Volvo joins Tesla as it targets all-electric semi truck in 2019

Volvo joins Tesla as it targets all-electric semi truck in 2019

While Tesla continues to make headlines, progress on electric cars continues but those are not the only vehicles that are being prepped for all-electric solutions. Even as Tesla looks to bring Tesla Semi, a heavy-duty Class 8 truck to market in 2019, others including Daimler, Thor Industries and Volvo are testing their own versions, which in some cases include medium-duty class 6 trucks. Each of these is looking to tap incremental demand to be had as states look to address air quality, which is very much in sync with our Clean Living investing theme.

Much like we have seen with electric cars, the tradeoff between mileage and charge as well as the availability of charging stations will all be factors for the adoption of electric trucks. As that adoption rises, it will necessitate a pick up in demand for lithium as well as wide-bandgap semiconductors, which are all part of our Disruptive Innovators investment theme.

Volvo Trucks released teaser images Wednesday of the electric trucks it plans to bring to California next year as part of a demonstration project, the latest truck manufacturer to publicize its electric plans in the state.

The attraction to California is no accident. The state has set aggressive targets to improve air quality and reduce carbon emissions, particularly those generated from tailpipes.

Daimler Trucks North America said in July it would begin testing 20 fully electric heavy- and medium-duty Freightliner models at the ports of Los Angeles and Long Beach this year. Tesla, which unveiled the Tesla Semi prototype in November 2017 , began testing its prototype semis in California and Nevada earlier this year. Tesla CEO Elon Musk has said production of the Tesla Semi, a Class 8 heavy duty truck, would begin in 2019.

Newcomer Thor Trucks is developing a medium-duty Class-6 electric truck for UPS, which will also be tested in California.

Volvo Trucks plans to test its new electric VNR truck, a refitted version of its diesel-powered VNR model. The electric VNR, which will be based on powertrain technology used in the Volvo FE Electric, will be produced for the North American commercial vehicle market starting in 2020, the company said.

Source: Volvo Trucks teases the all-electric semi truck it’s bringing to California in 2019 | TechCrunch

Breaking down the ISM Manufacturing Report plus Paccar and Costco updates

Breaking down the ISM Manufacturing Report plus Paccar and Costco updates

Key points inside this issue

  • While the August ISM Manufacturing Report shows an improving economy, it also confirms inflation is percolating as well.
  • An earnings beat and robust outlook at heavy truck and engine company Navistar (NAV), keeps us bullish on Paccar (PCAR). Our PCAR price target remains $85.
  • Our price target on Costco Wholesale (COST) shares remains $230 heading into the company’s same-store-sales report after tonight’s market close.

This week we started to get our first firm look at the domestic economy for the month of August. The first piece of data was the ISM Manufacturing Index for August, which came in at 61.3, the highest reading in the last 12 months and a sequential improvement from 58.1 in July. In pulling back the covers on the index’s components, we find the forward-looking components – net orders and the backlog of orders – move up nicely month over month suggesting the manufacturing economy will continue to grow this month. The same, however, can be said for the Price component, which registered 72.1 for August. While down from July’s 73.2 figure, sixteen of the surveyed 18 industries reported paying increased prices for raw materials in August. With the August Prices reading well above the expansion vs. contraction line that is 50, the modest tick down in that sub-index does little to suggest the FOMC won’t boost interest when it meets later this month.

With regard to the report and the current trade wars, new export orders in August ticked lower to 55.2, down a meager 0.1 month over month. We’ll continue to monitor this and related data to assess the actual impact of the current trade wars for as long as they are occurring. As a reminder, by the end of this week, the US could impose tariffs on roughly half of all Chinese goods entering the country. Estimates put that figure at $200 billion, a step up from the $34 billion that had tariffs placed on them in July and the additional $16 billion last month. Should this latest round of tariffs go into effect, odds are we will see China follow suit with another round of its own tariff increases on US goods.

Drilling into the employment component of the ISM Manufacturing Report, it jumped to 58.5 in August, up from 56.5 in July. Given the historical relationship between this component and the Bureau of Labor Statistics (BLS) Employment Report – a reading in the ISM employment index above 50.8 percent, is generally consistent with an increase in the (BLS) data on manufacturing employment – odds are Friday’s Employment Report could surprise to the upside. To us, the real figure to watch inside that report, however, will be average hourly earnings to see how it stacks up against the data pointing to mounting inflation to be had in the economy. As we’ve said before, if wage growth lags relative to that data, it could put the brakes on the robust consumer spending we’ve seen in recent months.

 

An update on Paccar and a reminder on Costco Wholesale

Turning to the portfolio, this morning heavy truck and engine company Navistar (NAV) reported better than expected quarterly earnings due to continued strength in the heavy truck market. We see that as well as Navistar’s upsized heavy truck industry delivery forecast to 260,000-280,000 from the prior 250,000-280,000 as a positive for our Paccar (PCAR) shares. The same can be said from the recent July report on truck tonnage released by the American Trucking Association that showed an 8.6% year over year increase for the month, sequentially stronger than the 7.7% increase in June. The activity had with that ATA report suggest not only a pick up in the domestic economy, but the pain point of the current truck shortage continues to be felt, which bodes well for continued new order flow.

  • Our price target on Paccar (PCAR) shares remains $85.

After tonight’s close, Costco Wholesale (COST) will report its August same-store-sales figures, which we expect will continue the recent string of favorable reports. We’ll also be looking for an update on the number of open warehouses, a leading indicator for its high margin membership fee revenue stream. Based on the report, we will look to revisit our current $230 price target on COST shares.

  • Our price target on Costco Wholesale (COST) shares remains $230 for now.

 

WEEKLY ISSUE: Taking Positions Off the Board and Reallocating Into Existing Positions

WEEKLY ISSUE: Taking Positions Off the Board and Reallocating Into Existing Positions

Key points from this issue

  • We are exiting the shares of Paccar (PCAR), which had an essentially neutral impact on the Select List;
  • We are exiting the shares of Rockwell Automation (ROK), which were a drag of more than 11% on the Select List;
  • We are exiting the shares of GSV Capital (GSVC), which in full returned a modest decline since we added the shares back in April.
  • We are scaling into shares of Applied Materials (AMAT) at current levels and keeping our long-term price target of $70 intact.
  • We are scaling into shares of Netflix (NFLX) at current levels and keeping our long-term price target of $500 in place.

 

After the S&P 500 hit an all-time high yesterday, if the stock market finishes higher today it will mean the current bull market will be 3,453 days old, which will make it the longest on record by most definitions. For those market history buffs, as of last night’s market close, it tied the one that ran from October 1990 to March 2000.

Even as the S&P 500 hit an all-time high yesterday thus far in 2018 it’s up 7.1%. By comparison, we have a number of positions on the Tematica Investing Select List that are up considerably more. Among them are Amazon (AMZN), Apple (AAPL), Costco Wholesale (COST), ETFMG Prime Cyber Security ETF (HACK), Habit Restaurant (HABT), McCormick & Co. (MKC), and USA Technologies (USAT). Not that I’m prone to bragging, rather I’m offering a gentle reminder of the power to be had with thematic investing vs. the herd and sector-based investing.

Over the last few weeks, I’ve been recasting our investing themes, which in some cases has given rise to a new theme like Digital Infrastructure, combined a few prior themes into the more cohesive Digital Lifestyle and Middle-Class Squeeze ones, and expanded the scope of our Clean Living theme. In the next few weeks, I’ll finish the task at hand as well as ensure we have a stock recommendation for each of what will be our 10 investment themes.

As part of that effort, I’m re-classifying USA Technologies (USAT) shares as part of our Digital Infrastructure investing theme. The shares join Dycom Industries (DY) in this theme.

 

Pruning PCAR, ROK and GSVC shares

Once we pass the approaching Labor Day holiday, we will be off to the races with the usual end of the year sprint. For that reason, we’re going to take what is normally the last two relatively quiet weeks of August to do some pruning. This will go hand in hand with the ongoing investment theme reconstitution that will eliminate the stand-alone Economic Acceleration/Deceleration and Tooling & Re-tooling investment themes. As such, we’re saying goodbye to shares of Paccar (PCAR) and Rockwell Collins (ROK). We’ll also shed the shares of GSV Capital (GSVC), which are going to be largely driven by share price movements in Spotify (SPOT) and Dropbox (DBX). As the lock-up period with both of those newly public companies come and go, I’ll look to revisit both of them with an eye to our Digital Lifestyle and Digital Infrastructure investing themes.

  • We are exiting the shares of Paccar (PCAR), which had an essentially neutral impact on the Select List;
  • We are exiting the shares of Rockwell Automation (ROK), which were a drag of more than 11% on the Select List;
  • We are exiting the shares of GSV Capital (GSVC), which in full returned a modest decline since we added the shares back in April.

 

Scaling into Applied Materials and Netflix shares

We’ll use a portion of that returned capital to scale into shares of Applied Materials (AMAT), which approached their 52-week low late last week following the company’s quarterly earnings report that included an earnings beat but served up a softer than expected outlook.

Applied’s guidance called for sales of $3.85-$4.15 billion vs. analyst consensus outlook of $4.45 billion. On the company’s earnings conference call, CEO Gary Dickerson confirmed worries that slower smartphone growth could cause chipmakers to rein in capital spending and reduce demand for chipmaking equipment in the near- term. That’s the bad news, the good news is Applied sees double-digit growth in 2019 for each of its businesses and remains comfortable with its 2020 EPS forecast of $5.08.

From my perspective, I continue to see the several aspects of our Disruptive Innovators investing theme – augmented and virtual reality, 5G, artificial intelligence, Big Data and others – as well as growing storage and memory demands for connected devices driving semiconductor capital equipment demands. There is also the rising install base of semiconductor capital equipment inside China, and with Apple turning to China suppliers over Taiwanese ones to contain costs it likely means a rebound in China demand when the current US-China trade imbroglio ends.

As we wait for that, I suspect Applied will continue to use its stock buyback program During its recently closed quarter, Applied repurchased $1.25 billion or 25 million shares of stock and the company has about $5 billion remaining in buyback authorization. Applied’s next quarterly dividend of $0.20 per share will be paid on Sept. 13 to shareholders of record on Aug. 23.

  • We are scaling into shares of Applied Materials (AMAT) at current levels and keeping our long-term price target remains $70 intact.

Turning to Netflix (NFLX) shares, they are down some just under 20% from where I first added them to the Select List several weeks ago. My thesis on the shares remains unchanged, and I continue to see its streaming video service and original content as one of the cornerstones of our Digital Lifestyle investing theme. Adding to the shares at current levels will serve to reduce our cost basis from just under $420 to just under $380.

  • We are scaling into shares of Netflix (NFLX) at current levels and keeping our long-term price target of $500 in place.

 

 

WEEKLY ISSUE: Scaling deeper into Dycom shares

WEEKLY ISSUE: Scaling deeper into Dycom shares

Key points from this issue:

  • We are halfway through the current quarter, and we’ve got a number of holdings on the Tematica Investing Select List that are trouncing the major market indices.
  • We are using this week’s pain to improve our long-term cost basis in Dycom Industries (DY) shares as we ratchet back our price target to $100 from $125.
  • Examining our Middle-Class Squeeze investing theme and housing.
  • A Digital Lifestyle company that we plan on avoiding as Facebook attacks its key market.

 

As the velocity of June quarter earnings reports slows, in this issue of Tematica Investing we’re going to examine how our Middle-Class Squeeze investing theme is impacting the housing market and showcase a Digital Lifestyle theme company that I think subscribers would be smart to avoid. I’m also keeping my eyes open regarding the recent concerns surrounding Turkey and the lira. Thus far, signs of contagion appear to be limited but in the coming days, I suspect we’ll have a much better sense of the situation and exposure to be had.

With today’s issue, we are halfway through the current quarter. While the major market indices are up 2%-4% so far in the quarter, by comparison, we’ve had a number of strong thematic outperformers. These include Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), AXT Inc. (AXTI), Costco Wholesale (COST),  Habit Restaurant (HABT), Walt Disney (DIS), United Parcel Service (UPS), Universal Display (OLED) and USA Technologies (USAT).  That’s an impressive roster to be sure, but there are several positions that have lagged the market quarter to date including GSV Capital (GSVC), Nokia (NOK), Netflix (NFLX), Paccar (PCAR) and Rockwell Automation (ROK). We’ve also experienced some pain with Dycom (DY) shares, which we will get to in a moment.

Last week jettisoned shares of Farmland Partners (FPI) following the company taking it’s 3Q 2018 dividend payment and shooting it behind the woodshed. We also scaled into GSVC shares following GSV’s thesis-confirming June quarter earnings report, and I’m closely watching NFLX shares with a similar strategy in mind given the double-digit drop since adding them to the Tematica Investing Select List just over a month ago.

 

Scaling into Dycom share to improve our position for the longer-term

Last week we unveiled our latest investing theme here at Tematica – Digital Infrastructure. Earlier this week, Dycom Industries (DY), our first Digital Infrastructure selection slashed its outlook for the next few quarters despite a sharp rise in its backlog. Those shared revisions are as follows:

  • For its soon to be reported quarter, the company now sees EPS of $1.05-$1.08 from its previous guidance of $1.13-$1.28 vs. $1.19 analyst consensus estimate and revenues of $799.5 million from the prior $830-$860 million vs. the $843 million consensus.
  • For its full year ending this upcoming January, Dycom now sees EPS of $2.62-$3.07 from $4.26-$5.15 vs. the $4.63 consensus estimate and revenues of $3.01-$3.11 billion from $3.23-$3.43 billion and the $3.33 billion consensus.

 

What caught my eyes was the big disparity between the modest top line cuts and the rather sharp ones to the bottom line. Dycom attributed the revenue shortfall to slower large-scale deployments at key customers and margin pressure due to the under absorption of labor and field costs – the same issues that plagued it in its April quarter. Given some of the June quarter comments from mobile infrastructure companies like Ericsson (ERIC) and Nokia (NOK), Dycom’s comments regarding customer timing is not that surprising, even though the magnitude to its bottom line is. I chalk this up to the operating leverage that is inherent in its construction services business, and that cuts both ways – great when things are ramping, and to the downside when activity is less than expected.

We also know from Ericsson and Dycom that the North American market will be the most active when it comes to 5G deployments in the coming quarters, which helps explain why Dycom’s backlog rose to $7.9 billion exiting July up from $5.9 billion at the end of April and $5.9 billion exiting the July 2017 quarter. As that backlog across Comcast, Verizon, AT&T, Windstream and others is deployed in calendar 2019, we should see a snapback in margins and EPS compared to 2018.

With that in mind, the strategy will be to turn lemons – Monday’s 24% drop in DY’s share price – into long-term lemonade. To do this, we are adding to our DY position at current levels, which should drop our blended cost basis to roughly $80 from just under $92. Not bad, but I’ll be inclined to scale further into the position to enhance that blended cost basis in the coming weeks and months on confirmation that 5G is moving from concept to physical network. Like I said in our Digital Infrastructure overview, no 5G network means no 5G services, plain and simple. As we scale into the shares and factor in the revised near-term outlook, I’m also cutting our price target on DY shares to $100 from $125.

  • We are using this week’s pain to improve our long-term cost basis in Dycom Industries (DY) shares as we ratchet back our price target to $100 from $125.

 

Now, let’s get to how our Middle-Class Squeeze investing theme is hitting the housing market, and review that Digital Lifestyle company that we’re going to steer clear of because of Facebook (FB). Here we go…

 

If not single-family homes, where are the squeezed middle-class going?

To own a home was once considered one of the cornerstones of the American dream. If we look at the year to date move in the SPDR S&P Homebuilders ETF (XHB), which is down nearly 16% this year, one might have some concerns about the tone of the housing market. Yes, there is the specter of increasing inflation that has and likely will prompt the Federal Reserve to boost interest rates, and that will inch mortgage rates further from the near record lows enjoyed just a few years ago.

Here’s the thing:

  • Higher mortgage rates will make the cost of buying a home more expensive at a time when real wage growth is not accelerating, and consumers will be facing higher priced goods as inflation winds its way through the economic system leading to higher prices. During the current earnings season, we’ve heard from a number of companies including Cinemark Holdings (CNK), Hostess Brands (TWNK), Otter Tail (OTTR), and Diodes Inc. (DIOD) that are expected to pass on rising costs to consumers in the form of price increases.
  • Consumers debt loads have already climbed higher in recent years and as interest rates rise that will get costlier to service sapping disposable income and the ability to build a mortgage down payment

 

 

And let’s keep in mind, homes prices are already the most expensive they have been in over a decade due to a combination of tight housing supply and rising raw material costs. According to the National Association of Home Builders, higher wood costs have added almost $9,000 to the price of the average new single-family since January 2017.

 

 

Already new home sales have been significantly lower than over a decade ago, and as these forces come together it likely means the recent slowdown in new home sales that has emerged in 2018 is likely to get worse.

 

Yet our population continues to grow, and new households are being formed.

 

This prompts the question as to where are these new households living and where are they likely to in the coming quarters as homeownership costs are likely to rise further?

The answer is rental properties, including apartments, which are enjoying low vacancy rates and a positive slope in the consumer price index paid of rent paid for a primary residence.

 

There are several real estate investment trusts (REITs) that focus on the apartment and rental market including Preferred Apartment Communities, Inc. (APTS) and Independence Realty Trust (IRT). I’ll be looking at these and others to determine potential upside to be had in the coming quarters, which includes looking at their attractive dividend yields to ensure the underlying dividend stream is sustainable. More on this to come.

 

A Digital Lifestyle company that we plan on avoiding as Facebook attacks its key market

As important as it is to find well-positioned companies that are poised to ride prevailing thematic tailwinds that will drive revenue and profits as well as the share price higher, it’s also important to sidestep those that are running headlong into pronounced headwinds. These headwinds can take several forms, but one of the more common ones of late is the expanding footprint of companies like Alphabet (GOOGL), Amazon (AMZN) and Facebook (FB) among others.

We’ve seen the impact on shares of Blue Apron (APRN) fall apart over the last year following the entrance of Kroger (KR) into the meal kit business with its acquisition of Home Chef and investor concerns over Amazon entering the space following its acquisition of Whole Foods Market. That changing landscape highlighted one of the major flaws in Blue Apron’s subscription-based business model –  very high customer acquisition costs and high customer churn rates. While we warned investors to avoid APRN shares back last October when they were trading at north of $5, those who didn’t heed our advice are now enjoying APRN shares below $2.20. Ouch!

Now let’s take a look at the shares of Meet Group (MEET), which have been on a tear lately rising to $4.20 from just under $3 coming into 2018. The question to answer is this more like a Blue Apron or more like USA Technologies (USAT) or Habit Restaurant (HABT). In other words, one that is headed for destination @#$%^& or a bona fide opportunity.

According to its description, Meet offers  applications designed to meet the “universal need for human connection” and keep its users “entertained and engaged, and originate untold numbers of casual chats, friendships, dates, and marriages.” That sound you heard was the collective eye-rolling across Team Tematica. If you’re thinking this sounds similar to online and mobile dating sites like Tinder, Match, PlentyOfFish, Meetic, OkCupid, OurTime, and Pairs that are all part of Match Group (MTCH) and eHarmony, we here at Tematica are inclined to agree. And yes, dating has clearly moved into the digital age and that falls under the purview of our Digital Lifestyle investing theme.

Right off the bat, the fact that Meet’s expected EPS in 2018 and 2019 are slated to come in below the $0.39 per share Meet earned in 2017 despite consensus revenue expectations of $181 in 2019 vs. just under $124 million in 2017 is a red flag. So too is the lack of positive cash flow and fall off in cash on the balance sheet from $74.5 million exiting March 2017 to less than $21 million at the close of the June 2018 quarter. A sizable chunk of that cash was used to buy Lovoo, a popular dating app in Europe as well as develop the ability to monetize live video on several of its apps.

Then there is the decline in the company’s average total daily active users to 4.75 million in the June 2018 quarter from 4.95 million exiting 2017. Looking at average mobile daily active users as well as average monthly active user metrics we see the same downward trend over the last two quarters. Not good, not good at all.

And then there is Facebook, which at its 2018 F8 developer conference in early May, shared it was internally testing its dating product with employees. While it’s true the social media giant is contending with privacy concerns, CEO Mark Zuckerberg shared the company will continue to build new features and applications and this one was focused on building real, long-term relationships — not just for hookups…” Clearly a swipe at Match Group’s Tinder.

Given the size of Facebook’s global reach – 1.47 billion daily active users and 2.23 billion monthly active users – it has the scope and scale to be a force in digital dating even with modest user adoption. While Meet is enjoying the monetization benefits of its live video offering, Facebook has had voice and video calling as well as other chat capabilities that could spur adoption and converts from Meet’s platforms.

As I see it, Meet Group have enjoyed a nice run thus far in 2018, but as Facebook gears into the digital dating and moves from internal beta to open to the public, Meet will likely see further declines in user metrics. So, go user metrics to go advertising revenue and that means the best days for MEET shares could be in the rearview mirror. To me this makes MEET shares look more like those from Blue Apron than Habit or USA Technologies. In other words, I plan on steering clear of MEET shares and so should you.

 

 

Weekly Issue: Trade Meetings and Earnings Reshape Market Outlook

Weekly Issue: Trade Meetings and Earnings Reshape Market Outlook

Key points from this issue:

  • Earnings from Boeing (BA) and General Motors (GM) signal markets will trade day-to-day as trade meetings and earnings season heat up.
  • Our price target on Dycom Industries (DY) shares remains $125
  • Our AXTI price target remains $11.
  • Our price target on Nokia (NOK) shares remains $8.50
  • Our long-term price target for Farmland Partners (FPI) shares remains $12.
  • As we head into the seasonally strong second half of the year for United Parcel Service (UPS), our price target on the shares remains $130.

 

This week we’ve moved into the meaty part of 2Q 2018 earnings season, and so far, we’ve seen a number of companies beat top and bottom line expectations. Some market observers will point out that some 20%-25% of the S&P 500 group of companies are in that boat, and are declaring “victory” for the market. With today’s earnings from Boeing (BA) that and General Motors (GM), the market is trending lower as Boeing’s outlook falls short of Wall Street expectations while GM cut its outlook due to higher commodity prices. As you probably guessed, one of the culprits for GM is higher aluminum and steel prices.

My take on that is with 75%-80% of the S&P 500 yet to report, that claim while it could prove to right, it also could be a bit premature. As I shared with Oliver Renick, host at the TD Ameritrade Network a few days ago, we’ve only started to see the impact of initial trade tariffs and if the international dance continues we could see far more tariff jawboning put into action.

Consider a tweet from President Trump this morning that suggests a tariff follow through is possible.

 

 

But last night Trump tweeted a path forward to eliminating tariffs and other trade barriers between the Eurozone and the US ahead of his meeting today with the European Commission President Jean-Claude Juncker today to discuss trade, including tariffs on autos.

It would appear Trump is attempting to keep his negotiating opponents off balance in the hopes of improving trade relations from a US perspective. But it also seems that others have read Trump’s Art of the Deal by now as according to EU trade commissioner Cecilia Malmstrom, the Commission is also preparing to introduce tariffs on $20 billion of U.S. goods if Washington imposes trade levies on imported cars.

While I would love to see some forward progress coming out of these talks, but just like with China the probability is rather low in my opinion. Much like with the China trade talks, things have escalated so that both sides will be looking to claim some victory to report back to their countrymen and women.  This likely means that as we migrate over the next few weeks of earnings, we will have to continue to watch trade developments, especially if more recent and wider spread tariffs wind up being enacted.

With more on the earnings and trade to be had in the coming days, we should be ready for day-to-day moves in the market, which will make it challenging for traders and options players. As they struggle, we’ll continue to take a longer-term focus, heeding the signals to be had with our thematic investing lens. Now, let’s get to some updates and other items…

 

Checking in on 5G spending from Verizon and AT&T

With both Verizon Communications (VZ) and AT&T (T) reporting June quarter results yesterday, I sifted through their comments on several fronts but especially on 5G given our positions in mobile infrastructure and licensing company Nokia (NOK), specialty contractor Dycom (DY) as well as compound semiconductor company AXT Inc. (AXTI). The nutshell take is things remain on track as both carriers look to launch commercial 5G networks in the coming quarters.

Verizon delivered solid quarterly results, buoyed by its core wireless business that added 531,000 net retail postpaid subscribers, which included 398,000 postpaid smartphone net adds. We’ve talked about how sticky mobile service is with consumers as smartphones are increasingly a life link for their connected lives so it comes as little surprise that Verizon’s customer loyalty remains strong with the quarter marking the fifth consecutive period of retail postpaid phone churn at 0.80 percent or better.

In terms of capital spending, a figure we want to watch as Verizon gets ready to launch its commercial 5G network, the company shared its 2018 spend will be at the lower end of its previously guided range of $17.0-$17.8 billion. Now here’s the thing, the mix of spending will favor 5G, which confirms the bullish comment and tone we shared last week from Ericsson (ERIC) on the North American 5G market.

With AT&T, its net capital spending in the June quarter slipped to $5.1 million, down from roughly $6 million in the March quarter but the company shared it will spend roughly $25 billion in all of 2018. Doing some quick math, we find this spending is weighted to the back half of 2018, which likely reflects investments in its 5G network as well as the new first responder network, FirstNet, it is building. During the earnings call, management shared the company now has 5G Evolution in more than 140 markets, covering nearly 100 million people with a theoretical peak speed of at least 400 megabits per second with plans to cover 400 plus markets by the end of this year. In terms of true 5G, trials are progressing and AT&T is tracking to launch service in parts of 12 markets by the end of this year.

That network spend and 5G buildout bodes well for both our Dycom shares.

  • Our price target on Dycom Industries (DY) shares remains $125

 

In addition, a few days ago mobile chip company Qualcomm (QCOM) shared that its 5G antennas are ready from prime time. More specifically, Qualcomm is shipping 5G antennas to its device partners that include Samsung, LG, Sony (SNE), HTC and Xiaomi among others for testing. Moreover, Qualcomm said it stands ready for “large-scale commercialization” which likely means 5G devices are just quarters away instead of years away.

We’d note those device partners of Qualcomm’s mentioned above have all announced plans to bring initial 5G powered phones to market during the first half of 2019. That means the supply chain will be readying power amplifiers and switches that will enable these devices to communicate with the 5G networks, which bodes well for incremental compound semiconductor substrate demand at AXT. Because 5G is being viewed as an “access technology” that will move mobile broadband past smartphones and similar devices, I continue to see this as a positive for the higher margin licensing business at Nokia as well.

As a reminder, AXT will report its quarterly results after tonight’s market close, and expectations for its June quarter are clocking in at $0.08 per in earnings on $26.1 million in revenue, up 60% and roughly 11% year over year.

  • Our AXTI price target remains $11.
  • Our price target on Nokia (NOK) shares remains $8.50

 

Farmland Partners fights back

A few weeks ago, we shared not only our long-term conviction for Farmland Partners (FPI) shares but also prospects for continued drama in the coming months. Well, let’s say we’re not disappointed as this morning the company filed a lawsuit in District Court, Denver County, Colorado against “Rota Fortunae” (a pseudonym) and other entities who worked with or for Rota Fortunae in conducting a “short and distort” scheme to profit from the sharp decline in Farmland’s stock price resulting from false and misleading posting on Seeking Alpha. Farmland is seeking damages and injunctive relief for defamation, defamation by libel per se, disparagement, intentional interference with prospective business relations, unjust enrichment, deceptive trade practices, and civil conspiracy.

Are we surprised? No, especially since the Farmland management team signaled it would be moving down this path. While this will likely result in some incremental noise, we’ll continue to focus on the business and the long-term drivers of the agricultural commodities that drive it.

  • Our long-term price target for Farmland Partners (FPI) shares remains $12.

 

Paccar delivers on the earnings front, boosts its dividend

Tuesday morning, heavy and medium duty truck company Paccar (PCAR) delivered strong June quarter results, beating on both the top and bottom line. For the quarter, Paccar reported earnings of $1.59 per share, $0.16 better than the $1.43 consensus on revenues that rose more than 24% year over to year to $5.47 billion, edging out the $5.39 billion that was expected. The strength in the quarter reflects not only rising production and delivery levels that reflect the pick up in truck orders over the last 6-9 months, but also the ripple effect had on the company’s high margin financing business. Also too, as truck up time increases as does the number of Paccar trucks in service, we’ve seen a nice pick up in the company’s Parts business that carries premium margins relative to the new truck one.

During the quarter, Paccar repurchased 1.21 million of its common shares for $77.2 million, completing its previously authorized $300 million share repurchase program. The Board of Directors approved an additional $300 million repurchase of outstanding common stock earlier this month and given the current share price that is below that average repurchase price we suspect this new program will be put to use quickly. Also during the quarter, Paccar boosted its quarterly dividend to $0.28 per share from $0.25, and management reminded investors of the company’s track record of delivering quarterly and special dividends in the range of 45-55% of net income.

Given 111% year over year growth in the new heavy truck orders throughout the U.S. and Canada during the first half of 2018, we continue to be bullish on PCAR shares as we head into the second half of 2018. Even so, we’ll continue to analyze the monthly truck order data as well as freight indicators and other barometers of domestic economic activity to assess the continued strength in new truck demand. In the coming months, we expect long-time followers of Paccar will begin to focus on the potential year-end special dividend the company has issued more often than not.

  • Our price target on Paccar (PCAR) shares remains $80.

 

A quick note on United Parcel Service earnings

Early this morning, United Parcel Service (UPS) beat estimates by a penny a share, with an adjusted quarterly profit of $1.94 per share. Revenue beat forecasts, as well, boosted by strong growth in online shopping – no surprise to us given our Digital Lifestyle investing theme. UPS will host a conference call this morning during which it will update its outlook for the back half of the year, and that should help quantify the year over year growth in Amazon’s (AMZN) Prime Day 2018 ahead of its earnings report later this week.

  • As we head into the seasonally strong second half of the year for United Parcel Service (UPS), our price target on the shares remains $130.

 

 

WEEKLY ISSUE: Trade and Tariffs, the Words of the Week

WEEKLY ISSUE: Trade and Tariffs, the Words of the Week

 

KEY POINTS FROM THIS WEEK’S ISSUE:

  • We are issuing a Sell on the shares of MGM Resorts (MGM) and removing them from the Tematica Investing Select List.
  • While the markets are reacting mainly in a “shoot first and ask questions later” nature, given the widening nature of the recent tariffs there are several safe havens that patient investors must consider.
  • We are recasting several of our Investment Themes to better reflect the changing winds.

 

Investor Reaction to All the Tariff Talk

Over the last two days, the domestic stock market has sold off some 16.7 points for the S&P 500, roughly 0.6%. That’s far less than the talking heads would suggest as they focus on the Dow Jones Industrial Average that has fallen more than 390 points since Friday’s close, roughly 1.6%. Those moves pushed the Dow into negative territory for 2018 and dragged the returns for the other major market indices lower. Those retreats in the major market indices are due to escalating tariff announcements, which are raising uncertainty in the markets and prompting investors to shoot first and ask questions later. We’ve seen this before, but we grant you the causing agent behind it this time is rather different.

What makes the current environment more challenging is not only the escalating and widening nature of the tariffs on more countries than just China, but also the impact they will have on supply chain part of the equation. So, the “pain” will be felt not just on the end product, but rather where a company sources its parts and components. That means the implications are wider spread than “just” steel and aluminum. One example is NXP Semiconductor (NXPI), whose chips are used in a variety of smartphone and other applications – the shares are down some 3.7% over the last two days.

With trade and tariffs being the words of the day, if not the week, we have seen investors bid up small-cap stocks, especially ones that are domestically focused. While the other major domestic stock market indices have fallen over the last few days, as we noted above, the small-cap, domestic-heavy Russell 2000 is actually up since last Friday’s close, rising roughly 8.5 points or 0.5% as of last night’s market close. Tracing that index back, as trade and tariff talk has grown over the last several weeks, it’s quietly become the best performing market index.

 

A Run-Down of the Select List Amid These Changing Trade Winds

On the Tematica Investing Select List, we have more than a few companies whose business models are heavily focused on the domestic market and should see some benefit from the added tailwinds the international trade and tariff talk is providing. These include:

  • Costco Wholesale (COST)
  • Dycom Industries (DY)
  • Habit Restaurants (HABT)
  • Farmland Partners (FPI)
  • LSI Industries (LYTS)
  • Paccar (PCAR)
  • United Parcel Services (UPS)

We’ve also seen our shares of McCormick & Co. (MKC) rise as the tariff back-and-forth has picked up. We attribute this to the inelastic nature of the McCormick’s products — people need to eat no matter what — and the company’s rising dividend policy, which helps make it a safe-haven port in a storm.

Based on the latest global economic data, it once again appears that the US is becoming the best market in the market. Based on the findings of the May NFIB Small Business Optimism Index, that looks to continue. Per the NFIB, that index increased in May to the second highest level in the NFIB survey’s 45-year history. Inside the report, the percentage of business owners reporting capital outlays rose to 62%, with 47% spending on new equipment, 24% acquiring vehicles, and 16% improving expanded facilities. Moreover, 30% plan capital outlays in the next few months, which also bodes well for our Rockwell Automation (ROK) shares.

Last night’s May reading for the American Trucking Association’s Truck Tonnage Index also supports this view. That May reading increased slightly from the previous month, but on a year over year basis, it was up 7.8%. A more robust figure for North American freight volumes was had with the May data for the Cass Freight Index, which reported an 11.9% year over year increase in shipments for the month. Given the report’s comment that “demand is exceeding capacity in most modes of transportation,” I’ll continue to keep shares of heavy and medium duty truck manufacturer Paccar (PCAR) on the select list.

The ones to watch

With all of that said, we do have several positions that we are closely monitoring amid the escalating trade and tariff landscape, including

  • Apple (AAPL),
  • Applied Materials (AMAT)
  • AXT Inc. (AXTI)
  • MGM Resorts (MGM)
  • Nokia (NOK)
  • Universal Display (OLED)

With Apple we have the growing services business and the eventual 5G upgrade cycle as well as the company’s capital return program that will help buoy the shares in the near-term. Reports that it will be spared from the tariffs are also helping. With Applied, China is looking to grow its in-country semi-cap capacity, which means semi- cap companies could see their businesses as a bargaining chip in the short-term. Longer- term, if China wants to grow that capacity it means an eventual pick up in business is likely in the cards. Other drivers such as 5G, Internet of Things, AR, VR, and more will spur incremental demand for chips as well. It’s pretty much a timing issue in our minds, and Applied’s increased dividend and buyback program will help shield the shares from the worst of it.

Both AXT and Nokia serve US-based companies, but also foreign ones, including ones in China given the global nature of smartphone component building blocks as well as mobile infrastructure equipment. Over the last few weeks, the case for 5G continues to strengthen, but if these tariffs go into effect and last, they could lead to a short-term disruption in their business models. Last week, Nokia announced a multi-year business services deal with Wipro (WIT) and alongside Nokia, Verizon (VZ) announced several 5G milestones with Verizon remaining committed to launching residential 5G in four markets during the back half of 2018. That follows the prior week’s news of a successful 5G test for Nokia with T-Mobile USA (TMUS) that paves the way for the commercial deployment of that network.

In those cases, I’ll continue to monitor the trade and tariff developments, and take action when are where necessary.

 

Pulling the plug on MGM shares

With MGM, however, I’m concerned about the potential impact to be had not only in Macau but also on China tourism to the US, which could hamper activity on the Las Vegas strip. While we’re down modestly in this Guilty Pleasure company, as the saying goes, better safe than sorry and that has us cutting MGM shares from the Select List.

  • We are issuing a Sell on the shares of MGM Resorts (MGM) and removing them from the Tematica Investing Select List

 

Sticking with the thematic program

On a somewhat positive note, as the market pulls back we will likely see well-positioned companies at better prices. Yes, we’ll have to navigate the tariffs and understand if and how a company may be impacted, but to us, it’s all part of identifying the right companies, with the right drivers at the right prices for the medium to long-term. That’s served us well thus far, and we’ll continue to follow the guiding light, our North Star, that is our thematic lens. It’s that lens that has led to returns like the following in the active Tematica Investing Select List.

  • Alphabet (GOOGL): 60%
  • Amazon (AMZN): 133%
  • Costco Wholesale (COST) : 30%
  • ETFMG Prime Cyber Security ETF (HACK): 34%
  • USA Technologies (USAT): 62%

Over the last several weeks, we’ve added several new positions – Farmland Partners (FPI), Dycom Industries (DY), Habit Restaurant (HABT) and AXT Inc. (AXTI) to the active select list as well as Universal Display (OLED) shares. As of last night’s, market close the first three are up nicely, but our OLED shares are once again under pressure amid rumor and speculation over the mix of upcoming iPhone models that will use organic light emitting diode displays. When I added the shares back to the Select List, it hinged not on the 2018 models but the ones for 2019. Let’s be patient and prepare to use incremental weakness to our long-term advantage.

 

Recasting Several of our investment themes

Inside Tematica, not only are we constantly examining data points as they relate to our investment themes we are also reviewing the investing themes that we have in place to make sure they are still relevant and relatable. As part of that exercise and when appropriate, we’ll also rename a theme.

Over the next several weeks, I’ll be sharing these repositions and renamings with you, and then providing a cheat sheet that will sum up all the changes. As I run through these I’ll also be calling out the best-positioned company as well as supplying some examples of the ones benefitting from the theme’s tailwinds and ones marching headlong into the headwinds.

First up, will be a recasting of our Rise & Fall of the Middle-Class theme.  As the current name suggests, there are two aspects of this theme — the “Rise” and the “Fall” part. It can be confusing to some, so we’re splitting it into two themes.  The “Rise” portion will be “The New Global Middle Class” and will reflect the rapidly expanding middle class markets particularly in Asia and South America. On the other hand, the “Fall” portion will be recast as “The Middle Class Squeeze” to reflect the shrinking middle class in the United States and the realities that poses to our consumer-driven economy.

We’ll have a detailed report to you in the coming days on the recasting of these two themes, how it impacts the current Select List as well as other companies we see as well-positioned given the tailwinds of each theme.

 

 

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

KEY POINTS FROM THIS ALERT:

  • 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: Closing Out 2 Positions While Focusing On Yet Another Pain Point

Weekly Issue: Closing Out 2 Positions While Focusing On Yet Another Pain Point

  • We are closing out our position in the Wayfair (W) June 80 calls (W180615C00080000), which closed last night at 6.30, delivering a return of more than 150% over the last week.
  • We are also closing out our position in GSV Capital (GSVC) Jun 2018 10.000 calls (GSVC180615C00010000), which have been hard hit despite the monetization of key holdings Spotify (SPOT) and Dropbox (DBX).
  • We are issuing a Buy on the Cummins Inc. June 2018 150.00 calls (CMI180615C00150000)that closed last night at 2.64 and setting a stop loss at 1.70.
  • As a reminder, Funko (FNKO), a short position on the Tematica Options+ Select List will report its quarterly results after tonight’s market close. We continue to have our buy stop order set at 10.00
  • The next date to watch for our short position in Target shares will be May 15, when the Commerce Department publishes the April Retail Sales report. We expect to see signs of the retail apocalypse continue as consumers continue to shift toward digital shopping

Closing out our trades in Wayfair and GSV Capital call for a net positive

Last week we added the June 2018 80.00 call position in Wayfair (W), a digital commerce company focused on home décor, furniture and housewares. Over the last few days, following the upbeat earnings report that was had last week, which led to several price target increases, our call position gapped up more than 150% as of last night’s close. Not bad for one week of trading, but rather than get all heady over that success let’s remember that paper profits aren’t tangible ones until the exit trade is made.

As Tematica’s Chief Macro Strategist, Lenore Hawkins, and I talked about on this week’s Cocktail Investing Podcast, near-term the investing teeter-totter appears to be slanted toward the risk side. Therefore, my recommendation is to turn that hefty paper profit in the Wayfair calls and turn it into realized gains. As we exit that position, we’re going to exit the GSV Capital June 2018 10.00 calls as well. It’s no secret these have been hard hit, and even after the company’s March quarter results that I touched on yesterday I don’t see the shares cracking the 8.00 level let alone the 10.00 in the short-term. Longer-term as GSV monetizes more of its investment portfolio, I strongly suspect its net asset value per share will continue to rise – this keeps the GSVC shares on the Tematica Investing Select List.

 

With trucking order numbers strong, we are adding a derivative engine call option play

In mid-February, we added shares of heavy and medium duty truck company, Paccar (PCAR) to the Tematica Investing Select List given rising order levels for its products due to both an improving economy and the current truck shortage. Since then, we’ve seen robust year over year order growth for heavy and medium duty trucks in both March and April.

Last week, heavy truck component supplier Eaton (ETN) upsized its NAFTA heavy duty truck production forecast to 295,000 this year, up from the 275,000 it had at the start of 2018. Engine company Cummins (CMI) also boosted its expectation for North American heavy truck industry production this year to 286,000 units, up 29% vs. 2017 and above its prior guidance of 266,000 units.

This week several companies talked about the current truck shortage, including Knight Swift (KNX), RPM International (RPM), and several other. Comments like the following from PotlatchDeltic Corp. (PCH) – “It appears that the transportation shortage largely linked to truck and rail issues is not going to be short-lived” suggest the current truck shortage has legs.

Moreover, data from Statista points to the average age of heavy trucks is around 14 years old, which means truck owners and lessors have aged equipment on their hands. This is another factor that could spur continued growth in truck orders over the coming months especially given the changes put in place with tax reform pertaining to depreciation.

As tempted as I am to add a call option position in Paccar, the reality is though call options are thinly traded and half modest open contract sizes. This has us looking into the food chain for a supplier that derives a hefty piece of its sales and profits from the heavy and medium duty truck industry. That brings us to Cummins, which is not only seeing robust engine demand from the trucking industry but also from the construction equipment one as well. What makes Cummins even more attractive is that despite the positive engine fundamentals, its shares are down nearly 18% in 2018 even though the company is posed to grow its earnings by almost 25% year over year this year. And when we look at the technical chart below, we see CMI shares are oversold.

 

 

One of the strategies that we love to capitalize on is pain points, and the current truck shortage is one that will hit profits. Moreover, newer trucks have far better fuel economies that ones that were built more than 10 years ago. To capitalize on this, as well as the oversold nature of CMI shares, I’m the Cummins Inc. June 2018 150.00 calls (CMI180615C00150000) that closed last night at 2.64 to the Tematica Options+ Select List. As we do this, I’ll factor in my comments above about the skewing of potential risk in the market over the coming weeks, and that has me setting a protective stop loss for this position at 1.70.

 

 

 

 

 

Weekly Issue: Shift in Consumer Spending Continues

Weekly Issue: Shift in Consumer Spending Continues

 

KEY POINTS FROM THIS ALERT

  • We continue to have a Sell rating in Funko (FNKO) shares, and a short position on the Tematica Options+ Select List. Our buy stop for FNKO shares remains at $10.
  • We continue to have a Sell rating on Target (TGT) shares and a short position in them on the Tematica Options+ Select List. We continue to have our buy-stop set at $85.
  • We continue to have a Buy rating on the GSV Capital (GSVC) Jun 2018 10.000 calls (GSVC180615C00010000).
  • We will continue to hold the Paccar (PCAR) May 2018 70.00 calls (PCAR180518C00070000)ahead of the company’s April 24 earnings report. We are increasing our stop loss to 2.00 from 0.60.

 

Before we get started with this week’s issue of Tematica Options+, I would suggest you read yesterday’s weekly issue of Tematica Investing. Why? Not because I think the words are so full of wisdom, even though they are, but rather because of the discussion surrounding the March Retail Sales Report, especially the segments that underperformed – Department stores, general merchandise stores and  Sporting Goods, hobby, book & music stores.

As I mentioned yesterday, the Sporting Goods, hobby, book & music stores category was hardest hit during 1Q 2018 as those retail sales fell 4% year over year, and we’ve yet to see the impact of the Toys R Us bankruptcy and subsequent liquidation sales. This keeps our short position on Funko (FNKO) shares in place, and next week’s earnings reports from Mattel (MAT) and Hasbro (HAS), two leading toy companies, should shed some light on the challenging 1Q 2018 toy environment and what they expect the Toys R Us impact to be. As I shared recently, I continue to see this playing out the way the Sports Authority bankruptcy and liquidation sales did on Nike (NKE) and Under Armour(UAA).

  • We continue to have a Sell rating in Funko (FNKO) shares, and a short position on the Tematica Options+ Select List. Our buy stop for FNKO shares remains at $10.

 

The outlook for Target gets even more challenging

That same March Retail Sales Report also showed General merchandise retail sales rose 3% year over year during 1Q 2018, lagging behind overall year over year 1Q 2018 retail sales growth of 4.3%. Department stores didn’t fare much better as their sales for the quarter fell 0.6% year over year. By comparison, Costco Wholesale (COST) delivered stellar 1Q 2018 same store comp sales, and COST shares on the Tematica Investing Select List have soared closing last night at more than $196 vs. roughly $185 a year ago. As a reminder, I boosted our target on COST shares yesterday to $210 from $200.

What the above paragraph points out is consumers continue to shift where they spend, and that even before we factor in the 9.7% year over year increase in Nonstore retail sales during 1Q 2018. Yes… that means Amazon (AMZN) and others that are embracing digital shopping. In yesterday’s annual shareholder letter, Amazon CEO Jeff Bezos shared the company has 100 million Amazon Prime members. As Amazon continues to expand its offerings, odds are that means we’ll be seeing more pain for brick & mortar retailers especially since for the 8thyear in a row Amazon was ranked #1 on the American Customer Satisfaction. In fact, this past week it was announced that Bon-Ton Stores (BONT), which operates 260 locations is expected to go out of business with liquidation sales to follow.

Put it all together, and it’s more than a little worrisome when it comes to Target (TGT) growing its sales 3% plus year over year in 1Q 2018, which is exactly what Wall Street expects it to do. Over the last several weeks, we’ve seen EPS forecasts for the quarter start to move lower and in examining those expectations we see that Wall Street expects Targets revenue growth to slow as we move through 2018. Based on what I am seeing, it looks like that slowdown is poised to appear sooner than the herd thinks it will.

  • We continue to have a Sell rating on Target (TGT) shares and a short position in them on the Tematica Options+ Select List. We continue to have our buy-stop set at $85.

 

The expected positives for GSV’s portfolio are starting to emerge

Let’s turn to our call position in GSV Capital, the GSV Capital (GSVC) Jun 2018 10.000 calls (GSVC180615C00010000), which we scaled into last week and have since traded lower. Very frustrating to say the least, but as expected following the IPO of Dropbox (DBX) the underwriters are issuing Buy and Overweight ratings with price targets in the range of $35-$40. This led DBX shares, one of GSV’s larger positions in its investment portfolio, to rebound off its lows last week. We’re also seeing price targets for streaming music service Spotify (SPOT), another large position in GSV’s investment portfolio emerge. Canaccord Genuity started SPOT shares with a Buy rating and a $200 price target (up 29% from last night’s close) while Stifel has a $180 target on the shares.

In the coming weeks, Dropbox and Spotify will report their quarterly results and odds are pretty high they will at least meet expectations and likely beat them. As simple as it may sound, companies tend not to become public if their business is softening. Given our June expiration for our GSV Capital calls, even though the recent disconnect between the DBX and SPOT price targets and GSV shares is maddening, let’s be patient and let this run its course.

 

Our Paccar calls keep on trucking

On the positive, our call option position in heavy truck company Paccar, the Paccar (PCAR) May 2018 70.00 calls (PCAR180518C00070000), finished last night up 52% from our April 5 entry. Yesterday’s March Industrial Production Report, which revealed a month over month increase in manufacturing following an upwardly revised figure for February to +1.5%, bodes very well for additional truck orders. As a reminder, heavy truck orders for 1Q 2018 were the highest they have been in over a decade. Ahead of Paccar reporting its 1Q 2018 results on April 24, let’s continue to hold the calls, but boost our stop loss to 2.00 from $0.60, which will lock in a modest profit on the position.

 

 

 

Betting against Facebook’s Outlook and Scaling into a call option position

Betting against Facebook’s Outlook and Scaling into a call option position

 

KEY POINTS FROM THIS ALERT:

 

 

Adding a short-term short position in Facebook ahead of 1Q 2018 earnings

You probably read my comments on Facebook (FB) in yesterday’s weekly Tematica Investing issue and thought to yourself, “rising expenses paired with a likely disruption in revenue and user metrics sure sounds like a short opportunity, especially after running back up some 10% over the last two weeks.”

My answer would be “yes” but we don’t short stocks in Tematica Investing – we save that for the more aggressive service that is Tematica Options+.”

Granted FB shares were oversold soon after we removed them from the Tematica Investing Select List, but sometimes the charts do not tell the full story, especially when the fundamentals have yet to be reflected in the share price. In this case, I’m referring to how Wall Street expectations for 1Q 2018 and 2Q 2018 have not budged despite all that that has happened over the recent weeks and the telegraphed step up in spending that is coming at Facebook. Again, I covered all of this in yesterday’s issue of Investing.

Given this combination, I’m making a short-term short call on Facebook shares ahead of the company’s April 25 1Q 2018 earnings report. This means that soon after Facebook’s report – good or bad – we’ll likely exit this short position. Full well knowing that higher beta stocks can trade quickly higher as well as lower, I’m recommending a protective buy stop order at $185.

  • We are adding a short-term Sell recommendation on Facebook (FB) shares and adding a short position to the Tematica Options+ Select List with a buy stop order at $185.

 

 

Scaling into our GSV Capital calls

Over the last week, shares of cloud storage company Dropbox moved 5% higher, while shares of music streaming service Spotify (SPOT) climbed 4%. These moves higher bode very well for the net asset value of GSV’s investment portfolio, and let’s remember that GSV’s positions are priced well below current levels. I’ll admit it’s frustrating not to see GSV’s shares move up in lockstep with these two holdings, but we have to remember that GSV Capital is a far smaller company than those two and has next to no analyst coverage.

As we remain patient given the June expiration associated without GSVC calls, let’s remember that in the coming weeks the underwrites and advisors for these two going public transaction will soon be issuing equity research coverage on DBX and SPOT shares. In my view, this is looking like yet another time when the herd will catch up to our forward view, but we’ll use the sharp fall in our GSV calls – down more than 60% since we added them in mid-January – to improve our cost basis.

 

 

Sticking with our Paccar calls

In yesterday’s weekly issue of Tematica Investing, I reiterated the stellar truck orders that were recorded for 1Q 2018 that I shared here last week. Despite that huge increase in orders for both heavy and medium-duty trucks, there has been no increase in earnings expectations for Paccar (PCAR) for either the June quarter or for all of 2018. In my book, given the magnitude of the year over year order increase for the industry, Wall Street expectations will need to move higher to match the demand pattern of the last several months.

The next point of confirmation will be had in next week’s March Industrial Production report, which is a leading indicator of truck demand.

 

 

Next up for Target (TGT) and Funko (FNKO), the March Retail Sales Report

Over the last few weeks, we added a short position in the shares of retailer Target and pop-culture and toy company Funko (FNKO) reflecting my concerns over the financial health of consumers as well as the pending fallout from the Toys”R”Us Bankruptcy. Recently, Telsey Advisory noted the closing of more than 800 US Toys”R”Us stores is underway, with discounts up to 30% off. Per Telsey, this inventory clearance and closeout activity should pressure toy and baby product sales across retail for the next few months

Since those additions to the Select List, both shares have vacillated back and forth as we wait for a true catalyst to emerge. One of them will be had this coming Monday in the form of March Retail Sales.

I’ll be watching the general merchandise and the sporting goods, hobby, book & music stores line items in this March report. Department sales over the last three months through February have been running behind the prior three months, which is no surprise given the seasonal downtick in spending.  Sporting goods, hobby, book & music stores sales, on the other hand, were down 4.8% year over year for the three months ending this past February.

  • Ahead of next week’s March Retail Sales report, we continue to have a Sell rating and short position in the shares of both Target (TGT) and Funko (FNKO).