WEEKLY ISSUE: Farming for a New Thematic Selection

WEEKLY ISSUE: Farming for a New Thematic Selection



  • We are adding Farmland Partners (FPI) to the Tematica Investing Select List with a $12 price target.
  • On the heels of a smart equity investment in PTC Inc. (PTC), we reiterate our $235 price target for shares of Rockwell Automation (ROK).


Stocks appear to have shrugged off the lack of developments spinning out of the international trade and talks that were had over the last several days.  Perhaps this reflects the meh attitude had by investors that understand it will take time to turn these conversations into solutions. As the focus on those events fades, we have the Fed’s next FOMC meeting on deck that will come into the spotlight even though it is widely expected to boost interest rates exiting this meeting.

This begs the question as to why this meeting will be so closely watched and the answer lies in that it is one of the handful of meetings at which the Fed will hold a post-meeting press conference as well as issues its updated economic forecast. My strong suspicion is the Fed will respond to the widening number of inflationary data points that we’ve been seeing in both hard economic data and other signals in its comments and forecast. More than likely this means the Fed will signal a fourth rate hike this year, again something that has been gaining in thought. Inside the Fed’s forecast, I’ll be looking to see if it telegraphs a change in the number of rate hikes for 2019 as well.

The reason I’ll be focusing on the overall number of rate hikes over the next several quarters is what it means for interest cost on an incremental basis as well as the impact to be had on consumer spending and the economy.

As we wait for that event and its implications to unfold later this afternoon, I’m adding a new company, Farmland Partners (FPI) to the Tematica Investing Select List. Up front, I will tell you Farmland is far from a household name, but it is a Real Estate Investment Trust (REIT) that as its name suggests invests in US farmland. As I explain below, there are several thematic factors coming together across our Rise of the New Middle Class and Scarce Resources investing themes with Farmland. Now with no further adieu…


Adding Farmland Partners to the Select List

As I just mentioned, we are adding shares of Farmland Partners to the Tematica Investing Select List to gain not only high dividend yielding exposure to the real-estate industry, but also benefit from the increasing scarcity that is arable farmland that is becoming more valuable as the middle class outside the US continues to expand. In thematic speak, we see the company as a direct beneficiary of our Scare Resource investing theme and an indirect one for our Rise of the Middle Class one.

My price target for FPI shares is $12, which equates to a price to book value of roughly 1.1x its current book value of $10.85 exiting the March quarter.

Who is Farmland Partners?

FPI is the largest U.S.-listed farmland REIT. Its portfolio spans some 166,000 acres across 17 states, with rental income driving roughly 90% of the company’s revenue stream. Farmers use about 70% of FPI’s land for primary crops like corn, with the remaining 30% committed to specialty crops such as almonds or citrus. In addition, Farmland “double dips” to some extent by producing solar and wind power on 11 of its farms.

If you’re thinking this is a very different REIT and a very different kind of company, I’d agree — but investors can often find meaningful opportunities in such overlooked companies. And FPI is definitely overlooked, with just two analysts covering the stock vs. the more than 18 who follow REITs like Public Storage (PSA) and HCP (HCP).

But what’s perhaps most interesting is that FPI’s share price is essentially unchanged so far in 2018 despite the upward moves in prices for corn, wheat and soybeans that these charts show:




We can attribute some of these crop-price hikes to potential tariffs that would limit global supply, but the increases also have to do with rising global demand. The U.S. Department of Agriculture recently boosted its 2018 projection for overall American grain and feed exports to $31.2 billion — $1.5 billion higher than the agency’s February projection. That’s also up from the $30.35 billion of grain and feed that American producers shipped overseas in 2017.

And with rising global demand for proteins due in part to emerging markets’ rising middle classes, we’re likely to see price increases continue for these commodities over the longer term. In fact, America recorded it third-best year for agricultural exports in 2017, shipping $140.5 billion of goods. That’s up $10.9 billion year over year. By comparison, China only exported $22 billion of such crops, followed by Canada at $20.4 billion and Europe at $11.6 billion.

The higher U.S. exports have come even though America’s arable land fell by nearly 15% between 1997 and 2015 vs. a slight gain in worldwide arable land. Add in rising demand from emerging Asian economies for food imports and U.S. farmland seems poised to become more valuable over time.

We’re already seeing this in the USDA’s annual Land Values report. The latest edition valued U.S. farmland at $3,080 per acre on average in 2017, up from just $1,483 per acre in 2000. While there can be some ups and downs year to year, U.S. farmland prices have generally been growing at just under a 4.7% compound annual growth rate.

In short, I see arable land as a scarce resource, with Farmland Partners poised to benefit over the longer term as land prices creep higher. Income investors should also remember that as Farmland’s business grows, it must pay out at least 90% of its income to keep its REIT status. That bodes well for future dividend increases.

In the meantime, Farmland will pay its next quarterly dividend of $0.1275 per common share on July 16 to shareholders of record as of July 2. On an annualized basis, that equates to a dividend yield of 5.7%, well above the 1.8% yield to be had with the S&P 500.

Getting to the $12 price target

As for the stock’s price, FPI is trading at just $8.70 as I write this — about a 20% discount from the $10.85-per-share book value that the company had as of March 31. For those unfamiliar with book value, it’s a proxy for the total value of a company’s assets that shareholders would theoretically receive if the business had to liquidate.

FPI’s discount to book value strongly suggests that its shares are undervalued, likely due to recent trade-war and interest-rate fears. While this might restrain FPI shares in the near term, I instead choose to focus on the stock’s long-term favorable fundamentals discussed above. That said, FPI shares have had a favorable move higher since early May and that has the shares approaching over bought status. Given the upside to be had, we’re adding the shares to the Select List, but we would look to scale deeper into the position below $8, which would also serve to improve our cost basis.

Like most REITs, odds are Farmland will use its balance sheet to grow its operating business by acquiring additional farmland. If and when such transactions occur, we’ll assess the impact to the share’s book value and our price target. For now, my $12 price target equates to roughly 1.0x the company’s most recent book value of $10.85 per share, which is in line with its price to book value average over the last three years.


Rockwell Automation makes a strategic move and bumps up its buyback program

Yesterday, Rockwell Automation (ROK), a company that is riding our Tooling & Re-Tooling investment theme, made two announcements. The first one surrounds its upsizing its stock buyback program by $300 million to $1.5 billion. I see this as a positive in terms of supporting the share price, but it will be something to watch in terms of profit growth when Rockwell reports its quarterly earnings over the coming quarters.

The second announcement to me is far more interesting because it focused on the evolution of Rockwell’s business model. Specifically, Rockwell shared it will spend $1 billion to acquire 10.58 million shares of PTC Inc. (PTC), a company that software company focused on internet of things (IoT), augmented reality and industrial automation communications, and the Rockwell CEO, Blake Moret will join PTC’s board of directors. That bite at PTC shares will equate to an 8.4% ownership stake by Rockwell in PTC. While details were in short supply, I see the partnership bringing PTC’s offerings, which are in-line with several aspects of our Disruptive Technologies investing theme, to Rockwell’s factory automation solutions. A smart move as 5G and IoT looms ahead.

The focus on ROK shares will continue to be business investment spending as companies look to take advantage of tax reform and new depreciation schedules to update and overhaul their plants and other facilities. Our price target on ROK shares remains $235.

  • On the heels of a smart equity investment in PTC Inc. (PTC), we reiterate our $235 price target for shares of Rockwell Automation (ROK).
WEEKLY ISSUE: Taking a Last Sip from Our Venti Latte as We Head into the Summer

WEEKLY ISSUE: Taking a Last Sip from Our Venti Latte as We Head into the Summer


  • We are issuing a Sell on Starbucks (SBUX) shares and removing them from the Tematica Investing Select List.
  • We are trimming our position in USA Technologies (USAT) shares, selling half the position on the Tematica Investing Select List and keeping the other half in play to capture any potential additional upside.
  • Heading into this week’s Costco (COST) earnings call, our price target is $210.
  • Heading into Apples 2018 WWDC event next week, our price target on Apple (AAPL) shares remains $200.
  • While we watch for a potential Las Vegas strike, our longer-term price target for MGM remains $39.
  • We continue to have a Buy rating and an $85 target for Paccar (PCAR) shares
  • With data points confirming a pick-up in business investment, we continue to have a Buy rating and a $235 price target for Rockwell Collins (ROK) shares.


Coming into this shortened week for the stock market following the Memorial Day holiday, we’ve seemingly traded one concern for another. I’m talking about the shift in investor focus that has moved from the pending June 12 meeting between the US and North Korea to renewed concerns over Italy and what it could mean for the eurozone and the euro as well as the overall stock market and the dollar. In last week’s Weekly Wrap, I thought Tematica’s Chief Macro Strategist, Lenore Hawkins, did a bang-up job summing up the situation but as we entered this week it pivoted once again, pointing to the likelihood of new elections that could pave the way for anti-euro forces.

This fresh round of uncertainty led the market lower this week, pulling the CNN Money Fear & Greed Index back into Fear territory from Neutral last week. Not surprising, but as investors assess the situation odds are US stocks, as well as the dollar and US Treasuries, will be viewed as ports of safety. That realization likely means the short-term turbulence will give way to higher stock prices, especially for US focused ones. Multinational ones will likely see a renewed currency headwind given the rebound in the dollar as well as the new fall in the euro.

I’ll continue to keep close tabs on these developments and what they mean for not only our thematic lens, but also for the Tematica Investing Select List. Expect to hear more about this on our Cocktail Investing podcast as well.


Cutting Starbucks shares from the Tematica Investing Select List

Given our thematic bent, we tend to be investors with a long-term view and that means it takes quite a bit for me to remove a company from the Tematica Investing Select List. Today, we are doing that with Starbucks (SBUX) and for several reasons. As I just mentioned above, this multinational company will likely see currency headwinds return that will weigh on its income statement.

At the same time, the company has been underperforming of late in same-store sales comparisons, which have slipped to the low single digits from mid-single digits in 2013-2016. The decline has occurred as Starbucks has reaped the benefits of its improved food offering over the last several quarters, and its new beverage offerings of late have underwhelmed. In the March quarter, if it weren’t for price increases, its same-store sales would have been negative.

While I still go to Starbucks as does the rest of team Tematica, the reality is that we are not spending incremental dollars compared to last year outside of a price increase for our latte or cappuccino. Said a different way, Starbucks needs to reinvigorate its product line up to win incremental consumer wallet share. In the past, the company had new beverages and then the addition of an expanded food and snack offering to deliver favorable same-store comparisons. Now with a full array of beverages, food and snacks, the question facing Starbucks is what’s next?

It’s this question as well as the simple fact that the closure of its stores yesterday to deliver racial tolerance training to its employees will weigh not only on same-store sales comps for the current quarter but hit profits as well. Keep in mind too that we are heading into the seasonally slower part of the year for the company.

Taking stock of Starbucks stock, my view is let’s take the modest profit and dividends we’ve collected over the last 24 months and move on.

  • We are issuing a Sell on Starbucks (SBUX) shares and removing them from the Tematica Investing Select List.


Trimming back our position in USA Technologies

Since adding shares of USA Technologies (USAT) back to the Tematica Investing Select List in early April, they have risen more than 50%, making them one of the best performers thus far in 2018. While the prospects for mobile payments remains vibrant and we are starting to see some consolidation in the space, I’m reminded of the old Wall Street adage – bulls make money, bears make money and pigs get slaughtered.

Therefore, we will do the prudent thing given the sharp rise in our USAT shares in roughly a handful of weeks – we will trim the position back, selling half the position on the Tematica Investing Select List and keep the other half in play to capture the additional upside. As we do this, we are placing our $12 price target under review with an upward bias. That said, we would need to see upside near $16 to warrant placing fresh capital into the shares.

  • We are trimming our position in USA Technologies (USAT) shares, selling half the position on the Tematica Investing Select List and keeping the other half in play to capture the additional upside.


Prepping for Costco earnings later this week

After the market close on Thursday (May 31), Costco Wholesale (COST) will report its latest quarterly earnings. Consensus Wall Street expectations are for EPS of $1.68 on revenue of $31.59 billion.

Over the last several months, the company’s same-store sales show it gaining consumer wallet share as it continued to open additional warehouse locations, which sets the stage for favorable membership fee income comparisons year over year. Exiting April, Costco operated 749 warehouse locations around the globe, the bulk of which are in the U.S. and that compares to 729 warehouses exiting April 2017. The number of Costco locations should climb by another 17 by the end of August and paves the way for continued EPS growth in the coming quarters.

  • Heading into this week’s earnings call, our price target is $210 for Costco (COST) shares


Updates, updates, updates, updates

Apple (AAPL)                                                                       
Connected Society

Next Monday Apple will hold its 2018 World-Wide Developer Conference (WWDC), which historically has been a showcase for the company’s various software platforms. This year it’s expected to feature iOS 12, the next evolution in its smartphone and tablet software. Recently it was hinted that Apple will unleash the full power of Near Field Communication capabilities found in those chipsets, which have been inside the iPhone since the iPhone 6 model.

In my view, this is likely to be but one of the improvements shared at the event. Those hoping for a hardware announcement are likely to be disappointed, but we never know if we’ll get “one more thing.”

  • Heading into next week’s 2018 WWDC event, our price target on Apple (AAPL) shares remains $200.


MGM Resorts International (MGM)
Guilty Pleasure

Quarter to date, shares of gaming-and-resort company MGM have come under pressure but our position in them is down only modestly. I’m putting MGM shares on watch this week following a vote by Las Vegas casino workers to strike when their contract expires at the end of May. I see that vote as a negotiating tactic with dozens of casino and resort operators, akin to what we’ve been seeing emanating from Washington these last few months.

I’ll continue to watch for a potential resolution and what it could mean for margins and EPS expectations. We’ve been patient with MGM shares, but if a strike ensues I’m apt to exit the position and fish in more fruitful waters for this investment theme of ours.

  • While we watch for a potential Las Vegas strike, our longer-term price target remains $39.


Paccar (PCAR)
Economic Acceleration/Deceleration

Over the last month, shares of this heavy-duty and medium-duty truck manufacturer have traded sideways. According to the most recent data point from the Cass Freight Index, shipment rose just over 10% year over year in April. That sets the stage for a favorable April reading for the American Trucking Associations’s For-Hire Truck Tonnage Index that rose 6.3% year over year after increasing 7.7% in February on the same basis.

At the same time, we continue to hear from a growing array of companies that they are facing rising costs due in part to surging trucking rates. Coca-Cola (KO) recently reported a 20% year-over-year increase in freight expense. Procter & Gamble (PG), Hasbro, Inc. (HAS), Danone SA, and Nestle SA also reported higher transportation costs and Unilever (UL) expects high-single-digit to high-teens increases in U.S. freight costs in the coming quarters. All of this confirms the current truck shortage that is fueling robust year-over-year growth in new orders for medium and heavy-duty trucks. Next week, we should get the May data and I expect the favorable year over year comparisons to continue.

As production rises to meet demand, we see a positive impact on Paccar’s business on both the top and bottom lines. Our $85 price target equates to just under 15x current estimated 2018 EPS, which has crept up by a few pennies over the last several weeks to $5.69 per share vs. $4.26 in 2017.

  • We continue to have a Buy rating and an $85 target for Paccar (PCAR) shares


Rockwell Automation (ROK)
Tooling & Re-Tooling

Our thesis on Rockwell Automation has focused on the expected pick-up in business investment and capital spending following tax reform last year. As the March quarter earnings season winds down, data collected by Credit Suisse reveals spending on factories, equipment and other capital goods by companies in the S&P 500 is expected to have risen to $166 billion during the quarter, up 24% year over year. That’s the fastest pick-up in capital spending since 2011 and marks a March-quarter record since Credit Suisse started collecting the data in 1995.

That year over year increase is roughly in line with the year over year increase in March 2018 U.S. manufacturing technology orders according to data published in the U.S. Manufacturing Technology Orders report from The Association For Manufacturing Technology (AMT). For March quarter in full, AMT’s data points to a 25% year over year improvement, which is in line with Credit Suisse’s capital spending assessment.

Based on these prospects, as well as statistics for the average age of private fixed assets that reveal the average age of U.S. factory stock is near 60 years old, it appears AMT’s 2018 forecast that calls for a 12% increase in US orders of manufacturing equipment compared to 2017 is looking somewhat conservative.

I’ve also noticed that over the last several weeks 2018 EPS expectations for Rockwell have inched up to $7.87 per share from $7.79, while 2019 expectations have moved higher to $8.81 per share from $8.73. I see those upward movements as increasing our confidence in our $235 price target for ROK shares.

  • With data points confirming a pick-up in business investment, we continue to have a Buy rating and a $235 price target for Rockwell Collins (ROK) shares.


WEEKLY ISSUE: Adding back a specialty contractor to Select List

WEEKLY ISSUE: Adding back a specialty contractor to Select List


  • We are issuing a Buy on Dycom Industries (DY) shares with a $125 price target as part of our Connected Society investing theme.
  • We are adding LendingClub (LC) shares to the Tematica Investing Contender List and will revisit the shares following the resolution of the current FTC complaint.
  • Our price target on Costco Wholesale (COST) and Amazon (AMZN) shares remain $210 and $1,750, respectively.
  • Our long-term price target on shares of Applied Materials (AMAT) remains $70.

As we inch along in the second half of the current quarter, the stock market is once again dealing with the flip-flopping on foreign trade. Last week there appeared to be modest progress between China and the US but following comments from President Trump on the pending summit with North Korea and “no deal” regarding China’s bankrupt ZTE, trade uncertainty is once again gripping the markets. Several weeks ago, I cautioned we were likely in for some turbulent weeks – some up some down – as these negotiations got underway. In my view, there will be much back and forth, which will keep the stock market on edge. I’ll continue to utilize our thematic lens and look for compelling long-term opportunities in the coming weeks, just like the one we are about to discuss…


Adding back shares of Dycom (DY) to the Tematica Investing Select List

Late last summer, we exited our position in specialty contractor and Connected Society food chain company Dycom Industries (DY) that serves the mobile and broadband infrastructure markets. Yesterday, following an earnings miss and reduced guidance from the company, its share dropped 20% to $92.64. The reason for the miss and outlook revisions stemmed from weather-related concerns during the February and March months as well as protracted timing associated with key next-gen network buildouts.

Clearly disappointing, but we have seen such timing issues before in the buildouts of both 3G and 4G/LTE networks before. In today’s stock market that double disappointment hit DY shares, no different than it has other companies that have come up short this earnings season.

We’ve often used pronounced pullbacks in existing positions to sweeten our average cost basis, and today we’re going to use this drop in DY shares to add them back to the Tematica Investing Select List.


Two reasons.

First, the inevitability of 5G network deployments from key customers (AT&T) and Verizon (VZ). Those two alongside their competitors have Sprint (S) and T-Mobile (TMUS) have committed to launching 5G networks by year-end, with a buildout to a national footprint to follow over the ensuing quarters. AT&T and Verizon accounted for 24% and 16% of the quarter’s revenue with Comcast (CMCSA) clocking in at just under 22% and Centurylink (CTL:NYSE) around 12%. This positions Dycom extremely well not only for the pending 5G buildout, but also the gigabit fiber one that is underway at cable operators like Comcast. Amid the timing disruptions with AT&T and Centurylink that led to the earnings disappointment and outlook cut, Dycom called out solid progress with Verizon, as its revenue rose more than 80% year over year. There’s also an added bonus – Dycom has little exposure to Sprint and T-Mobile, which are planning to merge and based on what we’ve seen in the past that means spending cuts are likely to be had as they consolidate existing assets and capital expansion plans.

Here’s the thing, while it is easy to get caught up in yesterday’s DY share price drop, it’s akin to missing the forest for the trees given the network upgrades and next-gen buildouts that will occur not over the coming months, but over the coming quarters.

Dissecting Dycom’s quarterly earnings and revised outlook that calls for EPS of $1.78-$1.93 in the first half of the year, to hit its new full-year target EPS of $4.26-$5.15 it means delivering EPS of $2.98-$3.22 in the back half of the year. In other words, a pronounced pick up in business activity that likely hinges on a pickup in network buildout activity from its customers.

I do expect Wall Street price target revisions and analyst commentary to weigh on DY shares in the near-term. Even I am cutting my once $140 price target for the shares to $125. That $140 target was based on 2019 EPS of $7.10 per share and given the company’s comments yesterday I expect 2019 EPS forecasts to be revised down to the $6.00-$6.50 range.

As the 5G buildout gets under way, the reality is that several quarters from now, such EPS and price target cuts could prove to be conservative, but I’d rather be in the position to raise our price target as the company beats EPS expectations. That revised 2019 EPS range derives a price target for DY shares of $120-$130. For now, we’ll split the difference at $125, which still offers almost 35% upside from current share price levels.

  • We are issuing a Buy on Dycom Industries (DY) shares with a $125 price target as part of our Connected Society investing theme.


Putting LendingClub shares onto the Contender List

As team Tematica has been discussing over the last several weeks in our writings and on our Cocktail Investing Podcast, we’re seeing increasing signs of inflation in the systems from both hard and soft data points. This likely means the Fed will boost rates four not three times in 2018 with additional rate hikes to be had 2019. That’s what’s in the front windshield of the investing car, while inside we are getting more data that points to a stretched consumer.

  • Per the May 2018 Consumer Debt Outlook report from Lending Tree (TREE), Americans are on pace to amass a collective $4 trillion in consumer debt by the end of 2018. This means Americans are spending more than 26% of their income on consumer debt, up from 22% in 2010 with the bulk of that increase due to non-house related borrowing.
  • The Charles Schwab’s (SCHW) 2018 Modern Wealth Index that reveals three in five Americans are living paycheck to paycheck.
  • A new report from the Federal Reserve finds that 40% of Americans could not cover an unexpected $400 expense and 25% of Americans have no retirement savings.


As consumer debt grows, it’s going to become even more expensive to service as the Fed further increases interest rates. On its recent quarterly earnings conference call, LendingClub’s (LC) CFO Tom Casey shared that “Borrowers are starting to see the increased cost of credit as most credit card debt is indexed to prime, which has moved up 75 basis points from a year ago…We have observed a number of lenders increase rates to borrowers…We know that consumers are feeling the increase in rates.”

Again, that’s before the Fed rate hikes that are to come.

The bottom line is it likely means more debt and higher interest payments that lead to less disposable income for consumers to spend. Unfortunately, we see this as a tailwind for our Cash-strapped Consumer investing theme as well as a headwind for consumer spending and the economy. We’ve seen the power of this tailwind in monthly retail same store sales from Costco Wholesale (COST), which have simply been off the charts, and in monthly Retail Sales reports that show departments stores, sporting goods stores and others continue to lose consumer wallet share at the expense of non-store retailers like Amazon (AMZN). The drive is the need to stretch what disposable spending dollars a consumer has.

The reality is, however, that those that lack sufficient funds will seek out alternatives. In some cases that means adding to their borrowings, often times at less than attractive rates.

With that in mind, above I mentioned LendingClub. For those unfamiliar with the company, it operates an online credit marketplace that connects borrowers and investors in the US. It went public a few years ago and was heralded as a disruptive business for consumers and businesses to obtain credit based on its digital product platform. That marketplace facilitates various types of loan products for consumers and small businesses, including unsecured personal loans, unsecured education and patient finance loans, auto refinance loans, and unsecured small business loans. The company also provides an opportunity to the investor to invest in a range of loans based on term and credit.

Last year 78% of its $575 million in revenue was derived from loan origination transaction fees derived from its platform’s role in accepting and decisioning applications on behalf of the company’s bank partners. More than 50 banks—ranging in total assets of less than $100 million to more than $100 billion—have taken advantage LendingClub’s partnership program.

LendingClub’s second largest revenue stream is derived from investor fees, which include servicing fees for various services, including servicing and collection efforts and matching available loans with capital and management fees from investment funds and other managed accounts, gains on sales of whole loans, interest income earned and fair value gains/losses from loans held on the company’s balance sheet.

The core loan origination transaction fee business along with the consensus price target of $5.00, which offers compelling upside from the current share prices, has caught my interest. However, there is one very good reason for why I am recommending we wait on LC shares.

It’s because the Federal Trade Commission (FTC) has filed a complaint against LendingClub, charging that it has misled consumers and has been deducting hidden fees from loan proceeds issued to borrowers. Moreover, as stated in the FTC’s complaint, Lending Club recognized that its hidden fee was a significant problem for consumers, and an internal review by the company noted that its claims about the fee and the amount consumers would receive “could be perceived as deceptive as it is likely to mislead the consumer.”

Given the potential fallout, which could pressure LC shares, we’ll sit on the sidelines with LendingClub and look for other companies that are positioned to capitalize on this particular Cash-strapped Consumer pain point.

  • We are adding LendingClub (LC) shares to the Tematica Investing Contender List and will revisit the shares following the resolution of the current FTC complaint.
  • Our price target on Costco Wholesale (COST) and Amazon (AMZN) shares remain $210 and $1,750, respectively.


Sticking with shares of Applied Materials

Last week Disruptive Technology company Applied Materials (AMAT) reported quarterly results that once again topped expectations but guided the current quarter below expectations. As I mentioned above with Dycom shares, the current market mood is less than forgiving in these situations and that led AMAT shares to give back much of the gains made in the first half of May.

The shortfall relative to expectations reflected reported weakness in high end smartphones, which is slowing capital additions for both chips and organic light-emitting diode display equipment. This is the latest in a growing number of red flags on smartphone demand, which in my view is likely to be the latest transition period in the world of smartphones. For those wondering about our Apple (AAPL) shares, the company already issued a sequentially down iPhone forecast when it reported its own earnings several weeks back as it upsized its own buyback program.

Again, looking back on my Dycom comments above, mobile carriers are about to embark on building out their 5G networks, which will drive incremental RF semiconductor chip demand as well as drive demand for new applications, such as semi-autonomous and autonomous cars. I see 5G devices with near broadband data speeds driving the next smartphone upgrade cycle. When that happens, there are also other technologies, such as artificial intelligence, augmented reality, and virtual reality that will be moving into a greater number of these and other devices. On its earnings call, Applied shared it’s starting to see ramping demand for artificial intelligence, big data a cloud related applications. I see more of this happening in the coming quarters… again, the long-term forest vs. the quarterly tree… and I haven’t even mentioned the internet of things (IoT).

Another driver I’m watching for Applied’s semi-cap business is the ongoing buildout of in-China semiconductor capacity. The item to watch for this is The National Integrated Circuitry Investment Fund, which represents the Chinese government’s primary vehicle to develop the domestic semiconductor supply chain and become competitive with the U.S.  chip industry leader the US. That fund is reportedly closing in on an upsized 300 billion-yuan fund ($47.4 billion) fund vs. the expected 120 billion-yuan ($18.98 billion) to support the domestic chip sector. As we have seen in the headlines with ZTE as well as the Broadcom (AVGO) bid for Qualcomm (QCOM), the semiconductor industry has taken a leading role in the current U.S.-China trade conflict. As I continue to watch these trade discussions play out, I’ll only be assessing implications for the National Integrated Circuitry Investment Fund and our Applied Materials shares.

In terms of organic light emitting diode displays and revisiting shares of Universal Display (OLED), the industry is still in a digestion period given the capacity ramp for that technology and the smartphone transition I touched on above. We’ve got OLED shares on the Tematica Investing Contender List and I’ll be watching them and signs of ramping demand as we move through the summer months.

While we wait, I expect Applied will continue to put its robust share repurchase program to use. As we learned in its quarterly earnings report last week, during the quarter, Applied used $2.5 billion of its $8.8 billion share repurchase authorization to repurchase 44 million shares, roughly 4% of the outstanding share count coming into the quarter. I suspect that once the post-earnings quiet period is over, Applied will be putting more of that program to work. I see that as limiting downside from current levels.

Finally, a quick reminder that come June, Applied will be paying its first $0.20 per share dividend.

  • Our long-term price target on shares of Applied Materials (AMAT) remains $70.
  • As we monitor signs of organic light emitting diode display demand, we continue to have shares of Universal Display on the Tematica Investing Contender List



WEEKLY ISSUE: What September May Bring

WEEKLY ISSUE: What September May Bring

Alright, alright, alright! Welcome back from the last bit of summer vacation, and it’s back to business for companies and stocks. We’ve moved from sleepy August to September, historically one of the most volatile months for stocks. Over the last few weeks, we’ve chin-wagged quite a bit over the items that could disrupt the market, but as happens from time to time, something appears out of thin air that is an unexpected disruptor. Last week that was the damage done by Hurricane Harvey, and now we have not just one but potentially two more hurricanes to contend with – Irma and Jose. Also adding to the news mix was the return of North Korea, following its nuclear test over the holiday weekend.



Normally after the Labor Day weekend, we see trading volume return to normal and the “B-team” that was covering trading desks replaced by the A-team. As they return, those players pore over data and happenings over the last few weeks that they’ve been away. This helps explain why September tends to be one of the more volatile months for stocks.

Another reason for the September volatility spikes is that in the coming days we’re going to see a return of investor conferences, and companies presenting at these events will give their first update since reporting 2Q 2017 earnings back in July. These updates will shape the tone of the second half of the year, and as we’ve shared previously, expectations call for meaningful EPS growth compared to the first half. In the coming days, we’ll start to see if those forecasts are as aggressive as we think they are given the speed of the economy.

We already know that Harvey and Irma will be and near-term economic shock to the system, likely resulting in a meaningful hit to GDP in the current quarter. In the coming days and weeks, we expect to hear retailers, restaurants, insurers, and others that have been impacted by Harvey reset expectations, and that is likely to weigh on the market near-term.  Eventually, we’ll see a snap back as rebuilding occurs in the coming months, but that will benefit a different set of companies than those affected. With that in mind, yesterday, we posted our thoughts on what the fallout could mean from the Harvey-Irma combination and shared a who’s who of stocks that are likely beneficiaries. With Jose being added to the mix, things could be even brighter for that list of companies we’re scoping out.

Cocktail Investing: Hurricane Harvey and its Impact on the Markets and EconomyAs we wait to see the incremental impact to be had from both Irma and Jose, let’s remember something we called out on last week’s Harvey focused podcast – the rebuilding effort, including federal relief, could trigger a sooner than expected debt ceiling coverage. Now we’re getting wind that the Republican Freedom Caucus is opposed to attaching a funding request for Hurricane Harvey aid to a debt limit increase and on the news that President Trump ended the Deferred Action for Childhood Arrivals (DACA) program. There has been no shortage of DC drama these last several weeks, and as we noted a few weeks ago, and with the debt ceiling discussion and tax reform taking center stage that DC drama is likely to extend its current run in the center ring.

We see this a one drama replacing another, with the one replaced being the Fed’s expected September balance sheet unwinding. In our view, following the near-term economic impact by Harvey and potentially the other hurricanes odds are the Fed will hold off with its balance sheet unwinding for a few more months. Even Federal Reserve Governor Lael Brainard argued this week the economic effects of Hurricane Harvey “raise uncertainties about the economic outlook for the remainder of the year” and argued for “a wait-and-see approach” before raising rates again. We’ve already seen another push out in rate hike expectations, and as balance sheet unwinding slips closer to the end of the year we’ll likely see yet another push out for the next Fed rate hike as well.

Putting these pieces together – hurricanes and the GDP impact, ongoing DC drama, and companies poised to reset guidance – it’s no surprise we’ve seen the Volatility Index perk up yesterday. Again, as the A-team on Wall Street has returned to their saddles. Most likely this means a thorough going over with an extra eye on risk management, as the herd looks to lock in profits.

We’ll be doing the same – revisiting thematic data points that reside in our own Thematic Signals and elsewhere – to do a review of positions on the Tematica Select List. As you saw with our recent exit of Dycom (DY) shares, we’re not ones to fall in love with the positions, but as you saw yesterday when we added to Costco (COST) shares when we see a mismatch between fundamentals and stock price performance, we’ll take action.


Thematic Data points this week — Apple & Universal Display

We have no companies reporting earnings this week, but we will be looking at thematic data points found in results from Safety & Security company American Outdoor Brands (AOBC), Cashless Consumption contender VeriFone (PAY) and Affordable Luxury company Restoration Hardware (RH). Next Tuesday, September 12th, Apple (AAPL) is set to take the wraps off its next iPhone iteration and this means we’ll finally get the official word on Apple’s use of organic light emitting diode displays. As we recently cautioned, there tends to be much build up ahead of these Apple events, and there is a history in the post-Steve Jobs era of them underwhelming. If that happens, we could see shares of Disruptive Technology position Universal Display (OLED) come under some pressure. Given the accelerating adoption of the technology across a variety of applications beyond smartphones, we would view any pullback as an opportunity.

  • At current levels, subscribers should “Hold” Universal Display (OLED) shares rather than commit fresh capital.
  • Our price target remains $135, but given expanding market applications for its products and licensing business, we’re inclined to be owners of the shares for the medium to longer term.


Be sure to check the website as well as your email for updates and other alerts as we share more thematic insights and actions during the week.