Doubling Down on Digital Infrastructure Thematic Leader

Doubling Down on Digital Infrastructure Thematic Leader

Key point inside this issue

  • We are doubling down on Dycom (DY) shares on the Thematic Leader board and adjusting our price target to $80 from $100, which still offers significant upside from our new cost basis as the 5G and gigabit fiber buildout continues over the coming quarters.

We are coming at you earlier than usual this week in part to share my thoughts on all of the economic data we received late last week.

 

Last week’s data confirms the US economy is slowing

With two-thirds of the current quarter behind now in the books, the continued move higher in the markets has all the major indices up double-digits year to date, ranging from around 11.5-12.0%% for the Dow Jones Industrial Average and the S&P 500 to nearly 18% for the small-cap heavy Russell 2000. In recent weeks we have discussed my growing concerns that the market’s melt-up hinges primarily on U.S.-China trade deal prospects as earnings expectations for this year have been moving lower, dividend cuts have been growing and the global economy continues to slow. The U.S. continues to look like the best economic house on the block even though it, too, is slowing.

On Friday, a round of IHS Markit February PMI reports showed that three of the four global economic horsemen — Japan, China, and the eurozone — were in contraction territory for the month. New orders in Japan and China improved but fell in the eurozone, which likely means those economies will continue to slug it out in the near-term especially since export orders across all three regions fell month over month. December-quarter GDP was revealed to be 2.6% sequentially, which equates to a 3.1% improvement year over year but is down compared to the 3.5% GDP reading of the September quarter and 4.2% in the June one.  Slower growth to be sure, but still growing in the December quarter.

Before we break out the bubbly, though, the IHS Markit February U.S. Manufacturing PMI fell to its lowest reading in 18 months as rates of output and new order growth softened as did inflationary pressures. This data suggest the U.S. manufacturing sector is growing at its slowest rate in several quarters, as did the February ISM Manufacturing Index reading, which slipped month over month and missed expectations. Declines were seen almost across the board for that ISM index save for new export orders, which grew modestly month over month. The new order component of the February ISM Manufacturing Index dropped to 55.5 from 58.2 in January, but candidly this line item has been all over the place the last few months. The January figure rebounded nicely from 51.3 in December, which was down sharply from 61.8 in November. This zig-zag pattern likely reflects growing uncertainty in the manufacturing economy given the pace of the global economy and uncertainty on the trade front. Generally speaking though, falling orders translate into a slower production and this means carefully watching both the ISM and IHS Markit data over the coming months.

In sum, the manufacturing economy across the four key economies continued to slow in February. On a wider, more global scale, J.P. Morgan’s Global Manufacturing PMI fell to 50.6 in February, its lowest level since June 2016. Per J.P. Morgan’s findings, “the rate of expansion in new orders stayed close to the stagnation mark,” which suggests we are not likely to see a pronounced rebound in the near-term. We see this as allowing the Fed to keep its dovish view, and as we discuss below odds are it will be joined by the European Central Bank this week.

Other data out Friday included the December readings for Personal Income & Spending and the January take on Personal Income. The key takeaway was personal income fell for the first time in more than three years during January, easily coming in below the gains expected by economists. Those pieces of data not only help explain the recent December Retail Sales miss but alongside reports of consumer credit card debt topping $1 trillion and record delinquencies for auto and student loans, point to more tepid consumer spending ahead. As I’ve shared before, that is a headwind for the overall US economy but also a tailwind for those companies, like Middle-class Squeeze Thematic Leader Costco Wholesale (COST), that help consumers stretch the disposable income they do have.

We have talked quite a bit in recent Tematica Investing issues about revisions to S&P 500 2019 EPS estimates, which at last count stood at +4.7% year over year, down significantly from over +11% at the start of the December quarter. Given the rash of reports last week – more than 750 in total –  we will likely see that expected rate of growth tweaked a bit lower.

Putting it all together, we have a slowing U.S. and global economy, EPS cuts that are making the stock market incrementally more expensive as it has moved higher in recent weeks, and a growing number of dividend cuts. Clearly, the stock market has been melting up over the last several weeks on increasing hopes over a favorable trade deal with China, but last week we saw President Trump abruptly end the summit with North Korea’s Kim Jong Un with no joint agreement after Kim insisted all U.S. sanctions be lifted on his country. This action spooked the market, leading some to revisit the potential for a favorable trade deal between the U.S. and China.

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. As I watch for these developments to unfold, given the mismatch in the stock market between earnings and dividends vs. the market’s move thus far in 2019 I will also be watching insider selling in general but also for those companies on the Thematic Leader Board as well as the Tematica Select List. While insiders can be sellers for a variety of reasons, should we see a pronounced and somewhat across the board pick up in such activity, it could be another warning sign.

 

What to Watch This Week

This week we will see a noticeable drop in the velocity of earnings reports, but we will still get a number of data points that investors and economists will use to triangulate the speed of the current quarter’s GDP relative to the 2.6% print for the December quarter. The consensus GDP forecast for the current quarter is for a slower economy at +2.0%, but we have started to see some economists trim their forecasts as more economic data rolls in. Because that data has fallen shy of expectations, it has led the Citibank Economic Surprise Index (CESI) to once again move into negative territory and the Atlanta Fed’s GDPNow current quarter forecast now sat at 0.3% as of Friday.

On the economic docket this week, we have December Construction Spending, ISM’s February Non-Manufacturing Index reading, the latest consumer credit figures and the February reports on job creation and unemployment from ADP (ADP) and the Bureau of Labor Statistics. With Home Depot (HD) reporting relatively mild December weather, any pronounced shortfall in December Construction Spending will likely serve to confirm the economy is on a slowing vector. Much like we did above with ISM’s February Manufacturing Index we’ll be looking into the Non-Manufacturing data to determine demand and inflation dynamics as well as the tone of the services economy.

On the jobs front, while we will be watching the numbers created, including any aberration owing to the recent federal government shutdown, it will be the wage and hours worked data that we’ll be focusing on. Wage data will show signs of any inflationary pressures, while hours worked will indicate how much labor slack there is in the economy. The consumer is in a tighter spot financially speaking, which was reflected in recent retail sales and personal spending data. Recognizing the role consumer spending plays in the overall speed of the U.S. economy, we will be scrutinizing the upcoming consumer credit data rather closely.

In addition to the hard data, we’ll also get the Fed’s latest Beige Book, which should provide a feel for how the regional economies are faring thus far in 2019. Speaking of central bankers, next Wednesday will bring the results of the next European Central Bank meeting. Given the data depicted in the February IHS Markit reports we discussed above, the probability is high the ECB will join the Fed in a more dovish tone.

While the velocity of earnings reports does indeed drop dramatically next week, there will still be several reports worth digging into, including Ross Stores (ROST), Kohl’s (KSS), Target (TGT), BJ’s Wholesale (BJ), and Middle-class Squeeze Thematic Leader Costco Wholesale (COST) will also issue their latest quarterly results. Those reports combined with the ones this week, including solid results from TJX Companies (TJX) last week should offer a more complete look at consumer spending, and where that spending is occurring. Given the discussion several paragraphs above, TJX’s results last week, and the monthly sales reports from Costco, odds are quite good that Costco should serve up yet another report showcasing consumer wallet share gains.

Outside of apparel and home, reports from United Natural Foods (UNFI) and National Beverage (FIZZ) should corroborate the accelerating shift toward food and beverages that are part of our Cleaner Living investing theme. In that vein, I’ll be intrigued to see what Tematica Select List resident International Flavors & Fragrances (IFF) has to say about the demand for its line of organic and natural solutions.

The same can be said with Kroger (KR) as well as its efforts to fend off Thematic King Amazon (AMZN) and Walmart (WMT). Tucked inside of Kroger’s comments, we will be curious to see what the company says about digital grocery shopping and delivery. On Kroger’s last earnings conference call, Chairman and CEO Rodney McMullen shared the following, “We are aggressively investing to build digital platforms because they give our customers the ability to have anything, anytime, anywhere from Kroger, and because they’re a catalyst to grow our business and improve margins in the future.” Now to see what progress has been achieved over the last 90 or so days and what Kroger has to say about the late-Friday report that Amazon will launch its own chain of supermarkets.

 

Tematica Investing

As you can see in the chart above, for the most part, our Thematic Leaders have been delivering solid performance. Shares of Costco Wholesale (COST) and Nokia (NOK) are notable laggards, but with Costco’s earnings report later this week which will also include its February same-store sales, I see the company’s business and the shares once again coming back into investor favor as it continues to win consumer wallet share. That was clearly evident in its December and January same-store sales reports. With Nokia, coming out of Mobile World Congress 2019 last week, we have confirmation that 5G is progressing, with more network launches coming and more devices coming as well in the coming quarters. We’ll continue to be patient with NOK shares.

 

Adding significantly to our position in Thematic Leader Dycom Industries

There are two positions on the leader board – Aging of the Population AMN Healthcare (AMN) and Digital Infrastructure Dycom Industries (DY) – that are in the red. The recent and sharp drop in Dycom shares follows the company’s disappointing quarterly report in which costs grew faster than 14.3% year over year increase in revenue, pressuring margins and the company’s bottom line. As we’ve come to expect this alongside the near-term continuation of those margin pressures, as you can see below, simply whacked DY shares last week, dropping them into oversold territory.

 

When we first discussed Dycom’s business, I pointed out the seasonal tendencies of its business, and that likely means some of the February winter weather brought some added disruptions as will the winter weather that is hitting parts of the country as you read this. Yet, we know that Dycom’s top customers – AT&T (T), Verizon (VZ), Comcast (CMCSA) and CenturyLink (CTL) are busy expanding the footprint of their connective networks. That’s especially true with the 5G buildout efforts at AT&T and Verizon, which on a combined basis accounted for 42% of Dycom’s January quarter revenue.

Above I shared that coming out of Mobile World Congress 2019, commercial 5G deployments are likely to be a 2020 event but as we know the networks, base stations, and backhaul capabilities will need to be installed ahead of those launches. To me, this strongly suggests that Dycom’s business will improve in the coming quarters, and as that happens, it’s bound to move down the cost curve as efficiencies and other aspects of higher utilization are had. For that reason, we are using last week’s 26% drop in DY shares to double our position size in DY shares on the Thematic Leader board. This will reduce our blended cost basis to roughly $64 from the prior $82. As we buy up the shares, I’m also resetting our price target on DY shares to $80, down from the prior $100, which offers significant upside from the current share price and our blended cost basis.

If you’re having second thoughts on this decision, think of it this way – doesn’t it seem rather strange that DY shares would fall by such a degree given the coming buildout that we know is going to occur over the coming quarters? If Dycom’s customers were some small, regional operators I would have some concerns, but that isn’t the case. These customers will build out those networks, and it means Dycom will be put to work in the coming quarters, generating revenue, profits, and cash flow along the way.

In last week’s Tematica Investing I dished on Warren Buffett’s latest letter to Berkshire Hathaway (BRK.A) shareholders. In thinking about Dycom, another Buffett-ism comes to mind – “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.” Since this is a multi-quarter buildout for Dycom, we will need to be patient, but as we know for the famous encounter between the tortoise and the hare, slow and steady wins the race.

  • We are doubling down on Dycom (DY) shares on the Thematic Leader board and adjusting our price target to $80 from $100, which still offers significant upside from our new cost basis as the 5G and gigabit fiber buildout continues over the coming quarters.

 

As the pace of earnings slows, over the next few weeks I’ll not only be revisiting the recent 25% drop in Aging of the Population Thematic Leader AMN Healthcare to determine if we should make a similar move like the one we are doing with Dycom, but I’ll also be taking closer looks at wireless charging company Energous Corp. (WATT) and The Alkaline Water Company (WTER). Those two respectively fall under our Disruptive Innovators and Cleaner Living investing themes. Are they worthy of making it onto the Select List or bumping one of our Thematic Leaders? We’ll see…. And as I examine these two, I’m also pouring over some candidates to fill the Guilty Pleasure vacancy on the leader board.

 

 

Adding two Middle-class Squeeze call option positions ahead of earnings this week

Adding two Middle-class Squeeze call option positions ahead of earnings this week

Key point inside this issue

We are coming at you earlier than usual this week in part to share my thoughts on all of the economic data we received late last week, but also to share a new call option trade with you. The timing on that trade is important because the underlying company will report its quarterly results after Tuesday’s (March 5) market close. With that said, let’s get to the issues at hand…

 

Last week’s data confirms the US economy is slowing

With two-thirds of the current quarter behind now in the books, the continued move higher in the markets has all the major indices up double-digits year to date, ranging from around 11.5-12.0%% for the Dow Jones Industrial Average and the S&P 500 to nearly 18% for the small-cap heavy Russell 2000. In recent weeks we have discussed my growing concerns that the market’s melt-up hinges primarily on U.S.-China trade deal prospects as earnings expectations for this year have been moving lower, dividend cuts have been growing and the global economy continues to slow. The U.S. continues to look like the best economic house on the block even though it, too, is slowing.

On Friday, a round of IHS Markit February PMI reports showed that three of the four global economic horsemen — Japan, China, and the eurozone — were in contraction territory for the month. New orders in Japan and China improved but fell in the eurozone, which likely means those economies will continue to slug it out in the near-term especially since export orders across all three regions fell month over month. December-quarter GDP was revealed to be 2.6% sequentially, which equates to a 3.1% improvement year over year but is down compared to the 3.5% GDP reading of the September quarter and 4.2% in the June one.  Slower growth to be sure, but still growing in the December quarter.

Before we break out the bubbly, though, the IHS Markit February U.S. Manufacturing PMI fell to its lowest reading in 18 months as rates of output and new order growth softened as did inflationary pressures. This data suggest the U.S. manufacturing sector is growing at its slowest rate in several quarters, as did the February ISM Manufacturing Index reading, which slipped month over month and missed expectations. Declines were seen almost across the board for that ISM index save for new export orders, which grew modestly month over month. The new order component of the February ISM Manufacturing Index dropped to 55.5 from 58.2 in January, but candidly this line item has been all over the place the last few months. The January figure rebounded nicely from 51.3 in December, which was down sharply from 61.8 in November. This zig-zag pattern likely reflects growing uncertainty in the manufacturing economy given the pace of the global economy and uncertainty on the trade front. Generally speaking though, falling orders translate into a slower production and this means carefully watching both the ISM and IHS Markit data over the coming months.

In sum, the manufacturing economy across the four key economies continued to slow in February. On a wider, more global scale, J.P. Morgan’s Global Manufacturing PMI fell to 50.6 in February, its lowest level since June 2016. Per J.P. Morgan’s findings, “the rate of expansion in new orders stayed close to the stagnation mark,” which suggests we are not likely to see a pronounced rebound in the near-term. We see this as allowing the Fed to keep its dovish view, and as we discuss below odds are it will be joined by the European Central Bank this week.

Other data out Friday included the December readings for Personal Income & Spending and the January take on Personal Income. The key takeaway was personal income fell for the first time in more than three years during January, easily coming in below the gains expected by economists. Those pieces of data not only help explain the recent December Retail Sales miss but alongside reports of consumer credit card debt topping $1 trillion and record delinquencies for auto and student loans, point to more tepid consumer spending ahead. As I’ve shared before, that is a headwind for the overall US economy but also a tailwind for those companies, like Middle-class Squeeze Thematic Leader Costco Wholesale (COST), that help consumers stretch the disposable income they do have.

We have talked quite a bit in recent Tematica Investing issues about revisions to S&P 500 2019 EPS estimates, which at last count stood at +4.7% year over year, down significantly from over +11% at the start of the December quarter. Given the rash of reports last week – more than 750 in total –  we will likely see that expected rate of growth tweaked a bit lower.

Putting it all together, we have a slowing U.S. and global economy, EPS cuts that are making the stock market incrementally more expensive as it has moved higher in recent weeks, and a growing number of dividend cuts. Clearly, the stock market has been melting up over the last several weeks on increasing hopes over a favorable trade deal with China, but last week we saw President Trump abruptly end the summit with North Korea’s Kim Jong Un with no joint agreement after Kim insisted all U.S. sanctions be lifted on his country. This action spooked the market, leading some to revisit the potential for a favorable trade deal between the U.S. and China.

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. As I watch for these developments to unfold, given the mismatch in the stock market between earnings and dividends vs. the market’s move thus far in 2019 I will also be watching insider selling in general but also for those companies on the Thematic Leader Board as well as the Tematica Select List. While insiders can be sellers for a variety of reasons, should we see a pronounced and somewhat across the board pick up in such activity, it could be another warning sign.

 

What to Watch This Week

This week we will see a noticeable drop in the velocity of earnings reports, but we will still get a number of data points that investors and economists will use to triangulate the speed of the current quarter’s GDP relative to the 2.6% print for the December quarter. The consensus GDP forecast for the current quarter is for a slower economy at +2.0%, but we have started to see some economists trim their forecasts as more economic data rolls in. Because that data has fallen shy of expectations, it has led the Citibank Economic Surprise Index (CESI) to once again move into negative territory and the Atlanta Fed’s GDPNow current quarter forecast now sat at 0.3% as of Friday.

On the economic docket this week, we have December Construction Spending, ISM’s February Non-Manufacturing Index reading, the latest consumer credit figures and the February reports on job creation and unemployment from ADP (ADP) and the Bureau of Labor Statistics. With Home Depot (HD) reporting relatively mild December weather, any pronounced shortfall in December Construction Spending will likely serve to confirm the economy is on a slowing vector. Much like we did above with ISM’s February Manufacturing Index we’ll be looking into the Non-Manufacturing data to determine demand and inflation dynamics as well as the tone of the services economy.

On the jobs front, while we will be watching the numbers created, including any aberration owing to the recent federal government shutdown, it will be the wage and hours worked data that we’ll be focusing on. Wage data will show signs of any inflationary pressures, while hours worked will indicate how much labor slack there is in the economy. The consumer is in a tighter spot financially speaking, which was reflected in recent retail sales and personal spending data. Recognizing the role consumer spending plays in the overall speed of the U.S. economy, we will be scrutinizing the upcoming consumer credit data rather closely.

In addition to the hard data, we’ll also get the Fed’s latest Beige Book, which should provide a feel for how the regional economies are faring thus far in 2019. Speaking of central bankers, next Wednesday will bring the results of the next European Central Bank meeting. Given the data depicted in the February IHS Markit reports we discussed above, the probability is high the ECB will join the Fed in a more dovish tone.

While the velocity of earnings reports does indeed drop dramatically next week, there will still be several reports worth digging into, including Ross Stores (ROST), Kohl’s (KSS), Target (TGT), BJ’s Wholesale (BJ), and Middle-class Squeeze Thematic Leader Costco Wholesale (COST) will also issue their latest quarterly results. Those reports combined with the ones this week, including solid results from TJX Companies (TJX) last week should offer a more complete look at consumer spending, and where that spending is occurring. Given the discussion several paragraphs above, TJX’s results last week, and the monthly sales reports from Costco, odds are quite good that Costco should serve up yet another report showcasing consumer wallet share gains.

Outside of apparel and home, reports from United Natural Foods (UNFI) and National Beverage (FIZZ) should corroborate the accelerating shift toward food and beverages that are part of our Cleaner Living investing theme. In that vein, I’ll be intrigued to see what Tematica Select List resident International Flavors & Fragrances (IFF) has to say about the demand for its line of organic and natural solutions.

The same can be said with Kroger (KR) as well as its efforts to fend off Thematic King Amazon (AMZN) and Walmart (WMT). Tucked inside of Kroger’s comments, we will be curious to see what the company says about digital grocery shopping and delivery. On Kroger’s last earnings conference call, Chairman and CEO Rodney McMullen shared the following, “We are aggressively investing to build digital platforms because they give our customers the ability to have anything, anytime, anywhere from Kroger, and because they’re a catalyst to grow our business and improve margins in the future.” Now to see what progress has been achieved over the last 90 or so days and what Kroger has to say about the late-Friday report that Amazon will launch its own chain of supermarkets.

 

Tematica Investing

As you can see in the chart above, for the most part, our Thematic Leaders have been delivering solid performance. Shares of Costco Wholesale (COST) and Nokia (NOK) are notable laggards, but with Costco’s earnings report later this week which will also include its February same-store sales, I see the company’s business and the shares once again coming back into investor favor as it continues to win consumer wallet share. That was clearly evident in its December and January same-store sales reports. With Nokia, coming out of Mobile World Congress 2019 last week, we have confirmation that 5G is progressing, with more network launches coming and more devices coming as well in the coming quarters. We’ll continue to be patient with NOK shares.

 

Adding significantly to our position in Thematic Leader Dycom Industries

There are two positions on the leader board – Aging of the Population AMN Healthcare (AMN) and Digital Infrastructure Dycom Industries (DY) – that are in the red. The recent and sharp drop in Dycom shares follows the company’s disappointing quarterly report in which costs grew faster than 14.3% year over year increase in revenue, pressuring margins and the company’s bottom line. As we’ve come to expect this alongside the near-term continuation of those margin pressures, as you can see below, simply whacked DY shares last week, dropping them into oversold territory.

 

When we first discussed Dycom’s business, I pointed out the seasonal tendencies of its business, and that likely means some of the February winter weather brought some added disruptions as will the winter weather that is hitting parts of the country as you read this. Yet, we know that Dycom’s top customers – AT&T (T), Verizon (VZ), Comcast (CMCSA) and CenturyLink (CTL) are busy expanding the footprint of their connective networks. That’s especially true with the 5G buildout efforts at AT&T and Verizon, which on a combined basis accounted for 42% of Dycom’s January quarter revenue.

Above I shared that coming out of Mobile World Congress 2019, commercial 5G deployments are likely to be a 2020 event but as we know the networks, base stations, and backhaul capabilities will need to be installed ahead of those launches. To me, this strongly suggests that Dycom’s business will improve in the coming quarters, and as that happens, it’s bound to move down the cost curve as efficiencies and other aspects of higher utilization are had. For that reason, we are using last week’s 26% drop in DY shares to double our position size in DY shares on the Thematic Leader board. This will reduce our blended cost basis to roughly $64 from the prior $82. As we buy up the shares, I’m also resetting our price target on DY shares to $80, down from the prior $100, which offers significant upside from the current share price and our blended cost basis.

If you’re having second thoughts on this decision, think of it this way – doesn’t it seem rather strange that DY shares would fall by such a degree given the coming buildout that we know is going to occur over the coming quarters? If Dycom’s customers were some small, regional operators I would have some concerns, but that isn’t the case. These customers will build out those networks, and it means Dycom will be put to work in the coming quarters, generating revenue, profits, and cash flow along the way.

In last week’s Tematica Investing I dished on Warren Buffett’s latest letter to Berkshire Hathaway (BRK.A) shareholders. In thinking about Dycom, another Buffett-ism comes to mind – “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.” Since this is a multi-quarter buildout for Dycom, we will need to be patient, but as we know for the famous encounter between the tortoise and the hare, slow and steady wins the race.

  • We are doubling down on Dycom (DY) shares on the Thematic Leader board and adjusting our price target to $80 from $100, which still offers significant upside from our new cost basis as the 5G and gigabit fiber buildout continues over the coming quarters.

 

As the pace of earnings slows, over the next few weeks I’ll not only be revisiting the recent 25% drop in Aging of the Population Thematic Leader AMN Healthcare to determine if we should make a similar move like the one we are doing with Dycom, but I’ll also be taking closer looks at wireless charging company Energous Corp. (WATT) and The Alkaline Water Company (WTER). Those two respectively fall under our Disruptive Innovators and Cleaner Living investing themes. Are they worthy of making it onto the Select List or bumping one of our Thematic Leaders? We’ll see…. And as I examine these two, I’m also pouring over some candidates to fill the Guilty Pleasure vacancy on the leader board.

 

Tematica Options+

One of the key takeaways over the last few issues has been the growing consumer spending headwind that has become increasingly evident across the December Retail Sales report, falling Personal Income data and increasing delinquencies. At the same time, we learned that despite mild December weather Home Depot (HD) missed earnings expectations and set the bar lower. Macy’s (M) reported uninspiring results and guidance while Nordstrom missed quarterly revenue expectations and L Brands (LB), the home of Victoria’s Secret and Bath & Body works.

Meanwhile, last week TJX Companies (TJX), the parent of TJ Maxx, Marshalls, HomeGoods, and HomeSense, reported same-store comp sales of 6% for its most recent quarter as store traffic surged. The company also boosted its quarterly dividend by 18% and announced plans to upsize its share buyback plan to $1.75-$2.25 billion.

Quite a different story. Also last week, the Gap (GPS), a company that in my view has been lost for quite some time, announced it was splitting into two companies. One will house its Gap and Banana Republic lines, while Old Navy, a business that fits the mold of our Middle-class Squeeze investing theme, will stand on its own.

Then there is Thematic Leader Costco Wholesale, which has been simply taking consumer wallet share as it opens additional warehouse locations. Excluding the impact of gas prices and foreign exchange, Costco’s US same store sales climbed 7.1% year over year in December and 7.3% in January.

In my view, all of this sets up very well for solid earnings reports from both Ross Stores, which will issue those results after the market close on Tuesday (March 5), and Costco, which reports after the close on Thursday (March 7). To capture the upside associated with these reports, we will add the following call option positions:

 

Note the corresponding stop losses. These are tighter than usual because these are earnings related trades, and as we’ve seen of late guidance is as important as the rear-view quarterly results. These stops will help us limit that downside risk.

With regard to our Del Frisco’s Restaurant Group (DFRG) September 20, 2019, 10.00 calls (DFRG190920C00010000) and Nokia Corp. (NOK) December 2019 7.00 calls (NOK191220C0000700), we will continue to hold them. The Del Frisco’s calls traded off last week and finished the week at 0.85, which is rather close to our 0.80 stop loss. This will bear watching and should we get stopped out, while we’ll net a 33% return should it happen soon than later, I may be inclined to jump back into a DFRG call position ahead of the company’s March 12 earnings report.

 

 

Verizon’s 5G in 30 US cities by end of 2019

Verizon’s 5G in 30 US cities by end of 2019

As we enter Mobile World Congress 2019, arguably the mobile event of the year, 5G network and device launch details are coming into greater focus. Verizon is taking the early lead in the US staking out 5G to 30 cities in the US by the end of 2019. Of course, 30 cities is hardly national coverage, which means a continued deployment for this aspect of our Digital Infrastructure investing theme well into 2020 at least for the US if not into 2021. Factor in the competitive response from AT&T and the soon to be combined T-Mobile USA and Sprint, and it means the likely tipping point for 5G is looking increasingly like the second half of 2020. From an iPhone perspective, even though Samsung and Motorola have announced they will have devices ready by mid-2019,  this 5G network timetable means we should not be expecting any 5G news from Apple this year, but rather its annual iPhone event in September-October of 2020.

Verizon on Thursday said it’s working on deploying 5G to some extent in 30 U.S. cities by the end of 2019, another hint that the technology won’t appear in iPhones until 2020.

The first parts of Verizon’s 5G network should be up by mid-2019 though, since the carrier is the exclusive launch partner for the Samsung Galaxy S10 5G.

AT&T and T-Mobile are also working on 5G deployments. Neither carrier is expected to get very far by the end of 2019 however, owing to partly to lags in equipment. There are also relatively few 5G-ready devices on the market, offering little incentive to speed up.

Multiple reports have pointed to Apple waiting until 2020 to ship 5G-capable iPhones. The company’s preferred modem maker, Intel, is unlikely to have a 5G chip ready until that timeframe.

Source: Verizon says 5G coming to 30 US cities by end of 2019

WEEKLY ISSUE: Companies continue to serve up weaker guidance

WEEKLY ISSUE: Companies continue to serve up weaker guidance

Key points inside this issue

  • The outlook for earnings continues to wane even as the trade-related market melt-up continues.
  • Our price target on Amazon (AMZN) shares remains $2,250.
  • Our price target on Alphabet (GOOGL) shares remains$1,300.
  • Our price target on Costco Wholesale (COST) shares remains $250.
  • Our price target on Universal Display (OLED) shares remains $125.
  • Our price target on Nokia (NOK) shares remains $8.50

 

The outlook for earnings continues to wane even as the trade-related market melt-up continues

Domestic stocks continued to trend higher last week as the December-quarter issues that plagued them continued to be dialed back. Said another way, the expected concerns — the Fed, the economy, the government shutdown, geopolitical issues in the eurozone, and U.S.-China trade talks — haven’t been as bad as feared a few months ago.

In recent weeks, we have seen the Fed take a more dovish approach and last week’s data, which included benign inflation numbers and fresh concerns over the speed of the economy following the headline December Retail Sales Report and Friday’s manufacturing-led contraction in the January Industrial Production Index, reaffirm the central bank is likely to stand pat on interest rate hikes. We see both of those reports, however, feeding worries over increasing debt-laden consumers and a slowing U.S. economy. 

Granted, economic data from around the globe suggest the U.S. economy remains one of the more vibrant ones on a relative basis, which also helps explain both the melt-up in both the domestic stock market as well as the dollar. On Thursday we learned that economic growth in the eurozone was basically flat on a sequential basis in the December quarter, rising a meager 0.2%. Year-over-year growth stood at just 1.2% for the final quarter of 2018. This came after news that the eurozone economic powerhouse that is Germany had no growth itself in the fourth quarter after a contraction of 0.2% in the third quarter. Italy experienced its second consecutive quarter of economic contraction, putting it in a technical recession.

 

All of this put further downward pressure on the euro versus the U.S. dollar, which means dollar headwinds remain for multinational companies. And we still have another major headwind that is the lack of any Brexit deal. With three pro-EU Conservatives having resigned this morning from Prime Minister Theresa May’s party to join a new group in Parliament, there is no an even slimmer chance of Brexit deal being put in place ahead of next week.

So, what has been fueling the rebound in the stock market?

Among other factors, the deal to avoid another federal government shutdown, which was followed by the “national emergency” declaration that will potentially give President Trump access to roughly $8 billion to fund a border wall. We’ll see how this all plays out in the coming days, alongside the next step in U.S.-China trade talks that are being held this week in Washington. While “much work remains” on the working Memorandum of Understanding, trade discussions last week focused on several of the larger structural issues that we’ve been more concerned about — forced technology transfer, intellectual property rights, cyber theft, and currency.

Early this morning, it’s being reported that President Trump is softening on the March 1 phase in date for the next round of tariff increases, which is likely to give the market some additional trade optimism and see it move higher. We remain hopeful, but we expect there to be several additional steps to go that will set the stage for any final agreement that will likely be consummated at a meeting between Presidents Trump and Xi. And yes, the final details will matter and will determine if we get a “buy the rumor, sell the news” event.

Even as the trade war continues at least for now, we continue to see companies positioning themselves for the tailwinds associated with Living the Life and New Global Middle-class investing theme opportunities to be had in China. If you missed a recent Thematic Signal discussing how Hilton (HLT) is doing just that, you can find it here.

And then there are earnings

Over the last several weeks, we’ve been tracking and sharing the declining outlook for S&P 500 earnings for 2019. As we closed last week, roughly 80% of the S&P 500 companies had reported their quarterly earnings and issued outlooks. In aggregating the data, the new consensus calls for a 2.2% year-over-year decline in earnings for the current quarter, low single-digit earnings growth in the June and September quarters, and 9.1% growth in the December quarter. In full, the S&P 500 group of companies are now expected to grow their collective 2019 EPS by 5% to $169.53, which means that as those expectations have fallen over the last several months, the 2019 move in the market has made the stock market that much more expensive.

In my view, we are once again seeing a potentially optimistic perspective on earnings for the second half of the year. While a U.S.-China trade deal and infrastructure spending bill could very well lead to a better second half of 2019 from an earnings perspective, the unknown remains the vector and velocity of the rest of the global economy.  As discussed above, the US is looking like the best house on the economic block, but as I share below there are valid reasons to think that it too continues to slow.

 

Last week I touched on a Thematic Signal about the record level of auto loan delinquencies, and in the last few days, we’ve learned that student-loan delinquencies surged last year, hitting consecutive records of $166.3 billion in the September 2018 quarter and $166.4 billion in the December 2018 one. I’ve also noticed an uptick in credit-card delinquencies this past January as companies ranging from American Express (AXP) to JPMorgan (JPM) and other credit card issuers reported their monthly data. What I find really concerning is this record level of delinquencies is occurring even as the unemployment rate remains at multi-year lows, which suggests more consumers are seeing their disposable income pressured. While this isn’t a good sign for a consumer-led economy, it certainly confirms the tailwind associated with our Middle-class Squeeze investing theme.

 

Tematica Investing

 December Retail Sales shock some, confirm Costco and others

December Retail Sales have been published by the Commerce Department and to say the results were different than most were expecting is an understatement. And that’s even for those of us that were watching data of the kind I mentioned above.  Normally, holiday shopping tends to build as we close out the year, but according to the report, consumers pulled back in December as monthly retail sales fell 1.3% compared to November.

Yes, you read that right – they fell month over month, but as we know that is only one way to read the data. And while sequential comparisons are helpful, they do little to help us track year over year growth. From that perspective, retail sales in December 2018 rose 2.1% year over year with stronger gains registered at Clothing & Clothing Accessories Stores (+4.7%), Food Services & Drinking Places (+4.0%), Nonstore retailers (+3.7%) and Auto & other motor vehicles (+3.4%). That’s not to say there weren’t some sore spots in the report – there were, but there are also the ones that have been taking lumps for most of 2018. Sporting goods, hobby, musical instrument, & book stores fell 13% year over year in December, bringing the December quarter drop to 11% overall. Department Stores also took it on the chin in December as their retail sales fell 2.8% year over year. These declines are largely due to the accelerating shopping shift to digital from brick & mortar that are associated with our Digital Lifestyle investing theme.

Despite the headline weakness, I once again see the report as confirming for Thematic King Amazon (AMZN) and to a lesser extent Select List resident Alphabet (GOOGL) given its Google shopping engine. Not only is Amazon benefiting from the accelerating shift to digital commerce, but also from its own private label efforts, which span basic electronic accessories to furniture and apparel. It goes without saying that comparing the December Retail Sales report with Costco Wholesale’s (COST) monthly same-store sales reports shows Costco continues to win consumer wallet share.

 

As a reminder, Costco’s December same-store sales rose 7.5% in December (7.1% excluding gasoline prices and foreign exchange) and 6.6% in January (7.3%). And it remains on path opening new warehouse locations with 768 exiting January, up 3.0% year over year. That should continue to spur the company’s high margin membership fee income in the coming quarters. My suspicion is others are catching onto this given the 7% increase in COST shares thus far in 2019, the vast majority of which has come in the last week. We’ll continue to hold ‘em.

  • Our price target on Amazon (AMZN) shares remains $2,250.
  • Our price target on Alphabet (GOOGL) shares remains $1,300.
  • Our price target on Costco Wholesale (COST) shares remains $250.

 

Turning to this week’s data

This week’s shortened trading week brings several additional key pieces of economic data. And following the disappointing December Retail Sales report, these reports are bound to be closely scrutinized as the investment community looks to home in on the speed of the domestic economy. 

In addition to weekly mortgage applications, and oil and natural gas inventory data, tomorrow we’ll also get the December Durable Orders report and January Existing Home sales data. Given the drop-off in mortgage applications of late as well as weather issues, it’s hard to imagine a dramatic pick-up in the housing data since the end of 2018. Rounding out the economic data will be our first February look at the economy with the Philly Fed Index.

 Speaking of the Fed, today we’ll see the release of the Fed’s FOMC minutes from its January meeting. Considering the comments emanating from Fed heads lately as well as the lack of inflation in the January CPI and PPI data, there should be few surprises in terms of potential interest rate hikes in the near term. The looming question is the speed at which the Fed will normalize its balance sheet, which likely means that will be an area of focus as investors parse those minutes.

 

Here come Universal Display and Mobile World Congress 2019

As long as we’re looking at calendars, after Thursday’s market close Select List resident Universal Display (OLED) will report its quarterly results. To say the shares have found some legs in 2019 would be a bit of an understatement given their resurgence over the last several weeks.

 

We know Digital Lifestyle Select List company Apple (AAPL) has shared its plans to convert all of its iPhone models to organic light emitting diode displays by 2020, and that keeps us in the long-term game with OLED shares. Given the current tone of the smartphone market, however, we could see Universal Display serve up softer than expected guidance.

We’ll continue to hold OLED shares for the duration and look for signs that other device companies, including other smartphone vendors but other devices as well, are making the shift to organic light emitting diodes next week during Mobile World Congress 2019 (Feb. 25-28). The event is a premier one mobile industry as it tends to showcase new devices and technologies, and as you might imagine means a number of announcements. This means it’s not only one to watch for organic light emitting diode adoptions, but we are also likely to see much news on 5G virtual reality and augmented reality, key aspects of our Disruptive Innovators investing theme, as well. And with 5G in mind, we could very well hear of more 5G network launches as well, which means keeping my Nokia (NOK) and Digital Infrastructure ears open as well as my Digital Lifestyle ones.

  • Our price target on Universal Display (OLED) shares remains $125.
  • Our price target on Nokia (NOK) shares remains $8.50.

 

 

WEEKLY ISSUE: Reversing Course on Lending Club Calls

WEEKLY ISSUE: Reversing Course on Lending Club Calls

Key points inside this issue

The outlook for earnings continues to wane even as the trade-related market melt-up continues

Domestic stocks continued to trend higher last week as the December-quarter issues that plagued them continued to be dialed back. Said another way, the expected concerns — the Fed, the economy, the government shutdown, geopolitical issues in the eurozone, and U.S.-China trade talks — haven’t been as bad as feared a few months ago.

In recent weeks, we have seen the Fed take a more dovish approach and last week’s data, which included benign inflation numbers and fresh concerns over the speed of the economy following the headline December Retail Sales Report and Friday’s manufacturing-led contraction in the January Industrial Production Index, reaffirm the central bank is likely to stand pat on interest rate hikes. We see both of those reports, however, feeding worries over increasing debt-laden consumers and a slowing U.S. economy. 

Granted, economic data from around the globe suggest the U.S. economy remains one of the more vibrant ones on a relative basis, which also helps explain both the melt-up in both the domestic stock market as well as the dollar. On Thursday we learned that economic growth in the eurozone was basically flat on a sequential basis in the December quarter, rising a meager 0.2%. Year-over-year growth stood at just 1.2% for the final quarter of 2018. This came after news that the eurozone economic powerhouse that is Germany had no growth itself in the fourth quarter after a contraction of 0.2% in the third quarter. Italy experienced its second consecutive quarter of economic contraction, putting it in a technical recession.

 

All of this put further downward pressure on the euro versus the U.S. dollar, which means dollar headwinds remain for multinational companies. And we still have another major headwind that is the lack of any Brexit deal. With three pro-EU Conservatives having resigned this morning from Prime Minister Theresa May’s party to join a new group in Parliament, there is no an even slimmer chance of Brexit deal being put in place ahead of next week.

So, what has been fueling the rebound in the stock market?

Among other factors, the deal to avoid another federal government shutdown, which was followed by the “national emergency” declaration that will potentially give President Trump access to roughly $8 billion to fund a border wall. We’ll see how this all plays out in the coming days, alongside the next step in U.S.-China trade talks that are being held this week in Washington. While “much work remains” on the working Memorandum of Understanding, trade discussions last week focused on several of the larger structural issues that we’ve been more concerned about — forced technology transfer, intellectual property rights, cyber theft, and currency.

Early this morning, it’s being reported that President Trump is softening on the March 1 phase in date for the next round of tariff increases, which is likely to give the market some additional trade optimism and see it move higher. We remain hopeful, but we expect there to be several additional steps to go that will set the stage for any final agreement that will likely be consummated at a meeting between Presidents Trump and Xi. And yes, the final details will matter and will determine if we get a “buy the rumor, sell the news” event.

Even as the trade war continues at least for now, we continue to see companies positioning themselves for the tailwinds associated with Living the Life and New Global Middle-class investing theme opportunities to be had in China. If you missed a recent Thematic Signal discussing how Hilton (HLT) is doing just that, you can find it here.

And then there are earnings

Over the last several weeks, we’ve been tracking and sharing the declining outlook for S&P 500 earnings for 2019. As we closed last week, roughly 80% of the S&P 500 companies had reported their quarterly earnings and issued outlooks. In aggregating the data, the new consensus calls for a 2.2% year-over-year decline in earnings for the current quarter, low single-digit earnings growth in the June and September quarters, and 9.1% growth in the December quarter. In full, the S&P 500 group of companies are now expected to grow their collective 2019 EPS by 5% to $169.53, which means that as those expectations have fallen over the last several months, the 2019 move in the market has made the stock market that much more expensive.

In my view, we are once again seeing a potentially optimistic perspective on earnings for the second half of the year. While a U.S.-China trade deal and infrastructure spending bill could very well lead to a better second half of 2019 from an earnings perspective, the unknown remains the vector and velocity of the rest of the global economy.  As discussed above, the US is looking like the best house on the economic block, but as I share below there are valid reasons to think that it too continues to slow.

 

Last week I touched on a Thematic Signal about the record level of auto loan delinquencies, and in the last few days, we’ve learned that student-loan delinquencies surged last year, hitting consecutive records of $166.3 billion in the September 2018 quarter and $166.4 billion in the December 2018 one. I’ve also noticed an uptick in credit-card delinquencies this past January as companies ranging from American Express (AXP) to JPMorgan (JPM) and other credit card issuers reported their monthly data. What I find really concerning is this record level of delinquencies is occurring even as the unemployment rate remains at multi-year lows, which suggests more consumers are seeing their disposable income pressured. While this isn’t a good sign for a consumer-led economy, it certainly confirms the tailwind associated with our Middle-class Squeeze investing theme.

 

Tematica Investing

 December Retail Sales shock some, confirm Costco and others

December Retail Sales have been published by the Commerce Department and to say the results were different than most were expecting is an understatement. And that’s even for those of us that were watching data of the kind I mentioned above.  Normally, holiday shopping tends to build as we close out the year, but according to the report, consumers pulled back in December as monthly retail sales fell 1.3% compared to November.

Yes, you read that right – they fell month over month, but as we know that is only one way to read the data. And while sequential comparisons are helpful, they do little to help us track year over year growth. From that perspective, retail sales in December 2018 rose 2.1% year over year with stronger gains registered at Clothing & Clothing Accessories Stores (+4.7%), Food Services & Drinking Places (+4.0%), Nonstore retailers (+3.7%) and Auto & other motor vehicles (+3.4%). That’s not to say there weren’t some sore spots in the report – there were, but there are also the ones that have been taking lumps for most of 2018. Sporting goods, hobby, musical instrument, & book stores fell 13% year over year in December, bringing the December quarter drop to 11% overall. Department Stores also took it on the chin in December as their retail sales fell 2.8% year over year. These declines are largely due to the accelerating shopping shift to digital from brick & mortar that are associated with our Digital Lifestyle investing theme.

Despite the headline weakness, I once again see the report as confirming for Thematic King Amazon (AMZN) and to a lesser extent Select List resident Alphabet (GOOGL) given its Google shopping engine. Not only is Amazon benefiting from the accelerating shift to digital commerce, but also from its own private label efforts, which span basic electronic accessories to furniture and apparel. It goes without saying that comparing the December Retail Sales report with Costco Wholesale’s (COST) monthly same-store sales reports shows Costco continues to win consumer wallet share.

 

As a reminder, Costco’s December same-store sales rose 7.5% in December (7.1% excluding gasoline prices and foreign exchange) and 6.6% in January (7.3%). And it remains on path opening new warehouse locations with 768 exiting January, up 3.0% year over year. That should continue to spur the company’s high margin membership fee income in the coming quarters. My suspicion is others are catching onto this given the 7% increase in COST shares thus far in 2019, the vast majority of which has come in the last week. We’ll continue to hold ‘em.

  • Our price target on Amazon (AMZN) shares remains $2,250.
  • Our price target on Alphabet (GOOGL) shares remains $1,300.
  • Our price target on Costco Wholesale (COST) shares remains $250.

 

Turning to this week’s data

This week’s shortened trading week brings several additional key pieces of economic data. And following the disappointing December Retail Sales report, these reports are bound to be closely scrutinized as the investment community looks to home in on the speed of the domestic economy. 

In addition to weekly mortgage applications, and oil and natural gas inventory data, tomorrow we’ll also get the December Durable Orders report and January Existing Home sales data. Given the drop-off in mortgage applications of late as well as weather issues, it’s hard to imagine a dramatic pick-up in the housing data since the end of 2018. Rounding out the economic data will be our first February look at the economy with the Philly Fed Index.

 Speaking of the Fed, today we’ll see the release of the Fed’s FOMC minutes from its January meeting. Considering the comments emanating from Fed heads lately as well as the lack of inflation in the January CPI and PPI data, there should be few surprises in terms of potential interest rate hikes in the near term. The looming question is the speed at which the Fed will normalize its balance sheet, which likely means that will be an area of focus as investors parse those minutes.

 

Here come Universal Display and Mobile World Congress 2019

As long as we’re looking at calendars, after Thursday’s market close Select List resident Universal Display (OLED) will report its quarterly results. To say the shares have found some legs in 2019 would be a bit of an understatement given their resurgence over the last several weeks.

 

We know Digital Lifestyle Select List company Apple (AAPL) has shared its plans to convert all of its iPhone models to organic light emitting diode displays by 2020, and that keeps us in the long-term game with OLED shares. Given the current tone of the smartphone market, however, we could see Universal Display serve up softer than expected guidance.

We’ll continue to hold OLED shares for the duration and look for signs that other device companies, including other smartphone vendors but other devices as well, are making the shift to organic light emitting diodes next week during Mobile World Congress 2019 (Feb. 25-28). The event is a premier one mobile industry as it tends to showcase new devices and technologies, and as you might imagine means a number of announcements. This means it’s not only one to watch for organic light emitting diode adoptions, but we are also likely to see much news on 5G virtual reality and augmented reality, key aspects of our Disruptive Innovators investing theme, as well. And with 5G in mind, we could very well hear of more 5G network launches as well, which means keeping my Nokia (NOK) and Digital Infrastructure ears open as well as my Digital Lifestyle ones.

  • Our price target on Universal Display (OLED) shares remains $125.
  • Our price target on Nokia (NOK) shares remains $8.50.

 

Tematica Options+

Last week we added a Middle-class Squeeze position with Lending Club (LC) March 2019 4.00 calls (LC190315C0000400)to the Select List, and despite the move higher in recent days ahead of the company’s earnings report last night, the calls were little changed. While LendingClub reported a 35% increase in personal loan applications in 2018 to more than 14 million with double-digit growth in both loan volumes and revenue it served up softer than expected December quarter results and guided the first half of 2019 below expectations. It continues to expect positive earnings in 2019, but that’s not expected to happen now until the second half of the year.

Given the March strike data associated with the LendingClub calls, combined with last night’s developments, odds are the shares will not rebound in such time as to make it worth holding onto them. As such, we will look to limit our losses on the trade, shedding them today at market.

 

Del Frisco’s to report on March 12

Turning to the Del Frisco’s Restaurant Group (DFRG) September 20, 2019, 10.00 calls (DFRG190920C00010000)that closed last night at 1.00, up more than 65% from our 0.60 entry point two weeks ago, the company has announced it will report its December quarter results on March 12. Because the company pre-announced it results in early January, the quarterly results won’t be much of a surprise. In my opinion, the company has stretched out its reporting timetable in order to evaluate potential bids. We know the company has beefed up its Board of late with an eye to maximizing a would be takeout transaction, and with ample private equity and corporate cash on the sidelines, odds are rather good that Del Frisco’s won’t be a stand-alone public company by this time next year.

 

Reasons To Be Cautious Ahead of Trump’s Feb. 28 Speech?

Reasons To Be Cautious Ahead of Trump’s Feb. 28 Speech?

Subscribers to Tematica Investing received this commentary on Monday, Feb. 27 with specific instructions pertaining the Tematica Select List.


If you’ve missed our weekly Monday missive that is the Monday Morning Kickoff, we’d encourage you to pursue it later today as it offers both context and perspective on last week, including much talk about the Fed, and sets the stage for this week. We’ve got a lot of data coming at us, more corporate earnings that prominently feature our Cash-strapped Consumer and Fattening of the Population investing themes. There are a number of events and conferences as well, and before too long we’ll have some thoughts on this week’s Mobile World Congress, an event that meshes very well with our Connected Society, Disruptive Technology and Cashless Consumption investing themes. We expect to see a number of announcements ranging from new smartphone models, connected as well as autonomous vehicle developments, voice digital assistant initiatives, drones, and payment systems to name a few. We’ll be watching these with regard to a number of positions on the Tematica Select List,

As Mobile World Congress gets underway, however, we have another event that should capture investor attention. After presenting what’s called a “skinny budget” today, (which we view as the “opening bid budget”) tomorrow night, President Trump will be speaking to a joint session of Congress. Typically this is referred to as the State of the Union Address, but it’s not called that for a newly elected president. Trump has already shared that he will be talking about health care reform – “We’re going to be speaking very specifically about a very complicated subject…I think we have something that is really going to be excellent.”

As we’ve said before, we’re optimistic and hopeful, but thus far it seems Republicans have yet to find common ground on which to move forward on this. In addition to healthcare reform, investors, including us, will be listening for more details on Trump’s fiscal policies. The issue is speeches such as this tend to be lacking in specifics, and we would be rather surprised to see Trump deviate from that tradition.  Moreover, we’ve already seen the Treasury Secretary push out the timetable for a tax report to late summer, and Trump himself suggested that we are not likely to see his tax reform proposal until after the healthcare reform has been addressed.

As we shared in this morning’s Monday Morning Kickoff, with the S&P 500 trading at 18x expected earnings, it looks like the stock market is out over its ski tips. Two drivers of the market rally over the coming months have been the improving, but not stellar economic data and the hope that President Trump’s policies will jumpstart the economy. We’ve been saying for some time that the soonest we’d likely get any meaningful impact from Trump’s policies would be the back half of 2017. That’s been our perspective, but as we know from time to time, the stock market can get ahead of itself, and we see this as one of those times. The stock market’s move reflects expectations for an accelerating economy – it’s the only way to get the “E” that is earnings growing enough to make the market’s current valuation more palatable.

One of the common mistakes we see with investors is they almost always only focus on the upside to be had, without keeping an eye on the downside risks. If Trump is successful when it comes to the domestic economy, and we’d love nothing more than to see acceleration here, earnings will likely grow materially.

One of the potential risks we see this week is the market being disappointed by the lack of details that Trump will share tomorrow night, which might be read as a push out in timing relative to what the stock market expects. As we said on last week’s Cocktail Investing podcast, resetting expectations is a lot like children that open presents on Christmas morning to find something other than what they expected — it’s far from a harmonious event and more like one that is met with mental daggers, confusion, and second guessing. In short, not a fun time at all.

Again, our thought is better to be safe than sorry given where the market currently sits. Some investors may want to utilize stop losses across positions like Universal Display (OLED), CSX Corp. (CSX), Skyworks Solutions (SWKS), Activision Blizzard (ATVI) and others that have been robust performers thus far in 2017 in order to preserve gains should the stock market get its post-Trump speech jiggy on. More aggressive investors may wish to utilize inverse ETFs, such as ProShares Short S&P500 ETF (SH), ProShares Short Dow30 ETF (DOG), or ProShares Short QQQ (PSQ), while traders implement call options on those inverse ETFs or employ the use of select puts.

 

 

Prepping for Dycom’s Earnings This Week

Prepping for Dycom’s Earnings This Week

While we are finally starting to see the pace of corporate earnings reports subside, there are still a number of stragglers on the Tematica Select List. One of those is Dycom Industries (DY), which will report its quarterly results on Wednesday (Mar. 1) before the market open. Consensus expectations call for this communications heavy specialty contractor and Connected Society company to deliver EPS of $0.69 on revenue of $661.8 million and guide the current quarter to EPS of $1.09-$1.18 on revenue of $708-$725 million.

We’ve noted that as Dycom customers have been reporting and sharing their 2017 capital spending plans over the last few weeks, the combined 2017 capital spending plans for Dycom’s core customers — AT&T (T), Verizon (VZ), CenturyLink (CTL) and Comcast (CMCSA) — for broadband and wireless will be up modestly year over year with a greater portion of spending on network capacity and new technologies (5G, Gigabit fiber). We continue to see Dycom as a prime beneficiary of that wireless and wireline capital spending.

As we noted earlier today, this week the 2017 iteration of Mobile World Congress is being held and its one of the major wireless trade shows of the year. We expect a number of announcements to be had, some of which should shed light on expected 5G deployments. We see those items as filling in between the lines for Dycom’s core customers, many of which continue to build out existing 4G LTE networks as they begin to test their 5G offerings.

As we get ready for Dycom’s earnings and follow on management comments during the follow-up conference call, we are inclined to sit tight and be patient with the position given our view that, worst case, it’s only a matter of time for next-generation network technologies to be deployed. Keep in mind, in order for them to be deployed, they first have to be constructed.

  • We continue to rate DY shares a Buy with a $110 price target.
Putting Some Defensive Measures in Place Ahead of Tuesday’s Trump Speech

Putting Some Defensive Measures in Place Ahead of Tuesday’s Trump Speech

If you’ve missed our weekly Monday missive that is the Monday Morning Kickoff, we’d encourage you to pursue it later today as it offers both context and perspective on last week, including much talk about the Fed, and sets the stage for this week.

This week, we’ve got a lot of data coming at us, more corporate earnings that prominently feature our Cash-strapped Consumer and Fattening of the Population investing themes. There are a number of events and conferences as well, and before too long we’ll have some thoughts on this week’s Mobile World Congress, an event that meshes very well with our Connected Society, Disruptive Technology and Cashless Consumption investing themes.

We expect to see a number of announcements ranging from new smartphone models, connected as well as autonomous vehicle developments, voice digital assistant initiatives, drones, and payment systems to name a few. We’ll be watching these with regard to a number of positions on the Tematica Select List, including Universal Display (OLED), Nuance Communications (NUAN), AT&T (T), Dycom Industries (DY), CalAmp (CAMP) and Alphabet (GOOGL) as well as Amazon (AMZN). Already Amazon has announced it will bring its Alexa VDA to Motorola’s smartphones, and we see that as the tip of the proverbial iceberg his week.

As the Mobile World Congress gets underway, however, we have another event that should capture investor attention. After presenting today what’s called a “skinny budget”, (which we view as the “opening bid budget”) tomorrow night President Trump will be speaking to a joint session of Congress. Typically this is referred to as the State of the Union Address, but it’s not called that for a newly elected president. Trump has already shared that he will be talking about health care reform — “We’re going to be speaking very specifically about a very complicated subject…I think we have something that is really going to be excellent.”

As we’ve said before, we’re optimistic and hopeful, but thus far it seems Republicans have yet to find common ground on how to move forward on this. In addition to healthcare reform, investors, including us, will be listening for more details on Trump’s fiscal policies. The issue is speeches such as this tend to be lacking in specifics, and we would be rather surprised to see Trump deviate from that tradition. Moreover, we’ve already seen the Treasury Secretary push out the timetable for a tax report to late summer, and Trump himself suggested that we are not likely to see his tax reform proposal until after the healthcare reform has been addressed.

As we shared in this morning’s Monday Morning Kickoff, with the S&P 500 trading at 18x expected earnings, it looks like the stock market is out over its ski tips. Two drivers of the market rally over the coming months have been:

  • The improving, but not stellar economic data
  • The hope that President Trump’s policies will jumpstart the economy.

We’ve been saying for some time that the soonest we’d likely get any meaningful impact from Trump’s policies would be the back half of 2017. That’s been our perspective, but as we know from time to time, the stock market can get ahead of itself, and we see this as one of those times. The stock market’s move reflects expectations for an accelerating economy – it’s the only way to get the “E” that is earnings growing enough to make the market’s current valuation more palatable.

 

Need to Keep Our Eyes on Both Sides of the Equation

One of the common mistakes we see with investors is they almost always only focus on the upside to be had, without keeping an eye on the downside risks. If Trump is successful when it comes to the domestic economy, and we’d love nothing more than to see acceleration here, earnings will likely grow materially.

One of the potential risks we see this week is the market being disappointed by the lack of details that Trump will share tomorrow night, which might be read as a push out in timing relative to what the stock market expects. As we said on last week’s Cocktail Investing podcast, resetting expectations is a lot like children that open presents on Christmas morning to find something other than what they expected — it’s far from a harmonious event and more like one that is met with mental daggers, confusion, and second guessing. In short, not a fun time at all.

For that reason, we’re going to make some defensive adjustments to the Tematica Select List, which has enjoyed the market rally over the last few months and led to strong moves in our Universal Display (OLED), AMN Healthcare (AMN), Costco Wholesale (COST) shares as well as several others.

 

With an eye toward preserving profits, we are going to introduce the following stop losses:
  • Alphabet (GOOGL) at $800
  • Universal Display at $70
  • AMN Healthcare at $37
  • PowerShares NASDAQ Internet Portfolio ETF (PNQI) at $90

 

Alongside these new stop losses, we’re also going to raise several existing ones:
  • Boost our stop loss on AT&T (T) to $36 from $31
  • Raise our stop loss on International Flavors & Fragrances (IFF) to $115 from $105
  • Boost our stop loss on Costco Wholesale to $170 from $165
  • Increase our stop loss on Disney (DIS) shares to $100 from $87

 

Again, our thought is better to be safe than sorry given where the market currently sits. We’ll continue to review other positions on the Tematica Select List with similar actions where and when it makes sense.