended recipient no matter who or where they are. That makes United Parcel Service (UPS) a prime beneficiary as more consumers and retailers embrace digital commerce. Given the data that has emerged over the last week, it is safe to say the speed of digital commerce adoption is accelerating. For that reason, we are adding back a UPS call option play for the holiday season, which candidly is at far better pricing levels following the market pain of the last few weeks. Between now and Christmas, I expect to see many a UPS truck traveling up and down the streets, and I strongly suspect you will see them as well.

 

Weekly Issue: Adding to BABA and DRFG

Weekly Issue: Adding to BABA and DRFG

 

Key points in this issue:

  • The market hits new records, but the corporate warnings are growing
  • We are using the recent fall-off in both Rise of the New Middle-Class investment theme company Alibaba (BABA) and Guilty Pleasure theme company Del Frisco’s (DRFG) to scale into both positions. Our price targets remain $230 and $14, respectively.
  • We’re putting some perspective around the National Retail Federation’s 2018 Holiday Shopping forecast that was published yesterday.
  • As more holiday shopping forecasts emerge, and we progress through the upcoming earnings season I plan on revisiting our current $2,250 price target for Amazon (AMZN) shares. More details on the pending acquisition of PillPack are also a catalyst for us, as well as Wall Street, to boost that target.
  • Heading into the holiday shopping season, our price target on UPS shares remains $130.
  • We continue to see Costco Wholesale (COST) a prime beneficiary of the Middle-class Squeeze. Our price target on the shares remains $250.
  • What to watch in tomorrow’s September Employment Report? Wage growth.

 

The market hits new records, but the corporate warnings are growing

While we’ve seen new records for the stock market indices this week, we’ve also seen the S&P 500 little changed amid fresh September data that in aggregate points to a solid US economy. This week we received some favorable September economic news in the form of the ADP Employment Report as well as the ISM Services Index with both crushing expectations. Despite these reports, the S&P 500 has barely budged this week, which suggests to me investors are expecting a sloppy September quarter earnings season. No doubt there will be some bright spots, but in aggregate we are seeing a number of headwinds compared to this time last year that could weigh on corporate outlooks.

Already we’ve had a number of companies issuing softer than expected outlooks due to rising input and transportation costs, trade and tariffs, political wrangling ahead of the upcoming mid-term elections, renewed concerns over Italy and the eurozone, and the slower speed of the economy compared to the June quarter. A great example of that was had yesterday when shares of lighting and building management company Acuity Brands (AYI) fell more than 13% after it reported fiscal fourth-quarter profit that beat expectations, but margins fell amid a sharp rise in input costs. The company said costs were “well higher” for items such as electronic components, freight, wages, and certain commodity-related items, such as steel, due to “several economic factors, including previously announced and enacted tariffs and wage inflation due to the tight labor market…”

Acuity is not the first company to report this and odds are it will not be the last one as September quarter earnings begin to heat up next week. As the velocity of reports picks up, we could be in for a bumpy ride as investors reset their growth and profit expectations for the December quarter and 2019.  The good news is we are our eyes are wide open and we will be prepared to use any meaningful moves lower to scale into our Thematic Leader positions or other positions on the Select List provided our investment thesis remains intact. Pretty much what we’re doing this morning with Alibaba (BABA) and Del Frisco’s Restaurant (DFRG) shares. As I watch the earnings maelstrom unfold, I’ll also be keeping an eye on inflation-related comments to determine if the Fed might be falling behind the interest rate hike curve.

 

Adding to our Alibaba and Del Frisco Restaurant Thematic Leader Positions

This morning we are putting some capital to work, scaling into and improving the respective cost basis for Alibaba (BABA) and Del Frisco’s Restaurant Group (DFRG), the Rise of the New Middle-Class and Guilty Pleasure Thematic Leader holdings.

Earlier this week, the administration inked a trade deal between the US-Mexico-Canada that has some incremental benefits, not yuuuuuuuge ones. But in the administration’s view, a win is a win and with that odds are the Trump administration will focus on making some progress with China trade talks. Per the recent Business Roundtable survey findings

As that happens we should see some of that overhang on BABA shares begin to fade, allowing the factors behind our original thesis to shine through. Before too long, we’ll be on the cusp of the upcoming Chinese New Year, the largest gift-giving holiday in the country, and as know from our own holiday shopping here in the US, consumer spending picks up ahead of the actual holiday.

We’re also seeing Wall Street turn more bullish on BABA shares – yesterday, they received a price target upgrade to $247 from $241 at Goldman Sachs that in its view reflects Alibaba’s expanding total addressable market with continued growth in its cloud business. We view this as more people coming around to our way of thinking on Alibaba’s business model, which closely resembles that of Amazon (AMZN) from several years ago. In short, the accelerating adoption of Alibaba’s digital platform along with the same for its cloud, streaming and mobile payment services should expand margins at the core shopping business and propel its other businesses into the black. Again, just like we’ve seen at Amazon and that has propelled the shares meaningfully higher.

Could we be early with BABA? Yes, but better to be early and patient than late is my thinking.

  • We will use the pullback in Alibaba (BABA) shares to improve our cost basis in this Rise of the New Middle-class position. Our price target on Alibaba shares remains $230.

 

Turning to Del Frisco’s, we have fresh signs that beef prices will trend lower over the next few years as beef production begins to climb. In the recently released Baseline Update for U.S. Agricultural Markets, projections through 2023, the Food and Agricultural Policy Institute (FAPRI) at the University of Missouri estimated the average price of a 600-to 650-pound feeder steer (basis Oklahoma City) at $158.51 per hundredweight (cwt) this year, and then declining to as low as $141.06 in 2020.

As a reminder, beef prices are the biggest impact on the company’s margin profile, and falling beef prices bode extremely well for better profits ahead. Even if we see a fickle consumer emerge, which is possible, but in my view has a low probability of happening given the increase in Consumer Confidence levels, especially for the expectation component, those falling beef prices should cushion the blow.

  • We are adding to our position in Guilty Pleasure company Del Frisco’s (DFRG), which at current levels will improve our cost basis. Our price target remains $14.

 

The NRF introduces its 2018 Holiday Shopping Forecast

Yesterday, the National Retail Federation published its 2018 holiday retail sales forecast, which covers the November and December time frame and excludes automobiles, gasoline, and restaurants sales. On that basis, the NRF expects an increase between 4.3%-$4.8% over 2017 for a total of $717.45- $720.89 billion. I’d note that while the NRF tried to put a sunny outlook on that forecast by saying it compares to “an average annual increase of 3.9% over the past five years” what it did not say is its 2018 forecast calls for slower growth compared to last year’s holiday shopping increase of 5.3%.

That could be some conservatism on their part or it could reflect their concerns over gas prices and other aspects of inflation as well as higher interest costs vs. a year ago that could sap consumer buying power this holiday season. Last October the NRF expected 2017 holiday sales to grow 3.6%-4.0% year over year, well short of the 5.3% gain that was recorded so it is possible they are once again underestimating the extent to which consumers will open their wallets this holiday season. And if you’re thinking about the chart on Consumer Confidence above and what I said in regard to our adding more DFRG shares, so am I.

While I am bullish, we can’t rule out there are consumer-facing headwinds on the rise, and that is likely to accelerate the shift to digital shopping this holiday season, especially as more retailers prime the digital sales pump. As Tematica’s Chief Macro Strategist, Lenore Hawkins, is fond of saying – Amazon is the deflationary Death Star, which to me supports the notion that consumers, especially those caught in our Middle-class Squeeze investing theme, will use digital shopping to offset any pinch they are feeling at the gas pump. It also means saving some dollars by not going to the mall – a double benefit if you ask me, and that’s before we even get to the time spent at the mall.

On its own Amazon would be a natural beneficiary of the seasonal pick up in shopping, but as I’ve shared before it has been not so quietly growing its private label businesses and staking out its place in the fashion and apparel industry. These moves as well as Amazon’s ability to competitively price product, plus the myriad way it makes money off its listed products and the companies behind them, mean we are entering into what should be a very profitable time of year for Amazon and its shareholders.

  • As more holiday shopping forecasts emerge, and we progress through the upcoming earnings season I plan on revisiting our current $2,250 price target for Amazon (AMZN) shares. More details on the pending acquisition of PillPack are also a catalyst for us, as well as Wall Street, to boost that target.

I’ve long said that United Parcel Service (UPS) shares are a natural beneficiary of the shift to digital shopping. With a seasonal pickup once again expected that has more companies offering digital shopping and more consumers shopping that way, odds are package volumes will once again outpace overall holiday shopping growth year over year. From a financial perspective, that means a disproportionate share of revenue and earnings are to be had at UPS, and from an investor’s perspective, that means multiple expansion is likely to be had.

  • As we head into the holiday shopping season, our price target on UPS shares remains $130.

 

Coming up – Costco earnings and the September Employment Report

After tonight’s market close, Middle-class Squeeze company Costco Wholesale (COST) will issue its latest quarterly results. Given the monthly reports that it issues, which has seen clear consumer wallet share gains in recent months and confirmed the brisk pace of new warehouse openings, we should see results tonight. As you are probably thinking, and correctly so, we are entering one of the strongest periods of the year for Costco, and that means watching not only its outlook, relative to the holiday shopping forecast we discussed above, but its membership comments and new warehouse location plans ahead of Black Friday. Two other factors to watch will be its comments on beef prices – the company is one of the largest sellers of beef in the world – and where it is seeing inflation forces at work.

In terms of consensus expectations for the quarter to be reported, Wall Street sees Costco serving up EPS of $2.36, up more than 13% year over year, on revenue of $44.27 billion, up 4.7% from the year ago quarter.

  • We continue to see Costco Wholesale (COST) a prime beneficiary of the Middle-class Squeeze. Our price target on the shares remains $250.

 

Tomorrow’s September Employment Report will cap the data filled week off. Following the blowout September ADP Employment Report, expectations for tomorrow’s report have inched up. While the number of jobs created is something to watch, the two key factors that I’ll be watching will be the payroll to population figure and wage data. The former will clue us into if we are seeing a greater portion of the US population working, while any meaningful movement in the latter will be fuel for inflation hawks. If the report’s figures for job creation and wage gains come in hotter than expected, we very well could see good news be viewed as concerning as investors connect the dots that call for potentially greater rate hike action by the Fed.

Let’s see what the report brings, and Lenore will no doubt touch on it as part of her next missive.

 

Weekly Issue: Adding Two Calls Ahead of the Holiday Season

Weekly Issue: Adding Two Calls Ahead of the Holiday Season

Key points in this issue

 

The NRF issues its 2018 holiday spend forecast,
and we add 2 new call positions

Yesterday, the National Retail Federation published its 2018 holiday retail sales forecast, which covers the November and December time frame and excludes automobiles, gasoline, and restaurants sales. On that basis, the NRF expects an increase between 4.3%-$4.8% over 2017 for a total of $717.45- $720.89 billion. I’d note that while the NRF tried to put a sunny outlook on that forecast by saying it compares to “an average annual increase of 3.9% over the past five years” what it did not say is its 2018 forecast calls for slower growth compared to last year’s holiday shopping increase of 5.3%.

That could be some conservatism on their part or it could reflect their concerns over gas prices and other aspects of inflation as well as higher interest costs vs. a year ago that could sap consumer buying power this holiday season. Last October the NRF expected 2017 holiday sales to grow 3.6%-4.0% year over year, well short of the 5.3% gain that was recorded so it is possible they are once again underestimating the extent to which consumers will open their wallets this holiday season. While I am bullish, we can’t rule out there are consumer-facing headwinds on the rise, and that is likely to accelerate the shift to digital shopping this holiday season, especially as more retailers prime the digital sales pump.

On its own Amazon would be a natural beneficiary of the seasonal pick up in shopping, but as I’ve shared before it has been not so quietly growing its private label businesses and staking out its place in the fashion and apparel industry. These moves as well as Amazon’s ability to competitively price product, plus the myriad way it makes money off its listed products and the companies behind them, mean we are entering into what should be a very profitable time of year for Amazon and its shareholders.

We already own the shares in Tematica Investing, but for some extra oomph here at Options+ I’m adding the Amazon (AMZN) Feb 2019 2000.00 (AMZN190215C02000000) calls that closed last night at 146.30. That strike price will capture the company’s December 2018 quarter earnings report as well as the post-holiday shopping that tends to happen each and every year.

As we move through the soon to be upon us September quarter earnings season, I’ll be assessing and collecting other retail outlooks for this holiday shopping season. Given the timing for this option position, I’m going to set a wider than usual stop loss at 100.00, and as the calls move higher, I’ll look to tighten it up.

 

I’ve long said that United Parcel Service (UPS) shares are a natural beneficiary of the shift to digital shopping. With a seasonal pickup once again expected that has more companies offering digital shopping and more consumers shopping that way, odds are package volumes will once again outpace overall holiday shopping growth year over year. From a financial perspective, that means a disproportionate share of revenue and earnings are to be had at UPS, and from an investor’s perspective, that means multiple expansion is likely to be had. Therefore, as we add those Amazon calls to our holdings, we will also do the same with UPS as follows:

 

As warnings flares are had, we’re sticking with our S&P 500 inverse calls

This week we received some favorable September economic news in the form of the ADP Employment Report as well as the ISM Services Index with both crushing expectations. Despite these reports, has barely budged this week, which suggests to me investors are expecting a sloppy September quarter earnings season for the market. No doubt there will be some bright spots, but in aggregate we are seeing a number of headwinds compared to this time last year that could weigh on corporate outlooks.

Already we’ve had a number of companies issuing softer than expected outlooks due to rising input costs, trade and tariffs, the slower speed of the economy compared to the June quarter, and concerns over higher gas prices and the impact on consumers. A great example of that was had yesterday when shares of lighting and building management company Acuity Brands (AYI) fell more than 13% after it reported fiscal fourth-quarter profit that beat expectations, but margins fell amid a sharp rise in input costs. The company said costs were “well higher” for items such as electronic components, freight, wages, and certain commodity-related items, such as steel, due to “several economic factors, including previously announced and enacted tariffs and wage inflation due to the tight labor market…”

Acuity is not the first company to report this and odds are it will not be the last one as September quarter earnings begins to heat up next week. As the velocity of reports picks up, we could be in for a bumpy ride as investors reset their growth and profit expectations for the December quarter and 2019. Therefore, we will continue to hold over inverse S&P 500 calls, which thus far are little changed from where we added them last week.

 

Checking in on our Universal Display calls

Over the last few weeks, we’ve seen a growing reception for Apple’s (AAPL) new iPhone models, both of which utilize the organic light emitting diode display technology that is made possible by Universal Display’s chemical and intellectual property business. We’ve also started to see adoption outside of Apple with other smartphone companies and in other markets as well (TVs, automotive lighting), which confirms to me adoption rates are on the upswing. This bodes very well for Universal’s business in the second half of 2018 and beyond as well as our January 2019 calls.

The next known catalyst for OLED shares and these calls is November 1, when Apple will report its September quarter results. I’ll be on the lookout for additional signs of OLED adoption between now and then, but for now let’s stick with our OLED calls.

 

 

Special Alert: Trimming Back our Amazon Call Position

Special Alert: Trimming Back our Amazon Call Position

 

KEY POINTS FROM THIS SPECIAL ALERT:

 

Earlier this morning, we posted a special alert to Tematica Investing, which digests all the data coming out Thanksgiving weekend, the official kickoff to the 2017 Holiday Shopping Season. We also included a special bonus alert letting all subscribers see the big Options+ win we’re banking this morning on our Amazon calls.  You can read that full alert here, but we also wanted to make sure we sent it directly to you as well, so here goes . . .

 

Being Prudent Investors and Taking Big Gains in our Amazon Calls Off the Table

As the confirming holiday shopping data is coming in, we’re seeing Amazon shares respond accordingly and that is propelling the Amazon (AMZN) January 2018 1150 calls (AMZN180119C01150000) higher this morning. As we share today’s thoughts with you the AMZN calls are trading past $76.62, which equates to a gain of more than 135% since we added the position just 7 days ago to the Tematica Options+ Select List. As much as we like quick gains, we also like to be prudent and in this case, that means trimming the position back, while leaving a portion intact to capture additional gains to be had this holiday shopping season.

  • We are selling half of the Amazon (AMZN) January 2018 1150 calls (AMZN180119C01150000) that broke $76.62 this morning, generating a gain of more than 135% over the last 7 trading days.
  • As we make this trade, we are also boosting our stop loss on those calls to $55 from $32.50, which should ensure a profit of at least 69% on the remaining call position.

 

 

Special Alert: Recapping bullish signals for our Connected Society theme as holiday shopping goes increasingly digital this year

Special Alert: Recapping bullish signals for our Connected Society theme as holiday shopping goes increasingly digital this year

 

KEY POINTS FROM THIS SPECIAL ALERT:

  • Tematica Options+ Subscribers: We are selling half the Amazon (AMZN) January 2018 1150 calls (AMZN180119C01150000) that broke $76.62 this morning, generating a gain of more than 135% over the last 7 trading days. We are also boosting our stop loss to $55 from $32.50.*
  • With today being Cyber Monday, we will be revisiting our Amazon (AMZN) price target as the day’s sales tallies are published.
  • We continue to see Amazon (AMZN), Alphabet (GOOGL), and United Parcel Services (UPS) as beneficiaries of the accelerating shift toward digital commerce.

 

* Note: Following the Thanksgiving holiday, we are in a thankful mood and as such we are sharing this latest Tematica Options+ call option trade with all Tematica Investing subscribers. If you would like to upgrade your subscription to include Tematica Options+, please contact us at (571) 293-1977 or email us at customerservice@TematicaResearch.com

 

Holiday shopping data is confirming Our Connected Society Investment Theme on several fronts

We hope you had an enjoyable Thanksgiving holiday, and where appropriate you took advantage of retail sales, both in-store and on digital platforms. Over the coming paragraphs, we’re going to review the weekend spending data that was bullish for our Connected Society investing theme as well as several Tematica Investing Select List positions and preview what’s expected today, Cyber Monday, but the quick takeaway is it confirmed the accelerating shift toward digital commerce that is fueling our positions in Amazon (AMZN) and United Parcel Service (UPS), and to a lesser degree Alphabet (GOOGL) given its search and shopping businesses.

According to Adobe Systems (ADBE), U.S. shoppers splurged more than $1.52 billion online by 5 PM ET on Thanksgiving and went on to part with more than $2.85 billion for the day in full. By comparison, that compares to $1.93 billion in online Thanksgiving sales in 2016. What we found even more incredible was the percentage derived from smartphones – a record 46% according to Adobe.

Turning to Black Friday, per e-commerce platform company Shopify, customers spent as much as $1 million per minute on the internet. Adobe reports that shoppers spent a record-high of $5 billion for the day, up from $3.34 billion in 2016. Another interesting data point, marketing firm Criteo reports that roughly 40 percent of Black Friday online sales were made on mobile devices Pairing Thanksgiving and Black Friday sales at the 100 largest U.S. Web retailers, Adobe found $7.9 billion was spent, marking an 18% increase compared to 2016.

Reports for Black Friday were less favorable for brick & mortar retailers, with many shoppers flocking to stores; however many of them were there only to “showroom” the merchandise. For those unfamiliar with that term, “showrooming” means eying items in person while waiting to complete the actual transaction online, while continuing to bargain hunt online or via mobile. Estimates from ShopperTrak said foot traffic “decreased less than one percent when compared to Black Friday 2016.” Looking at both Thanksgiving Day and Black Friday, however, ShopperTrak found in-store foot traffic was actually down nearly 2% compared to the same two days last year. Not good for brick & mortar at all, but with some context, we see it is simply more of the same given disappointing same-store sales reported by retailers of late.

What we found most interesting in retailer comments was the growing verbiage toward digital commerce . . . 

While some may call it pandering, we see it as more confirmation of the shift we’ve been describing. Case in point, Kohl’s (KSS) CEO Kevin Mansell shared that while the retailer delivered a “record-breaking” Thanksgiving, more than 16 million visits were made to kohls.com, Kohl’s said, outpacing any prior traffic or sales precedents. Mansell went on to say the company fulfilled roughly 40% more orders that were bought online and picked up in stores when compared with Black Friday of last year. Another example was had at J.C. Penney (JCP), which shared that traffic at jcp.com increased at a double-digit pace throughout the week, with most shoppers visiting the site from their mobile devices. And on Thanksgiving Day, Penney’s website received the most visits of any day so far this year.

Rounding out the holiday shopping weekend, today is Cyber Monday and it is expected to become the largest online shopping day in history, generating $6.6 billion in sales, up  16.5% compared to last year’s $5.6 billion according to Adobe. Here’s the thing — if this Cyber Monday sets a new online record, it will be the sixth year in a row the day has done so.

Stepping back, we see all the weekend’s data confirming the shift to digital commerce that has been at the heart of our position in Amazon. The same shift towards online is also driving the search and shopping business at Alphabet and fueling the season surge at United Parcel Service.

As this shopping shift is occurring, we are also seeing Amazon build its own private-label offerings across a growing number of categories, including sportswear, electronics, and accessories to kitchenware. This is placing additional pressure on bricks-and-mortar names such as J.C. Penney and Sears (SHLD). Of course, there is more than enough reason to think there will be even more pain on the way, as traditional retail businesses are pumping up the use of discounts to win business, which should further pressure margins.

In a survey conducted by the Berkley Research Group of more than 100 high-level retail executives in October, 64% of the respondents said they expected promotions to play a more significant role in overall sales during the 2017 holidays. This tells us is there is more trouble ahead for brick & mortar retailers as these companies sacrifice profits to win revenue. That isn’t exactly a sustainable business model and one that tends to lead to declining earnings per share. In our view, those that lack a competitive weapon in its back pocket — weapons like Amazon’s Amazon Web Services or Costco Wholesale’s (COST) higher margin membership fee business — are stocks to be avoided as retailer pain continues.

  • Our price target on Amazon is $1,250 but based on the online shopping strength thus far and what’s expected today we are reviewing that target.
  • As we review our AMZN price target, we are doing the same for Alphabet (GOOGL) shares. Currently, that price target sits at $1,150.
  • Our price target on United Parcel Service (UPS) shares remains $130.
  • Our price target on Costco Wholesale (COST) shares remains $185.

 

Tematica Options+ Subscribers: Trimming back our Amazon call position

* Note: Following the Thanksgiving holiday, we are in a thankful mood and as such we are sharing this latest Tematica Options+ call option trade with all Tematica Investing subscribers. If you would like to upgrade your subscription to include Tematica Options+, please contact us at (571) 293-1977 or email us at customerservice@TematicaResearch.com

As the confirming holiday shopping data is coming in, we’re seeing Amazon shares respond accordingly and that is propelling the Amazon (AMZN) January 2018 1150 calls (AMZN180119C01150000) higher this morning. As we share today’s thoughts with you the AMZN calls are trading past $76.62, which equates to a gain of more than 135% since we added the position just 7 days ago to the Tematica Options+ Select List. As much as we like quick gains, we also like to be prudent and in this case, that means trimming the position back, while leaving a portion intact to capture additional gains to be had this holiday shopping season.

  • We are selling half of the Amazon (AMZN) January 2018 1150 calls (AMZN180119C01150000) that broke $76.62 this morning, generating a gain of more than 135% over the last 7 trading days.
  • As we make this trade, we are also boosting our stop loss on those calls to $55 from $32.50, which should ensure a profit of at least 69% on the remaining call position.

 

 

SPECIAL ALERT: Adding new calls ahead of the holiday shipping rush

SPECIAL ALERT: Adding new calls ahead of the holiday shipping rush

 

KEY POINTS FROM THIS ALERT

Note: We’re bringing the weekly Tematica Options+ issue to you a few days earlier than usual given the likelihood that a significant number of subscribers will, like many, many other folks, be traveling tomorrow ahead of the Thanksgiving holiday. Usually the day before and after Thanksgiving see lower than usual trading volumes as investors and traders look to turn the holiday into an unofficial four-day weekend. As we digest our turkey, trimmings and that extra piece of pie, Team Tematica will be analyzing the Black Friday data, reporting our findings on Monday. 

I would suggest reading today’s Options+ issue after you’ve read today’s earlier than usual weekly issue of Tematica Investing. Trust me on this, as it will set the stage for what you will read below, and don’t worry I’ve linked to the Investing issue where appropriate to make it easy peasy.

 From all of us here at Team Tematica, we wish you and yours a very Happy Thanksgiving!

 

2017 holiday shopping to officially start, and it’s likely Amazon’s time of year

As we brace for the official start of the 2017 holiday shopping season, the Amazon (AMZN) January 2018 1150 calls (AMZN180119C01150000) traded off modestly over the last week. The proof in the seasonal trade pudding so to speak won’t really begin until this coming weekend that spans Black Friday to Cyber Monday. We’re already seeing a growing number of retailers advertise Black Friday sales, some of which look rather promising provided you can actually get those deals – as we all know, they tend to few and far between, and are used to entice would-be shoppers. These include online offerings as well in-store ones ranging from Best Buy (BBY) and Target (TGT) to Walmart (WMT) and Kohl’s (KSS), and many more – here’s a handy guide for those that are willing to willing to partake.

 

Adding UPS calls to the mix for the holidays

With more retailers targeting digital commerce this holiday season, it likely means, even more, packages being shipped to and fro, and we see that as a boon to United Parcel Service. I’ve held off adding a call position thus far, but now that we are at the proverbial mouth to the holiday shopping season kicking into gear, I am adding the United Parcel Service (UPS) January 2018 120 calls (UPS180119C00120000) that closed last night at 1.20.

Much like the Amazon calls, we expect favorable data points to emerge over the Black Friday to Cyber Monday time frame, but we also know the closer we get to Christmas the more deals retailers tend to trot out. Therefore, our strategy over the coming weeks will be to leverage any modest weakness in the UPS calls to improve our cost basis during what is the seasonally strongest time of the year for the company’s business. Also like the Amazon position, the timing of the calls will ensure that we capture not only the pre-holiday selling season but post-holiday sales as well. Given what we’re seeing as part of our Cash-strapped Consumer investing theme, and a recent report from Capital Economics showing Americans are having increasing trouble paying their credit card bills, the post-holiday sales rush could be as busy if not more so than pre-holiday shopping.

 

Applied Materials calls give back gains, but we remain bullish

Last week, following what was another beat and raise quarterly earnings report, shares of Applied Materials traded off and that weighed on our call position, which despite the pullback remains profitable. As I shared in today’s issue of Tematica Investing, Last Friday, Applied Materials (AMAT) President and CEO Gary Dickerson appeared on CNBC’s Mad Money and discussed several aspects of our Connected Society and Disruptive Technologies investing themes and how they are powering the company’s semiconductor capital equipment business. Dickerson also role in artificial intelligence and big data. I see Dickerson’s comments echoing our multi-faceted and multi-year thesis on Applied shares.

https://www.cnbc.com/video/2017/11/17/amat-ceo-the-future-of-competition-changing-fueling-our-business.html?play=1

Looking at the array of must-have holiday presents this year, I see smartphones, tablets, smart speakers, wearables and other similar products, all of which are fueling demand for chips. Cisco Systems continues to stick by its forecast that total data center traffic will triple over the 2014-2019 period, and what I’m seeing outside the DC area in terms of new data center construction is rather confirming as acres of land is turned into data center buildings for Amazon, Facebook (FB), Alphabet (GOOGL) and others. On Cisco’s recent earnings calls, it shared it is seeing a migration by its customers to continue to move toward 10, 40 and 100-gigabit architectures in data centers, which is fostering demand for high-speed chips as well. And of course, there is the ramping in-country demand in China as the country looks to build out its own semiconductor capacity.

Turning to Applied’s display business, the next proof point to watch for ramping organic light emitting diode display demand will be the next iteration the global consumer electronics and consumer technology tradeshow that is CES 2018, which runs from January 8-12, 2018. In the coming weeks, we’ll begin to hear more about the various consumer electronic items that will be previewed and debuted at the show, and we expect a smattering of organic light emitting diode display TVs. Already we’re hearing LG will launch a full line up of OLED TVs in 2018, and that OLED TVs are expected to see a meaningful price reduction, which could foster greater consumer adoption. I see both as positives for not only AMAT shares but also Universal Display (OLED) shares.

 

 

 

Boosting our AMZN price target as Amazon crushes expectations

Boosting our AMZN price target as Amazon crushes expectations

KEY POINTS FROM THIS UPDATE ON AMAZON (AMZN):

  • We are boosting our price target on Amazon (AMZN) shares to $1,250 from $1,150, which keeps our Buy rating intact.
  • Last night Amazon crushed 3Q 2017 expectations and offered an upbeat take on the current quarter.
  • Culling through the quarterly results, Amazon’s key differentiator – Amazon Web Services – continues to ride the cloud adoption wave and fund its expanding services and geographic footprint.
  • As we have said for some time, as consumers and business continue to migrate increasingly to online and mobile platforms Amazon shares are ones to own, not trade.

 

Last night thematic investing poster child Amazon (AMZN) reported 3Q 2017 results that easily topped expectations and sent the shares soaring in after-market trading. Quickly reviewing the results, which have already been amply covered by the financial media but bear repeating as they set the tone for our conversation – Amazon delivered EPS of $0.52 vs. the consensus expectation of -$0.01 with revenue for the quarter coming in at $43.74 billion topping the expected $42.14 billion. Even backing out the $1.3 billion in revenue derived from Whole Foods, Amazon’s digital retail and Amazon Web Services (AWS) outpaced expectations. The clear driver of the upside was AWS as well as the 59% increase in its subscription services business that includes digital music, digital video, audiobooks, e-books.

As investors know, context and perspective are key and in this case, Amazon’s 3Q 2017 revenue tied its 4Q 2016 revenue, which included the 2016 holiday shopping season. Once again, the bulk of the company’s operating earnings were furnished by AWS, which we continue to see as the company’s key differentiator compared to other retailers and one of its platforms alongside its digital voice assistant Alexa that is helping it weave itself even deeper into consumer’s lives.

In Amazon tradition, the company issued rather wide guidance with revenue for the current quarter between $56-$60.5 billion, which is in line with consensus expectations and equates to a year over year increase of 28%-38%. In terms of operating income for the current quarter, Amazon shared its current view that is should fall in the range of $300 million to $1.65 billion and that compares to the $1.64 billion Wall Street was expecting and $1.3 billion earned in the year-ago quarter. Given the litany of 2017 holiday shopping forecasts that call for an acceleration in digital shopping growth rates, it’s rather likely that Amazon’s top line guidance will prove conservative… yet again.

 

Boosting our AMZN price target to $1,250

Heading into last night’s earnings report, our price target for AMZN shares was $1,150. Today, given several factors, including the accelerating pace of digital commerce, continued revenue growth and margin expansion at AWS and the burgeoning subscription revenue business, we are boosting our price target to $1,250. As we do this we are seeing other investment banks up their price targets and some that have been less enthusiastic on AMZN shares finally come around and upgrade the rating to a Buy or some equivalent. As we have said for some time, as consumers and business continue to migrate increasingly to online and mobile platforms Amazon shares are ones to own, not trade.

 

Culling through AMZN’s 3Q 2017 results

Digging into 3Q 2017 earnings report, Amazon rattled off more than 30 highlights which in sum point to its expanding footprint and effectively recapped a number of product and service announcements during the quarter. The real meat came in culling through the company’s income and business segment information for the quarter. In that, we see the real power behind AWS as it supplied nearly all of the company’s operating income in the quarter and just 10.5% of the quarter’s revenue. Again, we see this as the key differentiator that allows Amazon to fund its retail expansion efforts and better yet the business is on an $18 billion run rate exiting 3Q 2017, up from $13 billion coming out of 3Q 2016 and $16 billion for 2Q 2017. What this tells us is AWS continues to win share as more companies embrace the cloud, and as that occurs AWS’s margins continue to scale higher enabling Amazon to expand its geographic and service footprint.

To be fair, the North American retail business rose 35% year over year fueled in part by the ongoing shift to digital commerce that we increasingly talk about as Amazon’s service offering expands (more on that shortly) and a successful Prime Day 2017. This kept the North American business as the company’s largest, but these ongoing investments in warehouses, new services, and video content once again weighted on segment profits. Contrary to expectations, the North American segment was profitable during the quarter, but its operating margin did slip to 0.4% in 3Q 2017 vs. from roughly 1.4% in the year-ago quarter. Again, not unexpected given the number of investments Amazon continues to make so it can continue to expand its product and service offering, catering to customer wants, but better than expected. In the current stock market environment that is meaningful.

Turning to the International retail facing business, revenue rose 29% year over year to $13.7 billion, a hair shy of the $14 billion achieved in 4Q 2016 as it too benefitted from Prime Day 2017 as well as the debut of Prime in India last year. During the earnings call Amazon shared that in India, it had more Prime members join in India than in any other country in the first 12 months. Despite the amazing growth in the International business, there is no other way to say it other than this segment continues to be a drag on Amazon’s overall profit picture as its operating loss widened both sequentially and year over year. It’s being fueled by the same expansion efforts as Amazon looks to solidify its footprint outside the US by replicating the growing number of Prime services it has in the U.S. We see this as Amazon doing what it does – playing the long game, and while we will be patient with this business we will be sure to monitor its ongoing progress.

 

Amazon to unleash even more creative destruction

Above it was mentioned that Amazon continues to expand its footprint and in addition to its in sum stellar 3Q 2017 results, it was reported that Amazon is positioning to unleash its creative destruction forces on the pharmaceutical industry. Yesterday, the St. Louis Post-Dispatch reported: “Amazon has become a licensed pharmaceutical wholesaler in 12 states, with a pending application in a thirteenth.” Because , Amazon would also need to be licensed as a pharmacy in each state to which it shipped drugs we see this as signs that Amazon is making a move, with the next question being will it build its own capabilities or will it look to acquire a building block company like it did with Whole Foods and grocery? We’ll continue to watch this for what it means not only for Amazon’s balance sheet but more importantly its revenue and profit stream.

It was also quietly announced this week that “Amazon will soon allow customers in some areas to place orders for takeout food with local restaurants from inside the Amazon app.”

 

Breaking down earnings from AXT, Nokia and UPS, plus thoughts on Amplify Snacks

Breaking down earnings from AXT, Nokia and UPS, plus thoughts on Amplify Snacks

We are officially in the thick of earnings season with reports from AXT Inc. (AXTI) last night, and both Nokia (NOK) as well as United Parcel Service (UPS) this morning. Below we have comments on the better than expected results from AXT, share why we are going to be patient with Nokia shares for the long-term and how United Parcel Service confirms out thesis on the shares. We also have some thoughts on the recent share price pressure in Amplify Snacks (BETR), and explain why Amazon’s (AMZN) comments and outlook on its Whole Foods business are what we’ll be watching next for this position.

 

Many positives in AXT’s 3Q 2017 earnings report and outlook

Last night compound semiconductor substrate and Disruptive Technology company AXT (AXTI) reported 3Q 2017 top and bottom line results that handily beat consensus expectations and delivered an in-line view on the current quarter. This popped the shares some 7% in aftermarket trading last night and sees the shares trading up nicely today.

More specifically, AXT delivered EPS of $0.11, $0.02 better than the consensus and up dramatically from $0.07 in the year-ago quarter on revenue that rose 29% compared to 3Q 2017. Higher substrate volumes revealed the operating leverage in the company’s business model and led gross margins to soar to 39.5% in the quarter, up from 30.8% in the prior quarter. Other factors aiding the margin comparisons included raw material prices and vendor consolidation as well as product mix, both of which help margins in the coming quarters.

In terms of its outlook for the current quarter, AXT guided revenue and EPS in the ranges of $26-$27 million and $0.07-$0.09, respectively, which compares with the consensus forecast of $26.6 million in revenue with EPS of $0.08. What’s not obvious in those ranges is expected growth at the midpoint of 22% and 47%, respectively. The current quarter, as well as the next one, tend to reflect the seasonal downtick compared to the third quarter 3Q 2017, which tends to house the RF semiconductor ramp for year-end smartphone sales. Given new smartphone models, continued growth in data traffic that is leading further data center investment, and new solar panel applications the outlook for continued year over year growth at AXT remains more than favorable.

For example, Audi and BMW are using solar panels on certain new models to provide power to the vehicle’s climate control system fan without ruining the battery, even when the vehicle is turned off. In addition, Audi and Alta Devices recently announced their partnership to integrate solar cells into panoramic glass roofs of Audi models to generate solar energy that increases the range of Audi electric vehicles. The first of these car prototypes are expected to by the end of this year, and the solar cells utilize compound semiconductor technology that is built on AXT’s substrates.

In the data center arena, companies such as Microsoft (MSFT), Intel (INTC), Cisco (CSCO), Broadcom (AVGO) and a number of others are driving the adoption of silicon photonics to drive data rates of 100 gigabits per second or better. This adoption bodes well for AXT’s higher margin indium phosphide substrates.

Recognizing the seasonal downturn we will face in the coming months, we will continue to be patient with AXTI shares.

  • Our price target on AXT (AXTI) shares remains $11, which for now keeps the shares a Buy at current levels.
  • With regard to that rating, we’ll be watching the $9.90 level, which offers roughly 10% upside to our price target.

 

Nokia: The market focuses on network infrastructure, but it’s the licensing business that matters.

Early this morning Nokia (NOK) reported 3Q 2017 results of €0.09 per share in earnings, €0.03 ahead of expectations even though overall revenue fell 7% year over year to €5.54 billion, a hair shy of the €5.64 billion consensus forecast. In trading today, Nokia shares are getting hit hard given the guidance that calls for continued declines in its Networks Business. We are not surprised by this guidance as we continue to wait for deployments of 5G technology in 2018-2020. Despite that shortfall, continued focus on cost in the Networks Business, as well as ongoing customer wins bode well for the business as the 5G ramp begins.

What we found as rather confirming was the continued growth in its high margin Nokia Technologies business, which rose to 9% of 3Q 2107 sales and 22% of 3Q 2018 gross profits up from 6% and 15%, respectively, in the year-ago quarter. Despite the overall revenue shortfall for Nokia in 3Q 2017, Nokia Technologies led the company’s consolidated margins higher and drove the EPS upside in the quarter. In other words, our thesis behind owning NOK shares was confirmed in this morning’s earnings report. As 5G and other technologies contained in the company’s intellectual property arsenal matriculate in the coming quarters, we see continued improvement ahead for this business and that bodes well for the company’s overall margin and EPS generation.

One of our key strategies has been to use share price weakness to scale into a position on the Tematica Select List provided the underlying investment thesis remains intact. As we saw in Nokia’s 3Q 2017 earnings report, that is the case. As we look for that opportunity, we’d note that Nokia’s Board of Directors plans to propose a dividend of EUR 0.19 per share for 2017, which if history holds will be paid in the first part of 2018. Given the current share price, that is a hefty dividend yield to be had and adds both a layer of support to the shares and adds to the total return to be had.

  • Our price target on Nokia (NOK) shares remains $8.50

 

Quick thoughts on UPS’s 3Q 2107 results

With United Parcel Service (UPS), the results and outlook were in line what we expected and simply put the company’s outlook simply reinforces our shift to digital commerce predicated thesis on the shares. Case in point, UPS sees:

  • Record holiday delivery of about 750 million packages,
  • Deliveries between Black Friday and New Year’s Eve forecasted to increase 5% from 2016
  • 17 of 21 holiday delivery days before Christmas to exceed 30 million packages each.

This latest forecast echoes what we’ve already heard about this holiday shopping season from the National Retail Federation, E-Marketer, and others.

We’ll dig through the UPS’s earnings call in greater detail, but what we’ve heard thus far along with a price increase slated for December 24th keeps our Buy rating and $130 price target intact. As we do that, we’ll also be looking at Amazon’s forecast for the current quarter and its comments on the holiday shopping season.

  • Our price target on United Parcel Service (UPS) share remains $130.

 

Shares of Amplify Snacks under pressure, but Amazon/Whole Foods will be the guide

Finally, our Amplify Snacks (BETR) shares have been under pressure this past week. On the news front, things have been rather quiet and the shares could be coming under pressure as institutional investors being their tax loss selling. We’ll look for confirmation on our thesis – consumers shifting toward food and snacks that are “healthy for you” in quarterly results out tonight from Amazon (AMZN) as it discusses recent performance and its outlook for recently acquired Whole Foods. As we do this, we’ll also be revisiting the dollar’s recent run-up and what it could mean for Amplify given its growing exposure to markets outside of the U.S.

With the shares approaching oversold levels, we are keeping a close eye on the shares. As we mentioned above with Nokia, we certainly like to improve our cost basis provided our investment thesis remains intact.