Weekly Issue: Del Frisco’s Sends Strong Signals of Potential Take Over Bid

Weekly Issue: Del Frisco’s Sends Strong Signals of Potential Take Over Bid

Key points inside this issue

  • The stock market continues to move higher even as global growth slows and S&P 500 earnings prospects for the current quarter slump further.
  • Our long-term price target on Thematic King Amazon (AMZN) shares remains $2,250, which offers more than 35% upside following its December quarter earnings report.
  • As Living the Life Thematic Leader Del Frisco’s Restaurant Group (DFRG) gets serious with its strategic alternatives, our price target remains $14.
  • We are issuing a Buy on and adding the Del Frisco’s Restaurant Group (DFRG) September 20, 2019, 10.00 calls (DFRG 190920C00010000) that closed last night at 0.60 with a stop loss at 0.30.
  • On the housekeeping front, we were stopped out of the Nokia (NOK) July 2019 7.00 (NOK190719C00007000) calls last Friday (Feb. 1).


Stocks rebounded in a pronounced manner as we started off 2019, making it the best January showing since 1989. The data continues to point to a slowing global slowing economy, especially in China and in the eurozone with Italy in a recession and France not too far behind. The December-quarter concerns, however, have rolled back and propelled the market higher, especially during the last week of the month when the Fed signaled patience with its speed of further interest rate hikes. For the month in full, the S&P 500 finished up just shy of 8.0%, ahead of the Dow Jones Industrial Average’s 7.2% rise, but trailing the tech-heavy Nasdaq’s 9.7% surge.

On top of Friday’s blockbuster January Employment Report, a stronger-than-expected ISM Manufacturing Index reading for January came in, which showcased a rebound in new order activity. On the back of those two reports, the domestic stock market started February off in the green, as that data suggest the U.S. remains the brightest spot in the global economy. That view was supported by the January PMI data released Friday morning by IHS Markit, which showed the U.S. manufacturing economy picking up steam while that activity in the eurozone and Japan slowed, and China marked the second month in contraction territory.


Another positive inside the ISM Manufacturing Report was the month-over-month drop in the Prices component. Pairing that with falling prices in the eurozone data, it’s another reason the Federal Reserve can take its finger off the interest rate hike button for the time being. That patient stance, shared by the Fed this week after its latest FOMC meeting, has walked the dollar back some, but as we see in the chart below the greenback’s year-over-year strength will likely continue to be a headwind for companies during the first half of 2019.


The current mismatch between U.S. economic data and that for China has raised hopes for U.S.-China trade talks. Also lending a helping hand on that front were several positive tweets from President Trump exiting this week’s round of trade talks. I remain cautiously optimistic but will once again remind subscribers it’s the details that we’ll be focused on when they are released. 

As we move deeper into February, just over half of the S&P 500 companies have yet to report their quarterly results and given the slowing global economy and dollar headwinds we are likely to see further downward revisions to earnings expectations for the S&P 500 in the coming weeks. Along with the market’s push higher in January that has extended into February, should those revisions come to pass it means the market gets incrementally more expensive. This means we should continue to tread carefully in the near-term.


As we do this, known catalysts to watch in the coming weeks will be incremental developments on U.S.-China trade and potential moves by the European Central Bank. Following the weakening economic data in the eurozone, ECB President Mario Draghi said, “The European Central Bank is ready to use all its policy tools to support Europe’s softening economy, including by restarting a recently shelved bond-buying program.” There is also the possibility of another government shutdown should Congress fail to reach an agreement on immigration. Who said 2019 was likely to be boring?


Tematica Investing

As I have said numerous times, we do not buy the market, but rather invest in companies that are well positioned to capitalize on the tailwinds from our 10 investment themes. From time to time, we are given opportunities to scale into existing positions and in my view, we are seeing that now with Thematic King Amazon (AMZN). The reason for this latest bout of weakness in Amazon’s share price is management’s comments that it will once again investment more than Wall Street expected and the news over e-commerce regulations in India.

From time to time we’ve seen Amazon step up its investment spending and historically its been a great time to load up on the shares because those investments have paved the way for future growth. From opportunities in grocery, mobile payments, streaming video and gaming services, healthcare following its PillPack acquisition as well as expanding the scale and scope of its Amazon Prime service further in the US and abroad, there are ample thematic opportunities for the Amazon business. I also suspect that with FedEx (FDX) looking to collapse order times to under 24 hours for its retail partners, that Amazon too is working on growing its Prime Now offering at the same time.

Let’s turn to the new e-commerce regulations in India and their potential impact on Amazon. The issue is that while these new regulations permit full foreign ownership of ‘single brand’ retailers such as IKEA, restrictions are in place with ‘multibrand’ stores such as supermarkets from outside India. Odds are we will see a rebranding of sorts by the likes of Amazon, Walmart (WMT) and others that are looking to tap into this New Global Middle-Class market. Candidly, given Amazon’s growing private label business that spans apparel, furniture, food, electronics, and other categories, I’m not all that bothered by this. And let’s face it, not only are the folks at Amazon pretty smart, but we have yet to see a market that shuns two-day delivery. I doubt India and its growing middle-class will be the first.

The bottom line with this Thematic King is it is a stock to own as the company is poised to further disrupt other markets, sectors and other business models in the coming quarters.

  • Our long-term price target on Thematic King Amazon (AMZN) shares remains $2,250, which offers more than 35% upside following its December quarter earnings report.



Del Frisco’s gets serious about entertaining take out bids

After a few weeks of no big news from Living the Life company Del Frisco’s Restaurant Group Inc. (DFRG) after it pre-announced its fourth-quarter revenue in early January, we have a new development that in my view reinforces our belief that the company is putting itself up for sale. More specifically, Del Frisco’s announced on Monday that it has executed a cooperation agreement with its third-largest shareholder, Engaged Capital — the same shareholder that criticized the management team in late 2018 and suggested the company examine its strategic alternatives.

Included in the agreement is the appointment of Joe Reece not only to the Del Frisco’s board but also as the Chairman of the Transaction Committee that is overseeing the company’s previously announced review of strategic alternatives. There are other conditions with the cooperation agreement, but it is the naming of Reece and the comments contained inside the accompanying press release that gives us some insight into his background. The comments read in part:

Glenn W. Welling, the founder and Chief Investment Officer of Engaged Capital, said, “I am pleased to have reached this agreement as part of a constructive dialogue with Del Frisco’s. In addition to his decades of experience working inside boardrooms, Joe Reece brings exceptional experience in investment banking and the capital markets to Del Frisco’s which will be instrumental as the Board evaluates the various opportunities available to maximize value for all shareholders.”

 Joe Reece has over 30 years of experience as a business leader. His experience working with executives at corporations, financial sponsors, and institutional investors, as well as serving on several public company boards, will bring an added dimension to the Board.

Mr. Reece is the Founder and Chief Executive Officer of Helena Capital. Mr. Reece previously served as Executive Vice Chairman and Head of the Investment Bank for the Americas at UBS Group AG from 2017-2018 as well as serving on the board of UBS Securities, LLC.


More on Reece’s background is contained in the press release, but as the above excerpt notes, he has ample investment banking experience. In our view, the naming of Reece as chairman of the Del Frisco’s Transaction Committee means two things. First, the company is serious about examining alternatives to remaining a stand-alone company. Second, it is also serious about extracting the greatest value for its business and brands.

As shareholders, this news has increased my degree of confidence that a transaction, be it with private equity or a strategic partner, is likely to happen. As such, we will continue to keep DFRG shares as a Thematic Leader for the time being to capture these potential gains.

  • As Living the Life Thematic Leader Del Frisco’s Restaurant Group (DFRG) gets serious with its strategic alternatives, our price target remains $14.


Special Alert: Apple added to the Tematica Investing Select List

Special Alert: Apple added to the Tematica Investing Select List



  • We are adding shares of Connected Society company Apple (AAPL) to the Tematica Investing Select List with a $200 price target.
  • In our view, Apple and its new iPhone models are a 2018 story, and we see the recent string of upwardly revised expectations continuing as Apple tweaks its iPhone production and takes newer models global.
  • We would look to use pullbacks in the AAPL shares to improve our long-term cost basis.

This morning we are adding, some would say finally, Apple (AAPL) to the Tematica Select List. It’s no secret that those of us at Tematica are hardcore users of the company’s products — from MacBooks, iPhones and iPads, to the Apple Watch, Time Machine and various other devices. Despite its deep bench of product, Apple, at least for now, is a smartphone company. Even ahead of the recent launches of its iPhone 8, 8S and iPhone X products, Apple derived the bulk of its revenue and profits from the iPhone.

Apple does have other businesses like Apple TV that bolster its position in our Connected Society investing theme, and the company appears to be branching out into live content similar to Tematica Investing Select List companies Amazon (AMZN) and Facebook (FB). We suspect that like many past products and services, Apple will look to unveil its content offering when it is ready, not when the financial media thinks it will. We see that as an added tailwind on the horizon for AAPL shares, provided it can get the content right. Case in point, we were not won over by Apple’s Carpool Karaoke series; however, per the financial press, Apple appears to have recognized its shortcoming and has gone on a hiring spree to course-correct this effort.


For many subscribers, the probable question is “Why now?”

Candidly, we have always kept eyes on Apple’s business given how it touches our Connected Society investing theme as well as its shares. Were we underwhelmed by the company’s September event? Yes, we were, given the staggered nature of the new iPhone launches and the simple fact the company kicked off the event discussing how it was going to revolutionize its Apple Stores vs. talking products. There was also the concern that iPhone sales would pause as shoppers waited for the iPhone X to hit shelves not to mention rumored component shortages.

Over the last few days, orders for the iPhone X commenced and early indications suggest it will be a brisk seller. Almost all Apple store channels are now reporting 5-6 week delivery times for new iPhone orders across all configurations of size and color, which means new online orders will not be fulfilled until early December. The initially low production volumes were due to component constraints for the new 3-D face-scanning sensor and a circuit board for a new camera were to blame and Apple is expected to have this corrected in the coming weeks.

Turning to the iPhone 8, while sales have been tepid ahead of the iPhone X launch in the U.S., this morning a new report from Canalys shows the iPhone 8 has led Apple to break a run of sales decreases that stretches back six quarters. Per the report, Apple should see a 40% annual growth to 11 million iPhone units China during the quarter. As with any new product launch, we see Apple tweaking production between these new iPhone models to better match demand.

In our view, we are likely to see Apple up its iPhone X product and dial back production for the iPhone 8, which is a nice but modest upgrade from the iPhone 7 — a model that continues to sell well. That’s right, it’s not just about the new models – the older ones, which are less expensive, help drive Apple sales in the all-important emerging markets like India, where smartphone penetration is far lower than in the U.S. In the U.S., smartphone penetration passed 80% last year. By comparison, roughly one-third of mobile phone users have a smartphone in India, and that figure is expected to only move higher in the next few years.

As we look back on prior iPhone launches, we find ourselves saying “I’ve seen this movie before” and we have. It usually bodes rather well for Apple and we expect that to be the case once again given the large install base Apple has for the iPhone. Last summer Apple sold its 1 billionth iPhone, but as we know from experience and upgrades, not all phones sold are still in use. According to research from UBS, the number of active devices is around 800 million, roughly 80% larger than when Apple debuted the iPhone 6. Simply put, the larger the number of active users, the larger the number of people upgrading every time Apple unveils a new smartphone, especially as newer versions of iOS tend to make older iPhone painfully slow.

There is also the added benefit of Apple putting would-be iPhone buyers in a box as they look to match either an iPhone upgrade or a new purchase with storage needs. Given the increasing usage of the camera for pictures and video, Apple has upped available storage, but that comes at a cost. We see this as well as the iPhone X helping move Apple’s average iPhone selling prices higher in the coming months.

Apple will report its 3Q 2017 results later this week, and odds are given the timing of the new iPhone model launches the company will get a pass of sorts on that performance. In our view, the guidance will be what investors will be focused on, and they will be listening, as will we, not only on iPhone production commentary, but the timing around these models being launched in other markets. As these models go truly global, it makes the iPhone story and thus Apple’s story a 2018 event. We are not alone in that thinking given that current revenue expectations for 2018 have Apple delivering 17% growth to $266.8 billion vs. 5.5% growth this year. As this occurs, odds are the Wall Street bulls will once again return to AAPL shares, and we want to be there ahead of them.

We recognize Apple can have great quarterly earnings report that leads to AAPL shares popping, but from time to time the company has issued results that caused some degree of investor indigestion. We want to be positioned for the former, but we will use the latter should it happen later this week to improve the cost basis for AAPL shares on the Tematica Investing Select List for the longer-term. In our view, Apple is one of the companies that will expand its offering as our Connected Society continues to expand past smartphones and computers to the home, car and the Internet of Things. Apple is paving the way for proprietary content, adding to its position in the home with its HomePod digital assistant and growing its partnerships in Corporate America.


Apple’s story is far from over.

Our price target on Apple shares is $200 or 18x expected current 2018 consensus EPS of $11.16. We’d note that over the last few weeks that 2011 consensus EPS figure has crept up from $10.67, and there is the rather likely possibility we will see that figure move even higher as we enter 2018. Over the last several quarters, Apple has regained its past track record for beating bottom line expectations and given the high profile nature of the iPhone X we would not be shocked to learn Apple has once again sandbagged expectations for the second half of 2017.

Over the last five years, Apple shares have peaked at an average P/E multiple of 16x and bottomed out at 11x. That suggests an upside vs downside tradeoff in the shares between $120-$180, vs. the current share price near $160. As we noted above, we strongly suspect Apple will surprise to the upside in 2018 and could deliver EPS between $12-$13; the current high estimate for Apple EPS in 2018 sits at $13.29. In the coming quarters, provided Apple’s EPS beating track record continues, we see 2018 EPS expectations moving higher, and Wall Street bumping up price targets along the way. If Apple stumbles near-term, we would look to aggressively scoop up the shares between $140-$145.

  • We are adding shares of Connected Society company Apple (AAPL) to the Tematica Investing Select List with a $200 price target.
PwC Data Confirms Our Content is King Investing Theme

PwC Data Confirms Our Content is King Investing Theme

We’ve touched on this aspect of our Content is King investing theme before, but nothing like data from PricewaterhouseCoopers to confirm it and the theme itself!

Box-office markets over the next few years are expected to grow more quickly abroad than in North America, where receipts have been relatively flat and are forecast to expand only modestly. That dynamic already is changing the way movies get made in Hollywood, as studios focus on big-tent productions like superhero epics that play across borders, or find story lines they know will fly in censorious countries.The Wall Street Journal used analysis by PricewaterhouseCoopers to give a fuller picture of the five fastest-growing box-office markets around the world.

Source: A Look at the Five Fastest-Growing Markets for Movies – WSJ