Weekly Issue: We aren’t out of the woods just yet

Weekly Issue: We aren’t out of the woods just yet

Key Points from this Issue:

  • We are downgrading Universal Display (OLED) shares from the Thematic Leaders to the Select List and cutting our price target to $125 from $150. In the coming days, we will name a new Thematic Leader for our Disruptive Innovators investing theme.
  • Given the widespread pain the market endured in October, Thematic Leaders Chipotle Mexican Grill (CMG), Del Frisco’s (DFRG), Axon Enterprises (AXXN), Alibaba (BABA) and Netflix (NFLX) were hit hard; however, the hardest hit was Amazon (AMZN).

 

This week we closed the books on the month of October, and what a month it was for the stock market. In today’s short-term focused society, some will focus on the rebound over the last few days in the major domestic stock market indices, but even those cannot hide the fact that October was one of the most challenging months for stocks in recent memory. In short, the month of October wiped out most the market’s year to date gains as investors digested both September quarter earnings and updated guidance that spurred a re-think in top and bottom line expectations.

All told, the Dow Jones Industrial Average fell 5.1% for the month, making it the best performer of the major market indices. By comparison, the S&P 500 fell 6.9% in October led by declines in eight of its ten subgroups. The technology-heavy Nasdaq Composite Index dropped 9.2% and the small-cap focused Russell 2000 plummeted 10.9%. That marked the Nasdaq’s steepest monthly drop since it posted a 10.8% fall in November 2008. The month’s move pulled the Russell 2000 into negative territory year to date while for the same time period both the Dow and S&P 500 closed last night up around 1.5%.

We are just over halfway through the September quarter earnings season, which means there are ample companies left to report and issue updated guidance. Candidly, those reports could push or pull the market either higher or continue the October pain. There are still ample risks in the market to be had as the current earnings season winds down. These include the mid-term elections; Italy’s next round of budget talks with Brussels; upcoming Trump-China trade talks, which have led to another round of tariff preparations; and Fed rate hikes vs. the slowing speed of the global economy.

Despite the very recent rebound in the stock market, CNN’s Fear & Greed Index remains at Extreme Fear (7) as I write this – little changed from last week. What this likely means is we are seeing a nervous rebound in the market, and it will likely some positive reinforcement to make the late October rebound stick. As we navigate that pathway to the end of the year, we will also be entering the 2018 holiday shopping season, which per the National Retail Federation’s annual consumer spending survey should rise more than 4% year over year.

This combination of upcoming events and sentiment likely means we aren’t out of the woods just yet even though we are seeing a reprieve from the majority of October. As is shared below, next week has even more companies reporting than this week as well as the midterm elections. The strategy of sitting on the sidelines until the calmer waters emerge as stock prices come to us is what we’ll be doing. At the right time, we’ll be adding to existing positions on the Thematic Leaders and Thematic Select List as well as introducing new ones.

Speaking of the Thematic Leaders and the Select List, as the mood shifts from Halloween to the year-end shopping season,  we have several companies including Amazon (AMZN), United Parcel Service (UPS), Costco Wholesale (COST), Del Frisco’s Restaurant Group (DFRG), McCormick & Co. (MKC) and Apple (AAPL) among others that should benefit from that uptick in holiday spending as well as our Digital Lifestyle, Living the Life and Middle-class Squeeze investing themes in the next few months.

 

UPDATES TO The Thematic Leaders and Select List

Given the widespread pain the market endured in October, we were not immune to it with the Thematic Leaders or companies on the Tematica Select List. Given the volatility, investor’s nerves it was a time of shoot first, ask questions later with the market – as expected – trading day to day based on the most recent news. I expect this to continue at least for the next few weeks.

The hardest hit was Amazon, which despite simply destroying September quarter expectations served up what can only be called a conservative forecast for the current quarter. For those that didn’t tune in to the company’s related earnings conference call, Amazon management flat out admitted that it was being conservative because it is too hard to call the second half of the quarter, which is when it does the bulk of its business during the frenetic holiday shopping season. I have long said that Amazon shares are one to hold not trade, and with the move to expand its private label product, move into the online pharmacy space as well as continued growth at Amazon Web Services, we will do just that. That conservative guidance also hit United Parcel Service (UPS) shares, but we see that as a rising tide this holiday season as digital shopping continues to take consumer wallet share this holiday shopping season.

Both Chipotle Mexican Grill (CMG), Del Frisco’s (DFRG), Axon Enterprises (AXXN), Alibaba (BABA) and Netflix (NFLX) have also been hit hard, and I’m waiting for the market to stabilize before scaling into these Thematic Leader positions. As we’ve moved through the current earnings season, comments from Bloomin’ Brands (BLMN), Del Taco (TACO), Wingstop (WING), Habit Restaurant (HABT) and others, including Chipotle, have all pointed to the benefit of food deflation. Chipotle’s Big Fix continues with progress had in the September quarter and more to be had in the coming ones. Del Frisco’s will soon report its quarterly results and it too should benefit from a consumer with high sentiment and lower food costs.

With Axon, the shares remain trapped in the legal volley with Digital Ally (DGLY), but as I pointed out when we added it to the Leaders, Axon continues to expand its safety business with law enforcement and at some point, I suspect it will simply acquire Digital Ally given its $30 million market cap. Turning to Alibaba (BABA) and Netflix (NFLX), both have been hit hard by the downdraft in technology stocks, with Alibaba also serving as a proxy for the current US-China trade war. In my opinion, there is no slowing down the shift to digital streaming that is driving Netflix’s business and its proprietary content strategy is paying off, especially outside the US where it is garnering subscriber growth at price points that are above last year’s levels. This is one we will add to as things settle down.

The same is true with Alibaba – there is no slowing down the shift to the Digital Lifestyle inside of China, and as Alibaba’s other business turn from operating losses to operating profits, I expect a repeat of what we saw with Amazon shares. For now, however, the shares are likely to trade sideways until we see signs of positive developments on trade talks. Again, let’s hang tight and make our move when the time is right.

 

Downgrading Universal Display shares to the Select List

Last night Thematic Leader Universal Display (OLED) reported rather disappointing September quarter results that fell well short of expectations and guided the current quarter below expectations given that the expected rebound in organic light emitting diode materials sales wasn’t ramping as expected despite a number of new smartphones using organic light emitting diode displays. On the earnings call, the company pointed out the strides being had with the technology in other markets, such as TV and automotive that we’ve been discussing these last few months but at least for the near-term the volume application has been smartphones. In short, with that ramp failing to live up to expectations for the seasonally strongest part of the year for smartphones, it speaks volumes about what is in store for OLED shares.

By the numbers, Universal now expected 2018 revenue in the range of $240-$250, which implies $63-$73 million for the December quarter vs. $77.5 million for the September quarter and $88.3 million in the year-ago one. To frame it another way, that new revenue forecast of $240-$250 million compares to the company’s prior one of $315- $325 million and translates into a meaningful fall off vs. 2017 revenues of $335.6 million. A clear sign that the expected upkeep is not happening as fast as was expected by the Universal management team. Also, too, the first half of the calendar year tends to be a quiet one for new smartphone models hitting shelves. And yes, there will be tech and consumer product industry events like CES, CEBIT, and others in 2019 that will showcase new smartphone models, but candidly we see these new models with organic light emitting diode displays as becoming a show-me story given their premium price points. Even with Apple (AAPL) and its September quarter earnings last night, its iPhone volumes were flat year over year at 46.9 million units falling short of the 48.0 million consensus forecast.

In my view, all of this means the best case scenario in the near-term is OLED shares will be dead money. Odds are once Wall Street computes the new revenue numbers and margin impact, EPS numbers for the next few quarters will be taken down and will hang on the shares like an anchor. Given our cost basis in the shares near $101, and where the shares are likely to open up tomorrow – after market trading indicates $95-$100, down from last night’s closing price of $129.65 – we have modest downside ahead. Not bad, but again, near-term the shares are likely range bound.

Given our long-term investing style and the prospects in markets outside of the smartphone, we’re inclined to remain long-term investors. That said, given the near-term headwinds, we are demoting Universal Display shares from the Thematic Leaders to the Select List. Based on revised expectations, we are cutting our price target from $150 to $125, fully recognizing the shares are likely to rangebound for the next 1-2 quarters.

  • We are downgrading Universal Display (OLED) shares from the Thematic Leaders to the Select List and cutting our price target to $125 from $150. In the coming days, we will name a new Thematic Leader for our Disruptive Innovators investing theme.

 

Clean Living signals abound

As we hang tight, I will continue to pour through the latest thematic signals that we see day in, day out throughout the year, but I’ll also be collecting ones from the sea of earnings reports around us.

If I had just read that it would prompt me to wonder what some of the recent signals have been. As you know we post them on the Tematica Research website but during the earnings season, they can get a tad overwhelming, which is why on this week’s Cocktail Investing podcast, Lenore Hawkins (Tematica’s Chief Macro Strategist) and I ran through a number of them. I encourage you to give it a listen.

Some of the signals that stood out of late center on our Clean Living investing theme. Not only did Coca-Cola (KO) chalk up its September quarter performance to its water and non-sugary beverage businesses, but this week PepsiCo (PEP) acquired plant-based nutrition bar maker Health Warrior as it continues to move into good for you products. Mondelez International (MDLZ), the company behind my personal fav Oreos as well as other cookies and snacks is launching SnackFutures, a forward-thinking innovation hub that will focus on well-being snacks and ingredients. Yep, it too is embracing our Clean Living investing theme.

Stepping outside of the food aspect of Clean Living, there has been much talk in recent months about the banning of plastic straws. Now MasterCard (MA) is looking to go one further with as it looks to develop an alternative for those plastic debit and credit cards. Some 6 billion are pushed into consumer’s hands each year. The issue is that thin, durable card is also packed with a fair amount of technology that enables transactions to occur and do so securely. A looming intersection of our Clean Living, Digital Infrastructure and Safety & Security themes to watch.

 

Turning to next week

During the week, the Atlanta Fed published its initial GDP forecast of 2.6% for the current quarter, which is essentially in line with the same forecast provided by the NY Fed’s Nowcast, and a sharp step down from the initial GDP print of 3.5% for the September quarter. Following the October Employment Report due later this week, where wage growth is likely to be more on investor minds that job gains as they contemplate the velocity of the Fed’s interest rate hikes, next week brings several additional pieces of October data. These include the October ISM Services reading and the October PPI figure. Inside the former, we’ll be assessing jobs data as well as pricing data, comparing it vs. the prior months for hints pointing to a pickup in inflation. That will set the stage for the October PPI and given the growing number of companies that have announced price increases odds are we will some hotter pricing data and that could refocus the investor spotlight back on the Fed.

Next week also brings the September JOLTS report as well as the September Consumer Credit report. Inside those data points, we expect more data on the continued mismatch between employer needs and available worker skills that is expected to spur more competitive wages.  As we examine the latest credit data, we will keep in mind that smaller banks reporting higher credit card delinquency rates while Discover Financial (DFS) and Capital One (COF) have shared they have started dialing back credit spending limits. That could put an extra layer of hurt on Middle-class Squeeze consumers this holiday season.

Also, next week, the Fed has its next FOMC meeting, and while it’s not expected to boost rates at that meeting, we can expect much investor attention to be focused on subsequent Fed head comments as well as the eventual publication of the meeting’s minutes in the coming weeks ahead of the December meeting.

On the earnings front, following this week’s more than 1,000 earnings reports next week bring another 1,100 plus reports. What this means is more than half of the S&P 500 group of companies will have issued September quarter results and shared their revised guidance. As these reports are had, we can expect consensus expectations for those companies to be refined for the balance of the year. Thus far, roughly 63% of the companies that have issued EPS guidance for the current quarter have issued negative guidance, but we have yet to see any meaningful negative revisions overall EPS expectations for the S&P 500.

Outside the economic data and corporate earnings flow next week, we also have US midterm elections. While we wait for the outcome, we would note if the Republicans maintain control of the House and Senate, it likely means a path of less resistance for President Trump’s agenda for the coming two years. Should the Democrats gain ground, which has historically been the case following a Republican presidential win, it could very well mean an even more contentious 24 months are to be had in Washington with more gridlock than not. Should that be the case, expectations for much of anything getting done in Washington in the medium-term are likely to fall.

Yes, next week will be another busy one that could challenge the recent market rebound. We’ll continue to ferret out signals for our thematic lens as we remain investors focused on the long-term opportunities to be had with thematic investing.

 

 

 

 

Introducing The Thematic Leaders

Introducing The Thematic Leaders

 

Several weeks ago began the arduous task of recasting our investment themes, shrinking them down to 10 from the prior 17 in the process. This has resulted in a more streamlined and cohesive investment mosaic. As part of that recasting, we’ve also established a full complement of thematic positions, adding ones, such as Chipotle Mexican Grill (CMG) and Altria (MO) in themes that have been underrepresented on the Select List. The result is a stronghold of thematic positions with each crystalizing and embodying their respective thematic tailwinds.

This culmination of these efforts is leading us to christen those 10 new Buy or rechristened Buy positions as what are calling The Thematic Leaders:

  1. Aging of the Population – AMN Healthcare (AMN)
  2. Clean Living – Chipotle Mexican Grill (CMG)
  3. Digital Lifestyle – Netflix (NFLX)
  4. Digital Infrastructure –  Dycom Industries (DY)
  5. Disruptive Innovators – Universal Display (OLED)
  6. Guilty Pleasure – Altria (MO)
  7. Living the Life – Del Frisco’s Restaurant Group (DFRG)
  8. Middle-Class Squeeze – Costco Wholesale (COST)
  9. Rise of the New Middle-Class – Alibaba (BABA)
  10. Safety & Security – Axon Enterprises (AAXN)

 

By now you’ve probably heard me or Tematica’s Chief Macro Strategist Lenore Hawkins mention how Amazon (AMZN) is the poster child of thematic investing given that it touches on nearly all of the 10 investing themes. That’s true, and that is why we are adding Amazon to the Thematic Leaders in the 11th slot. Not quite a baker’s dozen, but 11 strong thematic positions.

One question that you’ll likely have, and it’s a logical and fare one, is what does this mean for the Select List?

We wouldn’t give up on companies like Apple (AAPL), Alphabet (GOOGL), Disney (DIS), McCormick & Co. (MKC) and several other well-positioned thematic businesses that are on the Select List. So, we are keeping both with the Thematic Leaders as the ones that offer the most compelling risk-to-reward tradeoff and the greater benefit from the thematic tailwinds. When we have to make an adjustment to the list of Thematic Leaders, a company may be moved to the Select List in a move that resembles a move to a Hold from a Buy as it is replaced with a company that offers better thematic prospects and share price appreciation. Unlike Wall Street research, however, our Hold means keeping the position in intact to capture any and all additional upside.

Another way to look at it, is if asked today, which are the best thematically positioned stocks to buy today, we’d point to the Thematic Leaders list, while the Select List includes those companies that still have strong tailwinds behind their business model but for one reason or another might not be where we’d deploy additional capital. A great example is Netflix vs. Apple, both are riding the Digital Lifestyle tailwind, but at the current share price, Netflix offers far greater upside than Apple shares, which are hovering near our $225 price target.

After Apple’s Apple Watch and iPhone event last week, which in several respects underwhelmed relative to expectations despite setting up an iPhone portfolio at various price points, odds are the iPhone upgrade cycle won’t accelerate until the one for 5G. The question is will that be in 2019 or 2020? Given that 5G networks will begin next year, odds are we only see modest 5G smartphone volumes industry-wide in 2019 with accelerating volumes in 2020. Given Apple’s history, it likely means we should expect a 5G iPhone in 2020. Between now and then there are several looming positives, including its growing Services business and the much discussed but yet to be formally announced streaming video business. I continue to suspect the latter will be subscription based.  That timing fits with our long-term investing style, and as I’ve said before, we’re patient investors so I see no need to jettison AAPL shares at this time.

The bottom line is given the upside to be had, Netflix shares are on the Thematic Leaders list, while Apple shares remain on the Select List. The incremental adoption by Apple of the organic light emitting diode display technology in two of its three new iPhone models bodes rather well for shares of Universal Display (OLED), which have a $150 price target.

Other questions…

Will we revisit companies on the Select List? Absolutely. As we are seeing with Apple’s Services business as well as moves by companies like PepsiCo (PEP) and Coca-Cola (KO) that are tapping acquisitions to ride our Clean Living investing tailwind, businesses can morph over time. In some cases, it means the addition of a thematic tailwind or two can jumpstart a company’s business, while in other cases, like with Disney’s pending launch of its own streaming service, it can lead to a makeover in how investors should value its business(es).

Will companies fall off the Select List?

Sadly, yes, it will happen from time to time. When that does happen it will be due to changes in the company’s business such that its no longer riding a thematic tailwind or other circumstances emerge that make the risk to reward tradeoff untenable. One such example was had when we removed shares of Digital Infrastructure company USA Technologies (USAT) from the Select List to the uncertainties that could arise from a Board investigation into the company’s accounting practices and missed 10-K filing date.

For the full list of both the Thematic Leaders and the Select List, click here

To recap, I see this as an evolution of what we’ve been doing that more fully reflects the power of all of our investing themes. In many ways, we’re just getting started and this is the next step…. Hang on, I think you’ll love the ride as team Tematica and I continue to bring insight through our Thematic Signals, our Cocktail Investing podcast and Lenore’s Weekly Wrap.

 

 

Soft and hard seltzers gaining share and quenching consumer thirst

Soft and hard seltzers gaining share and quenching consumer thirst

When companies ranging from PepsiCo and Coca-Cola add aggressively to their product portfolio it likely means we are at or near an inflection point in terms of consumer preference. That is what we are seeing with flavored seltzers given PepsiCo’s 2018 introduction of its bubly Sparkling Water, its more recent acquisition of SodaStream and Coca-Cola testing its Dasani PureFill machine. Those perusing the shopping aisles may have noticed the influx of seltzer flavors but the observant shopper probably noticed the growing number of hard seltzers being offers from Spiked Seltzer, Nauti, and others. One has to wonder how long it will be until these Guilty Pleasures catch the eye of companies like Molson Coors and Constellation Brands.

 

While sparkling water on the whole has seen impressive growth, canned sparkling water in particular has emerged as a huge contributor to category performance. Nielsen reference data by package type shows that while bottled sparkling water commands the majority of dollar sales (64% of all sparkling water sales were from bottled varieties), canned sparkling water has performed exceptionally well this year, up 43% from last year to reach sales of over $803 million. And the week ended Aug. 18, 2018, saw sales of over $21 million for canned sparkling water, up 39% compared to the same week last year, whereas bottled sparkling water is up 11% during the same period. Above and beyond the effects of rising aluminum prices, growth in canned sparkling water is driving the category’s profits.

Stretching across the store, hard seltzers is a category on the rise in the alcohol market. Within the last 12 months ended July 14, 2018, sales of hard seltzers are up 177%. In fact, hard seltzers now represent about 10% of all flavored malt beverage (FMB) sales.

Renewed interest in sparkling waters is yet another reflection of consumers’ ongoing shift toward opting to make healthier choices. The sparkling water category across traditional beverage and alcohol beverage categories taps into several health and wellness trends popular with Americans today, such as the appeal of a low carbohydrate and low calorie option would could potentially be seen as a low guilt beverage and an offering that is gluten free. Beyond the potential health benefits consumers see, these drinks can be refreshing, provide interesting flavors and, within the beverage alcohol market, its versatility could appeal thanks to its ability to be part of a cocktail mix.

 

Source: No Signs of Fizzing Out: America’s Love of Sparkling Water Remains Strong Through August

 Our Clean Living theme hitting Frappuccino sales at Starbucks

 Our Clean Living theme hitting Frappuccino sales at Starbucks

The war on sugar has hit companies like Hershey Foods (HSY), forcing it to pivot its snacking M&A strategy to better meet shifting consumer preferences for healthy, natural and organic snacks.

We’ve seen a prononced shift for waters and seltzers that is driving companies like National Beverage Corp. (FIZZ), home of LaCroix, and Cott Corp. (COT), a now pure play company on water, coffee, tea and filtration, as consumers increasingly reach less frequently for sugary sodas or ones that have artificial sweeteners.

In other words, Hershey, Coca-Cola (KO), PepsiCo (PEP) are contending with the headwind associated with our Clean Living investing theme, while National Beverage and Cott are rising the tailwind.

Now we are seeing consumers balk at the sugar laden Frappuccino that has become a staple at Starbucks (SBUX) complete with seasonal specialites. While this is the latest thorn in the side of Starbucks, it has the potential to not only hit it on the profit line but also force an accelerated re-think on its beverage and even its food offerings.

 

Frappuccino sales are struggling, and concerns about how much sugar the slushy drinks contain may be among the reasons.Starbucks says sales from the drinks that mix coffee, ice, syrup and milk are down 3 percent from a year ago, and is blaming the “health and wellness” trend for the dip.”These are oftentimes more indulgent beverages — higher in sugar, higher in calories,” Starbucks CEO Kevin Johnson said during a presentation to investors Tuesday.

A 16-ounce Cupcake Creme Frappuccino has 400 calories and 63 grams of sugar. A Triple Mocha Frappuccino has 390 calories and 51 grams of sugar. That’s with 2 percent milk and whipped cream.

Peter Saleh, restaurant analyst for BTIG, notes that interest in healthy eating isn’t new: “It’s not something that popped up out of nowhere.”

Another problem may simply be “people not wanting to consume full-price Frappuccinos…” A medium Frappuccino costs between $4 and $5. Exactly how many calories the drinks deliver varies.

Source: Starbucks claims Frappuccino sales down due to ‘health and wellness’ trend | Fox News

With soda getting left in the cold, PepsiCo trots out Bubly sparkling water

With soda getting left in the cold, PepsiCo trots out Bubly sparkling water

 

Over the last decade, sugary soft drink volumes have been under pressure, but until recently soda companies have seen their case volumes bolstered by diet beverage that incorporate alternative sweeteners to deliver zero calories. With consumers becoming more health conscious as well as preferring healthier and good for you ingredients as part of our Food with Integrity investing theme, diet soda case volumes have also come under pressure and this is pushing companies like Coca-Cola, Dr. Pepper Snapple, Cott Corp., and PepsiCo to deliver new formulations and offer healthier alternatives. One of the biggest pushes is in flavored sparkling water, and now PepsiCo is joining the fray with Bubly, going head to head with not only La Croix, but also Coke’s line of flavored sparkling water under its Dasani brand.

 

PepsiCo is introducing Bubly, a new brand of sparkling water that comes in eight flavors, including apple, strawberry and mango, in brightly colored cans with lowercase lettering and greetings on the pull tabs. (“Hey u!” “yo!”)Bubly marks the most direct attack yet on LaCroix, a brand of flavored sparkling waters that has, in recent years, seen sales soar as it developed a near cultlike devotion among millennials.For PepsiCo, Bubly is a big bet. The beverage and snacks giant will put its formidable marketing and distribution machine behind the rollout. Bubly will land on shelves this month, and two ads will appear during the Oscars broadcast on March 4.PepsiCo executives say Bubly, with no artificial flavors, sweeteners or calories, fits into its broader corporate initiative to offer consumers healthier snack and beverage products.Continue reading the main storyRELATED COVERAGELETTER OF RECOMMENDATIONLetter of Recommendation: LaCroix Sparkling Water MARCH 3, 2015‘Lady Doritos’? Pepsi Wants a Do-Over FEB. 6, 2018But it is also an acknowledgment that sales of carbonated soda are falling as consumers increasingly shun sugary drinks in favor of healthier options, including water.

Source: PepsiCo Dips Its Toes Into the Sparkling Water Market – The New York Times

Is Diet Coke diluting and deluding itself with its latest move?

Given falling sales of soda, both the regular “sugary” kind as well as diet, Coca-Cola is once again trying to entice consumers with a new round of Diet Coke-branded beverages that will be available in the coming weeks. We’ve not tried them, and while we’re somewhat skeptical our preference for first-hand research means giving them a go.

Our concern is the potential risk to the Diet Coke-brand, which to date has focused on cola beverages. And while we understand the argument to be had with brand extension and consumer choice, we’ve also seen too much choice dilute a brand resulting in a company that needs to bring a brand “back to its core.”

At the same time, creating a new brand is no easy task. To us, it says Coca-Cola could have a tough time ahead as it tries to keep consumers coming back for its products as they look for healthier alternatives.

 

Starting in two weeks, you can buy Diet Coke in Ginger Lime, Feisty Cherry, Zesty Blood Orange and Twisted Mango.

They will come in a skinnier silver can, reminiscent of Red Bull’s. And the company may have had another drink in mind when it mixed up the flavors — LaCroix seltzer, which has attracted exactly the audience Coke is after.

Coke wasn’t shy about which customers it’s targeting.”Millennials are now thirstier than ever for adventures and new experiences, and we want to be right by their side,” said Rafael Acevedo, the group director for Diet Coke in North America. “We’re making the brand more relatable and more authentic.”

The company is not changing the classic Diet Coke formula, which will still be available in the traditional, squatter 12-ounce cans.

Coke has been paying special attention to its low- and zero-calorie drinks.Over the summer, the company replaced Coke Zero with a drink called Coca-Cola Zero Sugar.

But in general, consumer appetite for soda, both regular and diet, is shrinking. People are turning away from the artificial sweeteners used to flavor diet sodas — including the new Diet Coke flavors.

In a note published on Tuesday, the research group Cowen reported that diet soda sales fell 2% in the last three months of 2017. In that period, Diet Coke sales fell by 4% and Diet Pepsi (PEP) by 8%.

Source: Diet Coke’s new cans and flavors are Millennial-friendly – Jan. 10, 2018

WEEKLY ISSUE: Business as usual ahead of the Fed’s September policy meeting

WEEKLY ISSUE: Business as usual ahead of the Fed’s September policy meeting

Stocks continued to inch higher over the last several days ahead of today’s next Fed policy meeting. Over the last few days, we’ve seen GDP expectations for the current quarter revised lower from economists, regional Fed banks and even companies like FedEx (FDX), which sees GDP hitting all of 2.2% this year. I continue to see the Fed taking yet another pass on boosting interest rates later today, and given the impact from the recent hurricanes, the team Tematica view is that while next potential interest rate hike could come late this year, it’s more likely going to be in 1Q 2018.

The more closely watched item in the Fed’s comments will be timing for its balance sheet unwinding, and that means parsing the Fed-speak out this afternoon. Much like interest rates, I suspect the Fed will take a pass this month on kicking that initiative off and revisit the strength of the economy at its October/November meeting, but again, more on that once we have parsed the Fed’s words. We’ll have the Tematica take and what it means for the markets as well as the Tematica Investing Select List tomorrow morning.

Keeping the market somewhat in check yesterday was President Trump’s address to the United Nations General Assembly at which he shared he will take a hard line, vowing to “totally destroy” North Korea if it threatened the United States or its allies. Nothing keeps uncertainty alive lately quite like political drama in DC. Such drams also now includes questions over the potential benefits to the domestic economy with corporate tax reform at a time when the federal budget deficit continues to climb. Let’s also remember we are on the cusp of the 2017 election season, and even as President Trump reaches across the aisle, odds are it won’t be an all “cookies and warm milk” as politicians are vying for their own jobs.  For this reason, I see tax reform more likely toward the end of 2017, which happens to be when the debt ceiling conversation will be resumed.

 

Earnings this week, set the stage for coming 3Q 2107 season

Over the next week and a half we will close the books on 3Q 2017 and face quarterly earnings. Before too long the year-end holidays will be upon us. Last night we had a few earnings reports from FedEx, Bed Bath & Beyond (BBBY) and Adobe Systems (ADBE), and today all three stocks are trending lower. Part of the reason for FedEx missing expectations last night was the disruption it faced due to its recent cyber attack. Such attacks are yet another reminder that the cybersecurity aspect of our Safety & Security theme is a form of insurance in our Connected Society. This keeps us long-term bullish on PureFunds ISE Cyber Security ETF (HACK) shares.

Despite a beat at Adobe, the company signaled softer than expected growth for its cloud business. When paired with revenue guidance that was in line with expectations and the stocks sky-high valuation near 40x 2017 earnings per share, it’s not surprising to see ADBE shares trading off today. I point this out because it is another example of good news being ill-received on Wall Street — another reason to think the next few weeks will continue to be volatile.

  • Our price target on PureFunds ISE Cyber Security ETF (HACK) shares remains $35.

 

 

Another brick & mortar retailer looks to leverage Amazon

While earnings reports from FDX, BBBY and ADBE will factor into our larger thinking, what I found far more interesting was the new partnership announced between thematic investing poster child Amazon (AMZN) and retailer Kohl’s (KSS), which includes Kohl’s offering to accept returns for Amazon customers at 82 stores in Los Angeles and Chicago. This is yet another example of a retail-facing company looking to partner with Amazon, and to me, it speaks to the logistics power that is one of Amazon’s core strengths.

Perhaps the management team at Kohl’s saw what I did in the last week’s August Retail Sales Report –  continued pain at department stores as shoppers continue to shift spending to digital platforms. As much pain as we here at Tematica see for brick & mortar retailers in the upcoming year-end holiday shopping season, we see a similar amount of opportunity for Amazon given its footprint expansion over the last year.

  • Our price target on Amazon (AMZN) shares remains $1,150, which keeps the shares a Buy on the Tematica Investing Select List.

 

 

Results at United Natural Foods offer comfort for Amplify Snacks

One of the positions that has been lagging this market move higher is Food with Integrity company Amplify Snacks (BETR), and we used August pullback to improve our cost basis. Since that scaling, BETR shares have once again languished, but commentary last week from United Natural Foods (UNFI) offered a confirming perspective. In United Natural’s earnings report it shared its supernatural net sales were up approximately 6.8% year over year and its supermarket channel net sales increased 8.3% year over year in the quarter. To me, that points to consumers continuing to embrace food that is good for you and bodes rather well for healthy snacking options offered by Amplify. Anecdotally, after visiting several Whole Foods locations over the weekend we can attest to a rebound in traffic and shopping bags.

We will continue to be patient with Amplify Snacks (BETR) shares as the company expands its product offering as well as its reach beyond the U.S. As we have said, we see Amplify as a potential acquisition candidate for PepsiCo (PEP), Snyder’s-Lance (LNCE), Post Holdings (POST), General Mills (GIS) or another snack-food company as they look to expand their presence in the “better for you food” snacking category.

  • Our price target on Amplify Snacks (BETR) shares remains $11

 

 

Recapping moves made earlier this week

As we get ready for what lies ahead over the coming weeks, we made some maneuverings with the Tematica Select List earlier this week. Those moves included adding two new Buy rated positions – LSI Industries (LYTS) and Nokia Corp. (NOK) – and we exited shares of CalAmp Corp. (CAMP). I’d note that one day after we added NOK shares to the Select List, UBS unveiled a “buy” rating on the shares.

Also, this week, our shares of Applied Materials (AMAT) were upgraded to “outperform” at RBC Capital Markets with a new $55 price target; if you’re thinking “that $55 price target sounds familiar” it’s because it has been our AMAT price target for months. As a reminder, Applied will host its 2017 Analyst Day on Sept. 27, and I see that offering an upbeat dialog for both its display  semiconductor capital equipment businesses

  • Our price target on LSI Industries (LYTS) remains $10
    Our price target on Nokia Corp. (NOK) remains $8.50
    Our price target on Applied Materials (AMAT) remains $55

 

Speaking of displays and price targets, yesterday we increased our price target on Universal Display (OLED) shares to $175 from $135, and we are evaluating potential stop loss levels for this position.

As we close this week’s issue, we’d suggest subscribers that missed yesterday’s comments on the current corn harvest as well as a potential longer-term disruptor to corn supply-demand dynamics and what it means for the Teucrium Corn Fund (CORN) shares on the Select List give them a whirl.

  • Our long-term price target on Teucrium Corn Fund (CORN) shares remains $25.
Byte Foods targets smart vending machines with a fresh twist

Byte Foods targets smart vending machines with a fresh twist

The only thing we like more than talking about one thematic tailwind is doing so when two or more come together for an even more powerful tailwind. In this case, it’s Food with Integrity meets Connected Society and Cashless Consumption as food that is good for you meets smart vending machines. As we enter 2017 looking to follow our own advice to eat better, we hope to see more of these vending machines than the ones stocked with candy and chips from Hershey, M&M Mars and PepsiCo.

A San Rafael-based startup called Byte Foods has raised $5.5 million in seed funding to popularize its smart vending machines and delivery service stocking them with nutritious food and drinks from local vendors.

If the idea of the internet-connected vending machine sounds a bit familiar, it has been around for more than a decade, actually. But according to market research by Berg Insight, only 1.5 million of the world’s 17 million vending machines are actually internet-connected today.

Byte Foods is poised to grow as the IoT share of this market does as well. Berg predicts by 2020, the world will have at least 3.6 million internet-connected vending machines in circulation.

Source: Byte Foods raises $5.5 million for smart vending machines that serve local fare | TechCrunch

Meat Snacks Taking Stomach Share

Meat Snacks Taking Stomach Share

While not quite 100% in tune with our Food with Integrity investing theme, there is no argument that protein based snacking continues to be on the rise. What this tells us is salty-snacks and candy sales are likely to go the way of soda sales…

The meat snacks category has been experiencing significant growth for the past few years. According to Packaged Facts, the segment jumped to $3.14 billion in 2015 from $2.9 billion in sales for 2014, an 8.6% increase. For 2016, dollar sales are projected to top $3.4 billion. If indications are correct, meat snacks could experience a 9.6% hike in retail sales over the next four years. By 2020, sales are expected to hit $5 billion.

Source: Savory & Super Trendy, Meat Snacks Soar – Convenience Store Decisions