Weekly Issue: Factors making the stock market melt up a head-scratcher

Weekly Issue: Factors making the stock market melt up a head-scratcher

Key points inside this issue

  • Our long-term price target on Disruptive Innovator leader Nokia (NOK) shares remains $8.50.
  • We will continue to be long-term shareholders with Disruptive Innovator Select List resident Universal Display (OLED). Given the improving outlooks, our near-term price target for OLED shares is getting lifted to $150 from $125, and I will revisit that target as we move through the balance of 2019.

 

Reading the latest from the Oracle of Omaha

Over the weekend, the Oracle of Omaha, Warren Buffett, released his annual letter to shareholders of Berkshire Hathaway (BRK.A). This letter has become a must-read among institutional and individual investors alike because it not only reveals changes in Berkshire’s top investment portfolio positions, but it also has contained ample comments on the economy and markets as well as an investing lesson or two.

Out of the gate, we learned that once again Team Buffett outperformed the major stock market indices in 2018. As Buffett got underway, he casually reminded readers to be buyers of “ably managed businesses, in whole or part, that possess favorable and durable economic characteristics” and to do so at sensible prices. While it may seem somewhat self-serving this sounds very much like our thematic investing strategy that looks to identify companies benefitting from structural economic, demographic, psychographic and technological changes at prices that offer commanding upside vs. potential downside.

In the past, Buffett has commented that stocks are akin to pieces of paper and it’s the businesses behind them that are the drivers of revenue and profits. It’s an idea we are very much in tune with as we view ourselves as buyers of thematically well-positioned business first, their shares second. No matter how attractive a stock’s price may be, if its business is troubled or facing thematic headwinds, it can be a tough pill to swallow.

As Buffett later noted, “On occasion, a ridiculously high purchase price for a given stock will cause a splendid business to become a poor investment — if not permanently, at least for a painfully long period.” I certainly agree with that statement because buying a stock at the wrong price can make for a painful experience. There are times, to be patient, but there are also times when the thesis behind owning a stock changes. In those times, it makes far more sense to cut bait in favor of better-positioned companies.

Buffett then shared that “prices are sky-high for businesses possessing decent long- term prospects,” which is something we’ve commented on several times in recent weeks as the stock market continued to melt up even as earnings expectations for the near term have moved lower. We’ll continue to take the advice of Buffett and focus on “calculating whether a portion of an attractive business is worth more than its market price,” for much like Buffett and his team work for Berkshire shareholders, Tematica and I work for you, our subscribers.

Mixed in among the rest of the letter are some on Buffett’s investing history, which is always an informative read, and a quick mention that “At Berkshire, we hope to invest significant sums across borders” and that it continues to “hope for an elephant-sized acquisition.” While I can’t speak to any acquisition, especially after the debacle that is now recognized as Kraft Heinz (KHC), the focus on investing across borders potentially speaks to our New Global Middle-class and Living the Life investing themes. Given Buffett’s style, I suspect Team Buffett is more likely to tap into the rising middle-class over luxury and travel.

Several times Buffett touched on his age, 88 years, as well as that of its key partner Charlie Munger, who is 95. There was no meaningful revelation on how they plan to transition the management team, but odds are that will be a topic of conversation, as will Kraft Heinz Co. (KHC) at the annual shareholder meeting that is scheduled for Saturday, May 4. More details on that can be found at the bottom of the 2018 shareholder letter.

If I had to describe the overall letter, it was a very solid one, but candidly not one of the more memorable ones. Perhaps that reflects 2018 as a whole, a year in which all major market indices fell into the red during the last quarter of the year, and a current environment that is characterized by slowing global growth.

 

More signs that the domestic economy is a-slowin’

In recent issues of Tematica Investing and in the recent Context & Perspectives pieces penned by Tematica’s Chief Macro Strategist Lenore Hawkins, we’ve shared how even though the U.S. economy looks like the best one on the global block, it is showing signs of slowing. We had further confirmation of that in the recent December Retail Sales Report as well as the January Industrial Production data that showed a drop in manufacturing activity. The December Durable Orders report that showed orders for non-defense capital goods excluding aircraft dropped 0.7% added further confirmation. Moreover, the report showed a downward November revision for the category to a fall of 1.0% vs. the prior 0.6% decline.

Much the way we focus on the order data inside the monthly ISM and IHS Markit PMI reports, the order data contained inside the monthly Durable Orders report gives us a sense of what is likely to come in near-term. These declining orders combined with the January declines in Industrial Production suggest slack is growing in the manufacturing economy, which means orders for new production equipment are likely to remain soft in the near-term. 

This past Monday we received another set of data that point to a slowing U.S. economy. We learned the Chicago Fed National Activity Index (CFNAI) fell to -0.43 in January from +0.05 in December. This index tracks 85 indicators; we’d note that in January, 35 of those indicators made positive contributions to the index, but that 50 made negative contributions, which produced the month-over-month decline.

Before we get all nervous over that negative January reading for the CFNAI, periods of economic expansion have been associated with index values above -0.70, which means the economy continued to expand in January, just at a much slower pace compared to December. Should the CFNAI reading fall below -0.70 in February or another coming month, it would signal a contraction in the domestic economy.

In response, Buffett likely would say that he and the team will continue to manage the portfolio for the long term, and that’s very much in sync with our thematic investing time frame.

 

Watch those dividends… for increases and for cuts!

Ahead of Buffett’s shareholder letter, shares of Kraft Heinz (KHC) tumbled in a  pronounced manner following several announcements, one of which included the 35% cut in its quarterly dividend to $0.40 per share from $0.625 per share. That’s a huge disappointment given the commonplace expectation that a company is expected to pay its dividend in perpetuity. It can increase its dividend or from time to time declare a special dividend, but as we’ve seen time and time again, the cutting of a company’s dividend is a disaster its stock price. We’ve seen this when General Motors (GM) and General Electric (GE) cut their respective dividends and again last week when Kraft made a similar announcement.

Those three are rather high profile and well-owned stocks, but they aren’t the only ones that have cut quarterly dividend payments to their shareholders. In December, L Brands (LB), the company behind Victoria’s Secret and Bath & Body Works, clipped its annual dividend by 50% to $1.20 per share from $2.40 per share and its shares dropped from $35 to $24 before rebounding modestly. On the company’s fourth-quarter earnings conference call, management of Century Link (CTL)  disclosed it would be cutting the telecom service provider’s annual dividend from $2.16 to $1.00 per share. Earlier this month, postal meter and office equipment company Pitney Bowes (PBI) declared a quarterly dividend of $0.05 per share, more than 73% fall from the prior dividend of $0.1875 per share. Other dividend cuts in recent weeks were had at Owens & Minor (OMI), Manning & Napier (MN), Unique Fabricating (UFAB), County Bancorp (ICBK), and Fresh Del Monte (FDP).

What the majority of these dividend cuts have in common is a challenged business, and in some cases like that for Pitney Bowes, the management team and Board have opted to carve out a new path for its capital allocation policy. For Pitney, it means shifting the mix to favor its share buyback program over dividends given the additional $100 million authorization that was announced which upsized its program to $121 million.

As I see it, there are several lessons to be had from these dividends:

One, outsized dividend yields as was the case back in September with L Brands can signal an opportunity for dividend income-seeking investors, but it can also represent a warning sign as investors exit shares in businesses that look to have operating and/or cash flow pressures.

This means that Two, we as investors always need to do the homework to determine what the prospects for the company’s business. As we discussed above, Buffett’s latest shareholder letter reminds investors to be buyers of “ably-managed businesses, in whole or part, that possess favorable and durable economic characteristics” and to do so at sensible prices. Through our thematic lens, it’s no surprise that L Brands and Pitney Bowes are hitting the headwinds of our Digital Lifestyle investing theme, while Kraft Heinz is in the grips of the consumer shift to Cleaner Living. Perhaps Kraft should have focused on something other than cost cuts to grow its bottom line.

Third, investors make mistakes and as we saw with the plummet in the share price at Kraft Heinz, it can happen to Buffett as well. There’s no shame in making a mistake, so long as we can learn from it.

Fourth and perhaps most important, while some may look at the growing number of dividend cuts on a company by company basis, if we look at them in aggregate the pace is greater than the number of such cuts, we saw in all of 2018. While we try not to overly excited one way or another, the pace of dividend cuts is likely to spur questions over the economy and where we are in the business cycle.

 

Putting it all together

As we move into March, more than 90% of the S&P 500 group of companies will have reported their quarterly results. As those results have been increasingly tallied over the last few weeks, we’ve seen EPS expectations move lower for the coming quarters and as of Friday’ stock market close the consensus view is 2019 EPS growth for the S&P 500 will be around 4.7%. That is significantly lower than the more than 11% EPS growth that was forecasted back at the start of the December quarter.

For those keeping score, the consensus for the current quarter points to a 2% growth rate. However, we’re starting to see more analysts cut their outlooks as more figures are reported. For example, JPMorgan (JPM) now sees the current quarter clocking in at 1.5% due to slower business investment spending. For now, JP sees a pick-up in the June quarter to a 2.25% forecast. But in our view, this will hinge on what we see in the coming order data.

Putting it all together, we have a slowing economy, EPS cuts that are making the stock market incrementally more expensive as has moved higher over the last 9 weeks, marking one of the best runs it has had in more than 20 years, and a growing number of dividend cuts. Sounds like a disconnect in the making to me.

Clearly, the stock market has been melting up over the last several weeks on increasing hopes over a favorable trade deal with China, but as I’ve been saying for some time, measuring the success of any trade agreement will hinge on the details. Should it fail to live up to expectations, which is a distinct possibility, we could very well see a “buy the rumor, sell the news” situation arise in the stock market.

We will continue to tread carefully in the near-term, especially given the likelihood that following the disappointing December Retail Sales report and consumer-facing data, retailers are likely to deliver underwhelming quarterly results. Despite favorable weather in December, we saw that yesterday with Home Depot (HD),  and historically it’s been a pretty good yardstick for the consumer. In all likelihood as the remaining 10% of the S&P 500 companies report, we’re going to see further negative revisions to that current 4.7% EPS growth rate for this year I talked about.

 

Tematica Investing

A few paragraphs above, I touched on the strength of the stock market thus far in 2019, and even though concerns are mounting, we have seen pronounced moves higher in a number of the Thematic Leaders as you can see in the chart below. We’ll continue to monitor the changing landscapes and what they may bring. For example, in the coming weeks both Apple and Disney (DIS) are expected to unveil their respective streaming services, and I’ll be listening closely for to determine what this means for Digital Lifestyle leader Netflix (NFLX).

Nokia and Mobile World Congress 2019

We are two days into Mobile World Congress 2019, arguably THE mobile industry event of the year and one to watch for our Digital Lifestyle, Digital Infrastructure, and Disruptive Innovator themes. Thus far, we’ve received a number of different device and network announcements from the event.

On the device side, more 5G capable handsets have been announced as well as a number of foldable smartphones that appear to be a hybrid between a large format smartphone and a tablet. Those foldable smartphones are sporting some hefty price tags as evidenced by the $2,600 one for Huawei’s model. Interesting, but given the size of the device as well as the price point, one has to question if this is a commercially viable product or simply a concept one. Given the pushback that we are seeing with big-ticket smartphones that is resulting in consumers not upgrading their smartphones as quickly as they have in the past, odds are some of these device announcements fall more into the concept category.

On the network side, the news to center on comes from Verizon (VZ), which said it expects to have its 5G network in 30 U.S. cities by the end of 2019. That’s hardly what one would call a vibrant, national 5G network, and makes those commercial 5G launches really a 2020 event for the mobile carriers and consumers. It does mean that over the next several quarters, those mobile operators will continue to build out their 5G networks, which is positive for our shares of Nokia (NOK). As the 5G buildout moves beyond the U.S. into Europe and Asia, this tailwind bodes rather well for the company and helps back its longer-term targets. 

This 5G timetable was also confirmed by comments from Intel (INTC) about the timing of 5G chipsets, which are now expected to be available by the end of 2019 and are not likely to hit devices until 2020. Given the timing of CES in early January and the Mobile World Congress 2020 in February, odds are it means we will see a number of device announcements in early 2020 that will hit shelves in the second half of the year. Many have been wondering when Apple (AAPL) will have a 5G powered iPhone, and based on the various chipset and network comments, odds are the first time we’ll hear about such a device is September-October 2020. 

If history is to be repeated, we are likely to see something similar to what we saw with the first 3G and 4G handsets. By that, we mean a poor consumer experience at least until the 5G networks are truly national in scale and the chipsets become more efficient. One of the issues with each additional layer of mobile technology is it requires additional radio frequency (RF) chips, which in turn not only consume more power but also present internal design issues that out of the gate could limit the size of the battery. Generally speaking, early versions of these new smartphones tend to have less than desirable up-times. This is another reason to think Apple will not be one of those out of the gate 5G smartphone companies, but rather it will repeat its past strategy of bringing its product to market at the tipping point for the chipsets and network deployments. 

Circling back to our Nokia shares, while there are just over a handful of 5G smartphones that have been announced, some of which are expected to become available later this year, over the coming 18 months we will see a far greater number of 5G devices. This should drive Nokia’s high margin, IP licensing business in the coming quarters. As this occurs, Nokia’s mobile infrastructure should continue to benefit from the growing number of 5G networks being built out, not only here in the US but elsewhere as well.

  • Our long-term price target on Disruptive Innovator leader Nokia (NOK) shares remains $8.50

 

Universal Display shares get lit up

Last week I previewed the upcoming earnings report from Select List resident Universal Display (OLED) and following that news the shares were off with a bang! Universal posted earnings of $0.40 per share, $0.08 per share better than the consensus expectations, on revenue that matched the Wall Street consensus of $70 million. Considering the tone of the smartphone market, I view the company’s quarterly results as “not as bad a feared” and, no surprise, the guidance reflects the continued adoption of organic light-emitting displays across a growing number of devices and vendors. For the current year, Universal has guided revenue to $325 million-$350 million, which is likely to be a step function higher as we move through the coming quarters reflecting the traditional year-end debut of new smartphones, TVs and other devices.

Longer-term, we know Apple (AAPL) and others are looking to migrate more of their product portfolios to organic light-emitting diode displays. This shift will drive capacity increases in the coming several quarters — and recent reports on China’s next round of display investing seems to confirm this happening per its latest Five-Year Plan. As we have seen in the past, this can lead to periods of oversupply and pricing issues for the displays, but the longer-term path as witnessed with light-emitting diodes (LEDs) is one of greater adoption. 

As display pricing improves as capacity grows, new applications for the technology tend to arise. Remember that while we are focused on smartphones and TVs in the near-term, other applications include automotive lighting and general lighting. Again, just like we saw with LEDs.

  • We will continue to be long-term shareholders with Disruptive Innovator Select List resident Universal Display (OLED). Given the improving outlooks, our near-term price target for OLED shares is getting lifted to $150 from $125, and I will revisit that target as we move through the balance of 2019.

 

 

Weekly Issue: Favorable signposts have us adding a call option position

Weekly Issue: Favorable signposts have us adding a call option position

Key points inside this issue

  • We will continue to be long-term shareholders with Disruptive Innovator Select List resident Universal Display (OLED). Given the improving outlooks, our near-term price target for OLED shares is getting lifted to $150 from $125, and I will revisit that target as we move through the balance of 2019.
  • We are issuing a Buy on and adding the Nokia Corp. (NOK) December 2019 7.00 calls (NOK191220C0000700) that closed last night at 0.38 to the Options+ Select List with 0.20 stop loss.
  • We will continue to hold the Del Frisco’s Restaurant Group (DFRG) September 20, 2019, 10.00 calls (DFRG190920C00010000) that closed last night at 1.00, but we will boost our stop loss to 0.80, which will ensure a minimum return of 33% based on our 0.60 entry point.

 

Reading the latest from the Oracle of Omaha

Over the weekend, the Oracle of Omaha, Warren Buffett, released his annual letter to shareholders of Berkshire Hathaway (BRK.A). This letter has become a must-read among institutional and individual investors alike because it not only reveals changes in Berkshire’s top investment portfolio positions, but it also has contained ample comments on the economy and markets as well as an investing lesson or two.

Out of the gate, we learned that once again Team Buffett outperformed the major stock market indices in 2018. As Buffett got underway, he casually reminded readers to be buyers of “ably managed businesses, in whole or part, that possess favorable and durable economic characteristics” and to do so at sensible prices. While it may seem somewhat self-serving this sounds very much like our thematic investing strategy that looks to identify companies benefitting from structural economic, demographic, psychographic and technological changes at prices that offer commanding upside vs. potential downside.

In the past, Buffett has commented that stocks are akin to pieces of paper and it’s the businesses behind them that are the drivers of revenue and profits. It’s an idea we are very much in tune with as we view ourselves as buyers of thematically well-positioned business first, their shares second. No matter how attractive a stock’s price may be, if its business is troubled or facing thematic headwinds, it can be a tough pill to swallow.

As Buffett later noted, “On occasion, a ridiculously high purchase price for a given stock will cause a splendid business to become a poor investment — if not permanently, at least for a painfully long period.” I certainly agree with that statement because buying a stock at the wrong price can make for a painful experience. There are times, to be patient, but there are also times when the thesis behind owning a stock changes. In those times, it makes far more sense to cut bait in favor of better-positioned companies.

Buffett then shared that “prices are sky-high for businesses possessing decent long- term prospects,” which is something we’ve commented on several times in recent weeks as the stock market continued to melt up even as earnings expectations for the near term have moved lower. We’ll continue to take the advice of Buffett and focus on “calculating whether a portion of an attractive business is worth more than its market price,” for much like Buffett and his team work for Berkshire shareholders, Tematica and I work for you, our subscribers.

Mixed in among the rest of the letter are some on Buffett’s investing history, which is always an informative read, and a quick mention that “At Berkshire, we hope to invest significant sums across borders” and that it continues to “hope for an elephant-sized acquisition.” While I can’t speak to any acquisition, especially after the debacle that is now recognized as Kraft Heinz (KHC), the focus on investing across borders potentially speaks to our New Global Middle-class and Living the Life investing themes. Given Buffett’s style, I suspect Team Buffett is more likely to tap into the rising middle-class over luxury and travel.

Several times Buffett touched on his age, 88 years, as well as that of its key partner Charlie Munger, who is 95. There was no meaningful revelation on how they plan to transition the management team, but odds are that will be a topic of conversation, as will Kraft Heinz Co. (KHC) at the annual shareholder meeting that is scheduled for Saturday, May 4. More details on that can be found at the bottom of the 2018 shareholder letter.

If I had to describe the overall letter, it was a very solid one, but candidly not one of the more memorable ones. Perhaps that reflects 2018 as a whole, a year in which all major market indices fell into the red during the last quarter of the year, and a current environment that is characterized by slowing global growth.

 

More signs that the domestic economy is a-slowin’

In recent issues of Tematica Investing and in the recent Context & Perspectives pieces penned by Tematica’s Chief Macro Strategist Lenore Hawkins, we’ve shared how even though the U.S. economy looks like the best one on the global block, it is showing signs of slowing. We had further confirmation of that in the recent December Retail Sales Report as well as the January Industrial Production data that showed a drop in manufacturing activity. The December Durable Orders report that showed orders for non-defense capital goods excluding aircraft dropped 0.7% added further confirmation. Moreover, the report showed a downward November revision for the category to a fall of 1.0% vs. the prior 0.6% decline.

Much the way we focus on the order data inside the monthly ISM and IHS Markit PMI reports, the order data contained inside the monthly Durable Orders report gives us a sense of what is likely to come in near-term. These declining orders combined with the January declines in Industrial Production suggest slack is growing in the manufacturing economy, which means orders for new production equipment are likely to remain soft in the near-term. 

This past Monday we received another set of data that point to a slowing U.S. economy. We learned the Chicago Fed National Activity Index (CFNAI) fell to -0.43 in January from +0.05 in December. This index tracks 85 indicators; we’d note that in January, 35 of those indicators made positive contributions to the index, but that 50 made negative contributions, which produced the month-over-month decline.

Before we get all nervous over that negative January reading for the CFNAI, periods of economic expansion have been associated with index values above -0.70, which means the economy continued to expand in January, just at a much slower pace compared to December. Should the CFNAI reading fall below -0.70 in February or another coming month, it would signal a contraction in the domestic economy.

In response, Buffett likely would say that he and the team will continue to manage the portfolio for the long term, and that’s very much in sync with our thematic investing time frame.

 

Watch those dividends… for increases and for cuts!

Ahead of Buffett’s shareholder letter, shares of Kraft Heinz (KHC) tumbled in a  pronounced manner following several announcements, one of which included the 35% cut in its quarterly dividend to $0.40 per share from $0.625 per share. That’s a huge disappointment given the commonplace expectation that a company is expected to pay its dividend in perpetuity. It can increase its dividend or from time to time declare a special dividend, but as we’ve seen time and time again, the cutting of a company’s dividend is a disaster its stock price. We’ve seen this when General Motors (GM) and General Electric (GE) cut their respective dividends and again last week when Kraft made a similar announcement.

Those three are rather high profile and well-owned stocks, but they aren’t the only ones that have cut quarterly dividend payments to their shareholders. In December, L Brands (LB), the company behind Victoria’s Secret and Bath & Body Works, clipped its annual dividend by 50% to $1.20 per share from $2.40 per share and its shares dropped from $35 to $24 before rebounding modestly. On the company’s fourth-quarter earnings conference call, management of Century Link (CTL)  disclosed it would be cutting the telecom service provider’s annual dividend from $2.16 to $1.00 per share. Earlier this month, postal meter and office equipment company Pitney Bowes (PBI) declared a quarterly dividend of $0.05 per share, more than 73% fall from the prior dividend of $0.1875 per share. Other dividend cuts in recent weeks were had at Owens & Minor (OMI), Manning & Napier (MN), Unique Fabricating (UFAB), County Bancorp (ICBK), and Fresh Del Monte (FDP).

What the majority of these dividend cuts have in common is a challenged business, and in some cases like that for Pitney Bowes, the management team and Board have opted to carve out a new path for its capital allocation policy. For Pitney, it means shifting the mix to favor its share buyback program over dividends given the additional $100 million authorization that was announced which upsized its program to $121 million.

As I see it, there are several lessons to be had from these dividends:

One, outsized dividend yields as was the case back in September with L Brands can signal an opportunity for dividend income-seeking investors, but it can also represent a warning sign as investors exit shares in businesses that look to have operating and/or cash flow pressures.

This means that Two, we as investors always need to do the homework to determine what the prospects for the company’s business. As we discussed above, Buffett’s latest shareholder letter reminds investors to be buyers of “ably-managed businesses, in whole or part, that possess favorable and durable economic characteristics” and to do so at sensible prices. Through our thematic lens, it’s no surprise that L Brands and Pitney Bowes are hitting the headwinds of our Digital Lifestyle investing theme, while Kraft Heinz is in the grips of the consumer shift to Cleaner Living. Perhaps Kraft should have focused on something other than cost cuts to grow its bottom line.

Third, investors make mistakes and as we saw with the plummet in the share price at Kraft Heinz, it can happen to Buffett as well. There’s no shame in making a mistake, so long as we can learn from it.

Fourth and perhaps most important, while some may look at the growing number of dividend cuts on a company by company basis, if we look at them in aggregate the pace is greater than the number of such cuts, we saw in all of 2018. While we try not to overly excited one way or another, the pace of dividend cuts is likely to spur questions over the economy and where we are in the business cycle.

 

Putting it all together

As we move into March, more than 90% of the S&P 500 group of companies will have reported their quarterly results. As those results have been increasingly tallied over the last few weeks, we’ve seen EPS expectations move lower for the coming quarters and as of Friday’ stock market close the consensus view is 2019 EPS growth for the S&P 500 will be around 4.7%. That is significantly lower than the more than 11% EPS growth that was forecasted back at the start of the December quarter.

For those keeping score, the consensus for the current quarter points to a 2% growth rate. However, we’re starting to see more analysts cut their outlooks as more figures are reported. For example, JPMorgan (JPM) now sees the current quarter clocking in at 1.5% due to slower business investment spending. For now, JP sees a pick-up in the June quarter to a 2.25% forecast. But in our view, this will hinge on what we see in the coming order data.

Putting it all together, we have a slowing economy, EPS cuts that are making the stock market incrementally more expensive as has moved higher over the last 9 weeks, marking one of the best runs it has had in more than 20 years, and a growing number of dividend cuts. Sounds like a disconnect in the making to me.

Clearly, the stock market has been melting up over the last several weeks on increasing hopes over a favorable trade deal with China, but as I’ve been saying for some time, measuring the success of any trade agreement will hinge on the details. Should it fail to live up to expectations, which is a distinct possibility, we could very well see a “buy the rumor, sell the news” situation arise in the stock market.

We will continue to tread carefully in the near-term, especially given the likelihood that following the disappointing December Retail Sales report and consumer-facing data, retailers are likely to deliver underwhelming quarterly results. Despite favorable weather in December, we saw that yesterday with Home Depot (HD),  and historically it’s been a pretty good yardstick for the consumer. In all likelihood as the remaining 10% of the S&P 500 companies report, we’re going to see further negative revisions to that current 4.7% EPS growth rate for this year I talked about.

 

Tematica Investing

A few paragraphs above, I touched on the strength of the stock market thus far in 2019, and even though concerns are mounting, we have seen pronounced moves higher in a number of the Thematic Leaders as you can see in the chart below. We’ll continue to monitor the changing landscapes and what they may bring. For example, in the coming weeks both Apple and Disney (DIS) are expected to unveil their respective streaming services, and I’ll be listening closely for to determine what this means for Digital Lifestyle leader Netflix (NFLX).

Nokia and Mobile World Congress 2019

We are two days into Mobile World Congress 2019, arguably THE mobile industry event of the year and one to watch for our Digital Lifestyle, Digital Infrastructure, and Disruptive Innovator themes. Thus far, we’ve received a number of different device and network announcements from the event.

On the device side, more 5G capable handsets have been announced as well as a number of foldable smartphones that appear to be a hybrid between a large format smartphone and a tablet. Those foldable smartphones are sporting some hefty price tags as evidenced by the $2,600 one for Huawei’s model. Interesting, but given the size of the device as well as the price point, one has to question if this is a commercially viable product or simply a concept one. Given the pushback that we are seeing with big-ticket smartphones that is resulting in consumers not upgrading their smartphones as quickly as they have in the past, odds are some of these device announcements fall more into the concept category.

On the network side, the news to center on comes from Verizon (VZ), which said it expects to have its 5G network in 30 U.S. cities by the end of 2019. That’s hardly what one would call a vibrant, national 5G network, and makes those commercial 5G launches really a 2020 event for the mobile carriers and consumers. It does mean that over the next several quarters, those mobile operators will continue to build out their 5G networks, which is positive for our shares of Nokia (NOK). As the 5G buildout moves beyond the U.S. into Europe and Asia, this tailwind bodes rather well for the company and helps back its longer-term targets. 

This 5G timetable was also confirmed by comments from Intel (INTC) about the timing of 5G chipsets, which are now expected to be available by the end of 2019 and are not likely to hit devices until 2020. Given the timing of CES in early January and the Mobile World Congress 2020 in February, odds are it means we will see a number of device announcements in early 2020 that will hit shelves in the second half of the year. Many have been wondering when Apple (AAPL) will have a 5G powered iPhone, and based on the various chipset and network comments, odds are the first time we’ll hear about such a device is September-October 2020. 

If history is to be repeated, we are likely to see something similar to what we saw with the first 3G and 4G handsets. By that, we mean a poor consumer experience at least until the 5G networks are truly national in scale and the chipsets become more efficient. One of the issues with each additional layer of mobile technology is it requires additional radio frequency (RF) chips, which in turn not only consume more power but also present internal design issues that out of the gate could limit the size of the battery. Generally speaking, early versions of these new smartphones tend to have less than desirable up-times. This is another reason to think Apple will not be one of those out of the gate 5G smartphone companies, but rather it will repeat its past strategy of bringing its product to market at the tipping point for the chipsets and network deployments. 

Circling back to our Nokia shares, while there are just over a handful of 5G smartphones that have been announced, some of which are expected to become available later this year, over the coming 18 months we will see a far greater number of 5G devices. This should drive Nokia’s high margin, IP licensing business in the coming quarters. As this occurs, Nokia’s mobile infrastructure should continue to benefit from the growing number of 5G networks being built out, not only here in the US but elsewhere as well.

  • Our long-term price target on Disruptive Innovator leader Nokia (NOK) shares remains $8.50

 

Universal Display shares get lit up

Last week I previewed the upcoming earnings report from Select List resident Universal Display (OLED) and following that news the shares were off with a bang! Universal posted earnings of $0.40 per share, $0.08 per share better than the consensus expectations, on revenue that matched the Wall Street consensus of $70 million. Considering the tone of the smartphone market, I view the company’s quarterly results as “not as bad a feared” and, no surprise, the guidance reflects the continued adoption of organic light-emitting displays across a growing number of devices and vendors. For the current year, Universal has guided revenue to $325 million-$350 million, which is likely to be a step function higher as we move through the coming quarters reflecting the traditional year-end debut of new smartphones, TVs and other devices.

Longer-term, we know Apple (AAPL) and others are looking to migrate more of their product portfolios to organic light-emitting diode displays. This shift will drive capacity increases in the coming several quarters — and recent reports on China’s next round of display investing seems to confirm this happening per its latest Five-Year Plan. As we have seen in the past, this can lead to periods of oversupply and pricing issues for the displays, but the longer-term path as witnessed with light-emitting diodes (LEDs) is one of greater adoption. 

As display pricing improves as capacity grows, new applications for the technology tend to arise. Remember that while we are focused on smartphones and TVs in the near-term, other applications include automotive lighting and general lighting. Again, just like we saw with LEDs.

  • We will continue to be long-term shareholders with Disruptive Innovator Select List resident Universal Display (OLED). Given the improving outlooks, our near-term price target for OLED shares is getting lifted to $150 from $125, and I will revisit that target as we move through the balance of 2019.

 

Tematica Options+

It would have been wonderful to have been long Universal Display (OLED) calls, but again given what we’ve heard in recent weeks about the tone of the smartphone market, its results were far more “not as bad as feared” and I suspect in the short-term drove a fair amount of short covering. I still like the long-term prospects for the adoption of the technology, and it’s something to watch as adoption heats up.

By comparison, after months of what seemed like modest forward progress coming out of Mobile World Congress, the pace of 5G is about to get into gear from both a device and network perspective. As we move through 2019, that pace is poised to accelerate even further, which should bring favorable operating leverage to both businesses tucked inside Nokia.

For that reason, I am adding the Nokia Corp. (NOK) December 2019 7.00 calls (NOK191220C0000700) that closed last night at 0.38 to the Options+ Select List. The duration should capture that expected swell in 5G activity, and as we move through the coming months, I’ll consider a layered strategy that could include adding 2020 calls to the mix. Given the time span, we’ll set a wider stop loss berth than usual at 0.20.

 

 

Many Reasons to be Bullish on This Semi-Cap Company

Many Reasons to be Bullish on This Semi-Cap Company

We are adding shares of Applied Materials (AMAT) to the Tematica Select List as the company’s business is poised to benefit from our Disruptive Technology investing theme over the coming 12-24 months. Applied Materials is a leading nano- manufacturing equipment, service, and software provider to the semiconductor, flat panel display (FPD), and solar industries. In short, it builds the capital equipment that is used to manufacture chips, display and solar panel components. Our price target of $47 offers upside of roughly 30 percent and equates to just over 17x expected 2018 earnings in the range of $2.75 per share. By comparison, consensus expectations call for AMAT to deliver EPS of $2.55-$2.60 this year, up from $1.75 in 2016. Our rating is a Buy up to $41-$42.

Why We’re Adding AMAT Shares to the Tematica Select List

It’s been a while since we’ve seen the TV ad touting cotton as the fabric of our lives. Over the last few years, as we’ve been migrating more and more into the digital society, we’ve thought the new fabric of our lives is chips. As we know from our devices, be it a laptop, smartphone, tablet, we are facing the need for more computing power, greater connectivity speeds and more connections into more things (cars, homes, and that Internet of Things thing).

There are also newer and in some cases disruptive technologies — like emissive display technology organic light emitting diodes (OLEDs), a technology that is catching fire in the smartphone market, TVs and wearables. In short, there is a pronounced increase in the for chips, which is also spurring a pickup in new semiconductor capital equipment. We know this given our existing position in Universal Display (OLED) shares.

Exiting December, North America-based manufacturers of semiconductor equipment posted $1.99 billion in orders worldwide and a book-to-bill ratio of 1.06, according to the December Equipment Market Data Subscription (EMDS) Book-to-Bill Report published by SEMI. December bookings rose more than 28 percent compared to November 2016 and were up nearly 48% on a year over year basis.

In the recently reported January quarter, Applied’s order book rose more than 85 percent year over year, as orders for its silicon and display businesses rose more than 85 percent and 200 percent, respectively. The silicon business is benefitting from strong 3D NAND demand, given significant power and performance advantages over other memory solutions, as well as silicon to power applications, 4K video, as well as compute-intensive applications like artificial intelligence and smart vehicles.

 

As part of the Internet of Things, we’re seeing sensors and communications being added to a variety of commercial and consumer products as well. These and other applications are, on a combined basis, driving robust demand for additional semiconductor capacity and that is fuel for Applied’s semiconductor business. We see this reflected in capital spending budgets at companies like Intel (INTC), which is boosting its 2017 budget by $2.5 billion year over year to $12 billion. Taiwan Semiconductor (TSM)‘s 2016 capital spending came in at $10.2 billion, ahead of the expected $9.5 billion, and the company is slated to spend another $10 billion in 2017.

The accelerating ramp in OLED display demand was the primary driver of that robust Display order activity, and Applied noted the demand has only strengthened over the last several months. “In the past few months, our view of display spending has strengthened further. We now see customers increasing their investments by around $3 billion in 2017, $1 billion more than we thought in November. Our early view of 2018 is also positive.” It added: “50% of our demand going forward for this year is new customers for the mobile OLED”, with orders improving across all of its mobile OLED customer base. We strongly suspect a significant factor in this ramping Display demand is Apple (AAPL) adopting OLED displays in its next iPhone iteration. Odds are that shift will push other smartphone vendors to adopt OLED display.

One overarching driver over the long term is ramping capacity for semiconductor capital equipment and display technologies in China as it consumes a growing number of devices. In total, wafer fabrication equipment (WFE) sales in China are expected to reach $7 billion in 2017, compared to $6.7 billion in 2016 and $3.4 billion in 2013, according to SEMI, with more significant spending likely in 2018. With easier export controls in China compared to several years ago, companies like Applied can now ship more advanced tools into the country.

Against such a rosy outlook, we’d note semiconductor capital equipment demand tends to be dependent on the health of the economically sensitive semiconductor and consumer electronics industries. This means that we will continue to keep our eyes tuned not only to chip demand and fabrication utilization levels, but also the underlying economic tone of the global economy.

Valuation and Price Target

Our $47 price target equates to 17-18x expected 2017-2018 EPS, which we’d note is a discount to 52-week high price multiples in the range of 21-22x earnings that were accorded to AMAT shares during 2015 and 2016. On the downside, AMAT shares have bottomed out at roughly an average P/E multiple of 12x over the last few years. Applying that multiple to slated 2017-2018 earnings points to downside near $30-$32, and those are levels near which we’d look to scale into our position on share price weakness, as along as the current outlook remains intact.

 

The Bottom Line on Applied Materials (AMAT)
  • We are adding shares of Applied Materials (AMAT) to the Tematica Select List.
  • Our price target of $47 offers upside of roughly 30 percent.
  • Our rating is a Buy up to $41-$42.

 

A new “Buy” rating on a CVS option given its deal with Target (TGT)

A new “Buy” rating on a CVS option given its deal with Target (TGT)

Actions from this post

Ratings changes included in this dated post

  • Issued a “Buy” rating on the CVS Health (CVS) February $95 calls (CVS160219C00095000) that last traded at $1.92, with a recommended protective stop at $1.65.

After what started off as another dismal turn, the stock market rallied in the back half of last week to see the S&P 500 close up 1.4%. That sharp move higher midweek resulted in our being stopped out of the remaining portion of our iShares Barclays 20+ Year Treasury Bond ETF (TLT) February $130 calls. If you took advantage of my special alert last week to sell half of our TLT positon, you still booked a 36% winner in total even after we were stopped out — not bad at all considering that was accomplished in less than a week! It is even more impressive when we look at the market return last week or even year to date.

This just goes to show how volatile options can be when the market swings suddenly. That is why we’re going to focus on risk management as much as trading recommendations until the stock market is in calmer waters. You should continue to hold your FirstEnergy (FE) February $32 calls, as well as your PPL Corp. (PPL) February $35 calls, both of which are profitable at current levels. I continue to be frustrated with our Disney (DIS) position, and we will use any bounce to exit the position in the coming weeks.

Last week’s market rally relieved some of the January pain, but the net result is the index is down 6.7% so far in 2016. The reprieve was fueled in part by two things:

  • Comments from European Central Bank President Mario Draghi suggesting perhaps another round of stimulative monetary policy could be in the cards. Any additional stimulus would serve only to strengthen the dollar.
  • The move higher in oil prices reflects a smaller inventory build per the Energy Information Administration (EIA) weekly report. Peering into that EIA report, however, U.S. crude oil inventories are levels not seen in the last 80 years.

While oil prices will likely trend higher near-term as the East Coast digs out from #Blizzard2016, U.S. refineries are still clocking in at 90.6 percent capacity utilization and crude oil imports are up year over year. We also have to remember that Iran’s returning oil exports will soon ratchet up global supply against a slowing global economy. As such, I see a high probability that any short-term oil price bump is likely to be short-lived.

For those in doubt about the slowing speed of the U.S. economy, last week’s read on the Chicago Fed’s National Activity Index for December marked the fifth consecutive month of contracting activity in the United States. This week saw a horrific print in the January Texas Manufacturing Survey, which reported double-digit percentage drops in production, capacity utilization and new order growth. Granted, the energy economy is a big factor, but stepping back that report adds to the concern raised by the recent January Empire Manufacturing Report, which showed “that business activity declined for New York manufacturers at the fastest pace since the Great Recession.” Digging into that report we see new orders, shipments and overall business conditions fell sharply in January.

Adding more wood to that fire, the January Philly Fed Index not only remained in contraction territory, but also showed yet another drop in its six-month outlook indicator, which fell to 19.1 in December, down from 24.1 in December and 43.4 in November. Against that backdrop, it’s not hard to see how in its December earnings report last Friday, General Electric’s ([stock_quote symbol=”GE”]) industrials segment posted a 1% decline in both organic profit and revenue for the quarter.

Amid those latest economic gleanings, the velocity of earnings reports has started to pick up week over week, and so far I have to say I’ve seen more than a fair amount of disappointing, if not flat out weaker-than-expected outlooks from IBM ([stock_quote symbol=”IBM”]), Starbucks ([stock_quote symbol=”SBUX”]), Deutsche Bank ([stock_quote symbol=”DB”]), United Continental ([stock_quote symbol=”UAL”]), Intel ([stock_quote symbol=”INTC”]), Union Pacific ([stock_quote symbol=”UNP”]), American Express ([stock_quote symbol=”AXP”]) and others. That velocity will only accelerate further, given the number of companies that will be reporting their quarterly earnings the next two weeks.

While most people tend to focus on either growth or defensive positions, there are a few that sit at the intersection of growth and defensive plays. It’s no secret that our population is skewing older, and that is driving demand for a variety of healthcare services. Despite the tone of the economy, people will still seek out medical and other healthcare services. According to the Centers for Medicare & Medicaid Services, health spending is projected to grow at an average rate of 5.8% per year over the 2014-24 period. That’s pretty consistent growth and far better than we are likely to see in the domestic economy. If you get sick or injured, odds are you will still go to the doctor, take your medicine or recommended prescriptions and so on. I like that combination of demographic-fueled growth (it’s hard to slow let alone stop!) and inelastic demand. Put it together and it’s a great combination in a market environment such as this.

To me, CVS Health is a company that is transforming itself from “drug” store to more of a health company as it expands its geographic footprint. CVS continued to move more toward CVS Health as it entered into new clinical affiliations with four leading health care providers (John Muir Health, University of Chicago Medical Center, Novant Health and University of Michigan Health System). As part of this, CVS will provide prescription and visit information to those organizations, as well as clinical support, medication counseling, chronic disease monitoring and wellness programs at CVS/pharmacy stores and CVS MinuteClinics. CVS also stands to benefit from recently acquired businesses, including Target ([stock_quote symbol=”TGT”]) pharmacies and Omnicare. With the acquisition of Omnicare, CVS Health will significantly expand its ability to dispense prescriptions in assisted living and long-term care facilities, serving the senior patient population.

In light of this deal between Target and CVS, we are issuing a “Buy” rating on the CVS February $95 calls (CVS160219C00095000), which last traded at $1.92 and expire on Feb. 19. The strike date will allow investors to capture the benefit of the company’s December-quarter results, which will be published on Feb. 9. Given our attention to risk management in this volatile market, we are also recommending a stop loss at $1.65.

Using TLT, PPL and FE calls as a defensive position in the market

Using TLT, PPL and FE calls as a defensive position in the market

Actions from this post

Ratings changes included in this dated post

  • Issued a “Buy” rating on the iShares Barclays 20+ Year Treasury Bond ETF (TLT) February $130 calls (TLT160219C00130000) that last traded at $0.80, and set a stop loss at $0.50.
  • Issued a “Buy” rating on the PPL Corporation (PPL) February $35 calls (PPL160219C00035000) that last traded at $0.25, and set a $0.15 stop.
  • Issued a “Buy” rating on the FirstEnergy Corp. (FE) February $32 calls (FE160219C00032000) that last traded at $0.65, and set a $0.45 stop.

There is no way to sugar coat it — last week was a horrible five days in the stock market with the S&P 500 falling 2.2 percent ahead of the long weekend. That move lower, added to the index’s retreat thus far in 2016, is making it one of the roughest starts to the trading year in decades. Needless to say I am feeling much better that we exited a number of of positons last week, preferring to live to fight another day.

During the last few weeks, I’ve written about the factors that have been weighing on the market — the slowing domestic economy, concerns about the continued economic contraction in China and related ripple effect and currency headwinds. The market also was weighed down by scaled back expectations for both the global economy and earnings. As I wrote last week, these downward revisions to expectations can be painful at times such as now.

A heavy drag on the stock market last week was oil prices, which continued to come under pressure due to a growing oil glut. The causes include weakened demand and rising supply, which is likely to grow further as Iran begins exporting again after the lifting of economic sanctions against it. I expect oil prices to remain significantly lower year-over-year, which probably will lead to reduced earnings expectations, capital spending cuts and, in all likelihood, some degree of industry consolidation in the coming months. This is already starting to happen as we saw on Friday, when BHP Billiton announced it will book a $4.9 billion after-tax impairment charge against the value of its U.S. shale assets to reflect its reduced price projections and revisions to its development plans. Yesterday, while the stock market was closed, oil moved below $29, which suggests we only have begun to see the damage ahead.

We also saw additional signs of weakness in the domestic industrial economy via the December Industrial Production report. As you can see in the below chart, 2015 was a year of falling industrial activity in the United States. In fact, industrial production fell into contraction territory for the last two months of 2015. Despite what President Obama said in his State of the Union address, there is little reason to think the domestic economy is “strong.”

As these issues filter through the market leading to revised expectations for the economy, we’ll be moving further into an earnings season that is likely to be filled with negative revisions for expectations during the coming quarters.

I expect the market turbulence will continue.

Amid that turbulence, let’s enter two viable ports that should allow us to make some profits in the short term.

One such viable port in the storm is in one of the least risky assets out there — U.S. Treasuries. Given the rash of weaker-than-expected economic data and the lack of inflation confirmed by last week’s PPI report and probably by this week’s CPI report, treasuries are bound to attract increased attention. From my perspective, one of the best ways we can invest in treasuries is through the iShares Barclays 20+ Year Treasury Bond ETF ([stock_quote symbol=”TLT”]). Exchange-traded funds (ETFs) typically offer modest gains — not the big potential we strive for here at PowerOptions Trader with call options. My recommendation for TLT exposure are the TLT February $130 calls (TLT160219C00130000) that last traded at $0.80. The February strike date gives us ample time for additional economic data that will confirm the slowdown and get us through the bulk of the December quarter’s earnings. Given the prospects for a volatile market, let’s keep a tight rein on risk management and set a protective stop for this call option at $0.50, which will help limit potential losses if the market rebounds.

During the last few months, the monthly Industrial Production report has shown a continual drop in utility production due to the unseasonably warm weather. However, the National Weather Service is now reporting that a “frigid air mass” will make its way across the Northern Plains toward most of the eastern United States early this week. Later this week, we will see snow hitting most of the country with a major storm that could deliver up to a foot of snow in parts of the East Coast heading into this weekend.

To me, this once again means consumers will be turning up the heat to stay warm, which will result in a rebound in utility production. Utilities have an added benefit in that they are another port in the market storm. I’ve parsed through the financials of several utility stocks, including Southern Co. ([stock_quote symbol=”SO”]), Duke Energy ([stock_quote symbol=”D”]), PG&E ([stock_quote symbol=”PCG”]) and others to find the right geographic exposure combined with the right strike price and ample trading volume. That screening led me to PPL Corporation ([stock_quote symbol=”PPL”]), which delivers electricity to customers in Pennsylvania, Kentucky, Virginia and Tennessee — areas that will be hit by the snow and freezing temperatures — and FirstEnergy Corp. ([stock_quote symbol=”FE”]), which serves markets such as Ohio, Pennsylvania, Illinois, Michigan, New Jersey and Maryland.

To positon ourselves to profit from the return of frigid temperatures and snowy weather, add the PPL February $35 calls (PPL160219C00035000) that last traded at $0.25, with a $0.15 stop, and the FE February $32 calls (FE160219C00032000) that last traded at $0.65, with a $0.45 stop. Given the current market environment that could see a dead cat bounce on modest news, these risk management measures should help limit potential losses.

My expectation is the short trading week will be volatile, not so much due to the economic data we’ll be getting, which is mostly housing related, but because of the earnings reports ahead. Following last week’s results from Alcoa ([stock_quote symbol=”AA”]), Intel ([stock_quote symbol=”INTC”]) and others, as well as negative pre-announcements from GoPro ([stock_quote symbol=”GPRO”]) and other recent high fliers, my new recommendations should help us sleep at night, especially with our risk management actions. I may send you a special alert if conditions warrant action before next week’s scheduled alert.

Making a move on MBLY and FIT options while swapping on DIS

Making a move on MBLY and FIT options while swapping on DIS

Actions from this post

Ratings changes included in this dated post

  • Buy the Mobileye February $46 calls (MBLY160219C00046000) that last traded at $1.65 and expire Feb. 19.
  • Buy the Fitbit (FIT) February $30 calls (FIT160219C00030000) that last traded at $3.10 and expire Feb. 19.
  • Exit your Walt Disney (DIS) January $115 calls (DIS160115C00115000) and use the proceeds to buy the DIS February $110 calls (DIS160219C00110000) that last traded at $2.07 and expire Feb. 19.

Welcome back and welcome to 2016! By now, I suspect you’ve probably heard how the stock market ended 2015 — the S&P 500 dipped 0.73% for the year while the Dow Jones Industrial Average slipped 2.23% — marking the worst performance since 2008. Looking back, it was a tumultuous year, with wide swings in the indices as investors grappled with the Greek showdown, the realization that China’s economic woes were far greater than expected heading into 2015 (which was reflected in commodity prices!) and the U.S. dollar strengthening and weighing on domestic companies while those in the euro zone benefited. Finally, there was the Groundhog Day-like nature of the Federal Reserve, which finally boosted interest rates in early December. If we include dividends, and who doesn’t love dividends, the S&P 500 returned 1.4% in 2015. By comparison, hedge funds lost more than 3%, on average, according to early estimates from hedge-fund-research firm HFR Inc.

All in all, 2015 is a year that many investors would like to put in the rear-view mirror. While I don’t necessarily disagree and acknowledge the stock market is a forward-looking animal, I’d remind you that the path that starts 2016 is laid at the end of the prior year. For us, that means looking ahead this week to the data about the end of 2015 that will be published in the coming week that starts to form the last economic snapshot of 2015. My suspicion is the rash of data we’ve seen toward the end of 2015 is exactly what we’ll be getting this week when we get the global PMI data from Markit Economics as well as the Institute for Supply Management on the domestic front.

Against that backdrop, as well as the one that surprisingly calls for a reacceleration in earnings from the S&P 500 in 2016 (up 7.7% year over year compared to the 1.4% expected for all of 2015), my plan is to start 2016 off on a far more selective note. I will use both disruptive technologies and pain points to steer us.

On the disruptive technology front, the coming week is also home to one of the most closely watched technology events, the annual Consumer Electronics Show (CES), which runs from Jan. 6 (Wednesday) to Jan. 9 (Saturday). As tends to be the case, I expect a flurry of announcements, particularly in the early days. However, don’t expect a peep from Apple (AAPL) because it does not formally present or attend the event. CES 2016 does feature keynote presentations from Intel (INTC), Volkswagen AG (VLKAY), Netflix (NFLX), General Motors (GM), IBM (IBM), Samsung and Alphabet’s (GOOGL) YouTube. I’d also note “The Future of Urban Mobility” Keynote on Jan. 7 (Thursday) that features presentations from Mobileye (MBLY), Qualcomm (QCOM), Robert Bosch GMBH and the U.S. Department of Transportation. To me, all of this points to fodder for the Connected Car and sets the stage for the North American International Auto Show in Detroit that spans Jan. 11-24.

Arguably the best stand-alone play on Autonomous Emergency Braking (AEB) mandates across the globe and on the automotive industry adopting semi-autonomous and eventually autonomous driving technologies is Mobileye (MBLY). The shares have been beaten down toward the end of 2015 due, in part, to a short call by Citron Research. However, the company has yet to disappoint expectations, continues to generate cash and has racked up a number of impressive automotive OEM partners and program wins. I see this week’s keynote at CES as a move that will propel the shares higher as the shorts begin to cover their positions. Let’s capitalize on that by adding the Mobileye February $46 calls (MBLY160219C00046000) that last traded at $1.65 and expire Feb. 19.

Turning to pain points, to say that I have indulged in all sorts of cookies and cakes as well as larger-than-usual meals would be something of an understatement. If you don’t put on a few extra pounds around the holidays, you’re just not really enjoying them.

Exiting the holidays, however, I’ve noticed more than few pieces of clothing are… fitting a little more snugly than before. From a PowerTrend perspective, you’d be correct in saying that I’ve personally contributed to the “Fattening of the Population” investing theme these past few weeks. For that reason, as I’ve started 2016, I’m leaning on my Fitbit (FIT) device, a wearable fitness device reminds us to get moving. While some may point to Fitbit’s products as more like an Amazon (AMZN) Kindle than Apple’s (AAPL) Apple Watch, I’d note that I love reading on my Kindle over an iPad or other tablet, and I think the streamlined functionality along with the more affordable price points compared to the Apple Watch and other current wearables, positions Fitbit well for the intersection of my “Always On, Always Connected” and “Fattening of the Population” themes.

According to research firm IDC, Fitbit was the market-share leader for wearables in the September 2015 quarter, with 22% share thanks to its Charge and Surge fitness trackers. What we found most interesting in IDC’s findings was that despite the growth of smart watches, interest in fitness trackers has not fallen. We attribute this to the combination of more affordable price points than smart watches, making products like those from Fitbit more palatable to consumers and corporate wellness programs.

But despite those prospects, as the market closed 2015, FIT shares have fallen 43% since peaking at $51.64 in early August. Already we’ve had positive comments from Morgan Stanley and others that are pointing towards solid holiday season demand for the shares, with Barclays upgrading FIT shares to a Buy rating with a $49 price target coming out of the holiday shopping weekend. With Fitbit’s products on several 2015 holiday gift-giving guides and consumers prone to shedding the holiday pounds come January, the company’s products and shares seem like a natural fit this holiday season. Let’s position ourselves accordingly by adding the FIT February $30 calls (FIT160219C00030000) that last traded at $3.10 and expire Feb. 19.

Unlike the last few weeks of December, the news around Disney was anything but quiet as its “Star Wars: The Force Awakens” was not only the fastest film to surpass the $1 billion mark at the box office. it also rallied the lagging North American box office to exceed $11 billion for 2015, which makes it the highest-earning year at the North American box office in movie history per Rentrak. Making the news even sweeter, per CNBC, Disney’s opening weekend percentage of 60% is above the industry average of around 55% and the higher revenue split is likely to continue throughout the extended run of the movie. Disney also secured a four-week commitment from theater chains instead of the normal three-week arrangement. This strong box office presence and extended run bode well for Disney’s other businesses, and I’d note the latest “Star Wars” installment has yet to open in China. Needless to say, I see the Disney machine capitalizing heavily on the film, as well as its coming Marvel, Pixar and “Star Wars” films in 2016.

Our DIS January $115 calls (DIS160115C00115000) have certainly taken it on the chin, and with the company not likely to report its quarterly earnings until after the January options expire, let’s exit those and reposition ourselves with the DIS February $110 calls (DIS160219C00110000) that last traded at $2.07 and expire Feb. 19. As we execute that trade, remember to hold your Regal Entertainment (RGC) January $20 calls.