No Sleepy End of  Summer in Sight

No Sleepy End of  Summer in Sight

 

We’ve survived the eclipse, and while the display was a bit underwhelming outside of the Beltway, we hope you enjoyed this rare experience that pulled 10 percent of US viewers away from Netflix while it was happening. Rest assured the consumers of streaming content that help power our Connected Society investing theme were back on board soon thereafter propelling Marvel’s The Defenders to a binge viewing pop after dropping last Friday. From time to time we may see speed bumps for our Connected Society investing theme, but much like trying to put toothpaste back into the tube, we don’t see a reversal in this tailwind or any other of those associated with our investing themes anytime soon.

If anything, as we break down the monthly retail sales data, examine data points such as the box office take and maneuverings by companies like Target (TGT) and Wal-Mart (WMT), we see that Connected Society tailwind blowing even harder as we head into the 2017 holiday shopping season. This morning it was shared that Wal-Mart is teaming with Alphabet (GOOGL) to bring Wal-Mart products to people who shop on Google Express, Google’s online shopping mall. What’s significant about this news is that it marks the first time Wal-Mart has made its products available in the U.S. on a website other than its own. Also, too, Wal-Mart is embracing aspects of our Disruptive Technology theme as it makes it products available to customers via Google Home (Google’s answer to Amazon’s Echo) as well as Google Assistant, its artificial intelligence software assistant found in smartphones powered by Google’s Android software.

Clearly, Wal-Mart is shoring up its position and investing for where retail continues to head — a path that is increasingly chartered by the Connected Society. To us, this development, along with Nike’s (NKE) recent teaming with Amazon (AMZN), is a clear signal of what’s happening in retail. It also says that lines are being drawn between those partnered with Amazon and those that aren’t. We suspect many will see this as evidence of the “retail-megeddon” that is upending the retail industry. Here at Tematica, however, our view is Amazon and Wal-Mart are in the thematic sweet spot and are positioned to become the Coke and Pepsi of retail.

We also continue to see Costco Wholesale (COST) emerging as the bronze medal winner in retail. The company’s July retail sales metrics certainly showed it is gaining consumer wallet share as it rides our Cash-Strapped Consumerand Rise & Fall of the Middle-Class tailwinds. Plus, Costco’s business model is also based on collecting membership fees, which continue to grow, and thus insulates it somewhat from the struggles of brick & mortar retail. In our view, if Costco were to acquire Boxed.com, that transaction would be a game changer for Costco’s digital shopping business.

  • We continue to have Buy ratings on Amazon (AMZN), Alphabet (GOOGL), Costco Wholesale (COST) shares with price targets of $1,150,  $1,050 and $190, respectively. 

 

 

The No Man’s Land that is the last two weeks of August. 

As we shared in this week’s Monday Morning Kickoff, trading volumes are likely to be lower these next 10 days ahead of the Labor Day weekend.  Of course, while many try to get their last bit of R&R in at a nearby beach or lake, Washington is once again taking center stage. As you have probably guessed that means some back and forth political maneuvering will push the market around over the coming weeks as renewed hopes of U.S. tax reform contend with President Trump threatening a government shutdown if Congress didn’t present him with a spending bill for the next fiscal year that included funding for a border wall. Not exactly the tone we’d like to hear ahead of the debt ceiling negotiations.

While we ultimately think the debt ceiling will be raised, we’re not looking forward to the “deadline is approaching” drama that will likely unfold. Giving us some reassurance, during a public event on Monday in Kentucky with Treasury Secretary Steven Mnuchin, Senate Majority Leader Mitch McConnell said there was “zero chance — no chance” that Congress would fail to raise the debt ceiling. Of course, that doesn’t mean it’s going to be a walk in the park getting there.

As we watch those developments, we’ve started to get some hints as to what tax reform might look like. Early indications suggest capping the mortgage interest deduction for homeowners, scrapping people’s ability to deduct state and local taxes, eliminating businesses’ ability to deduct interest and allowing for the “repatriation” of corporate profits from overseas. As we’ve seen with the efforts to repeal and replace Obamacare, the devil will be in the details, and more solid ones should emerge in the coming weeks.

Finally, less than a week into NAFTA renegotiations, President Trump has cast doubt on the future of the trade agreement saying, “I think we’ll end up probably terminating NAFTA at some point.” Again, the devil will be in the details, and until those emerge we’re likely to see corporate American hem and haw as it faces several new obstacles that are fanning the flames of uncertainty.

In our view, this is points to a potentially tumultuous next few weeks, low volume end of August followed by September, historically one of the worst months for the stock market. From a Tematica Select List perspective, we’ve seen the recent volatility ding some of the positions, but we remain comfortable given the confirming data points that we are seeing.

For example, during his address Monday night, President Trump announced a new strategy that calls for sending more troops to Afghanistan. Trump provided few specifics about his policy and how much the U.S. military commitment in the region would increase as a result. The decision, however, to further commit rather than withdraw equates to a tailwind for defense spending that is a part of our Safety & Security investing theme. Also, this week, security researchers have discovered several apps on the Google Play store harboring malware, another reminder of the downside to our increasingly Connected Society that provides lift for the cyber security aspect of our Safety & Security investing theme. As we look for details on incremental defense spending, we’ll continue to recommend subscribers add PureFunds ISE Cyber Security ETF (HACK) shares to their holdings if they haven’t already done so.

  • We continue to have a buy on PureFunds ISE Cyber Security ETF (HACK) shares with a long-term price target of $35.

 

 

More Tailwinds for OLEDs

Last week, as it reported a solid earnings beat and raised its outlook for the balance of the year, Applied Materials (AMAT) had several bullish things to say on organic light-emitting diode display demand:

“Display is growing even faster than wafer fab equipment as customers make multi-year investments to address large inflections in both TV and mobile. In TV, a major push to new Gen 10.5 substrates is under way. These huge, 10- square-meters substrates are ideally suited for manufacturing larger-format screens, 60 inches and bigger. We now expect 30 new Gen 10.5 factories to be built over the next several years. At the same time, mobile organic light-emitting diode (OLED) display investment is getting stronger as customers prepare for broad adoption of OLED in smartphones. OLED enables new form factors that result in a larger display area for smartphone, further expanding the overall market.”

We could not have summed it up better ourselves, and that report keeps us bullish on both AMAT and Universal Display (OLED) shares despite the recent pullback both have experienced.

  • We continue to have Buy ratings on both Applied Materials (AMAT) and Universal Display (OLED) shares with prices targets of $55 and $135, respectively

 

USAT Beats Expectations and Offers Bullish Outlook

Yesterday, shares of Cashless Consumption company USA Technologies (USAT) popped in early trading following an earnings and revenue beat for the June quarter. More specifically, the company beat bottom line expectations by $0.01 per share and topped revenues with $34.3 million, $3.2 million ahead of consensus forecasts, and up more than 55% year over year. Ticking through the press release there were a number of positive connection and customer metrics shared by the company and as expected the company offering a bullish outlook for the coming quarters.

That’s the good news.

The less good news is the company fell short when it came to discussing the impact of its recent stock offering that was completed in late July. Yes, during the current quarter, and we find that somewhat disappointing. The company did say, however, that it plans to “to take advantage of opportunities both organic and inorganic that may present themselves in this rapidly evolving landscape” and that means an acquisition or more. When peppered on the earnings conference call, USAT shared that it would seek acquisitions to “enhancing our offering with additional value-added services or allowing us to expand into additional verticals or geographies to drive further growth.”

Not a bad development by any stretch, but it is one that raises some unknowns, particularly for a small company. As we’ve heard many a banker say, the headaches associated with small acquisitions are the same ones with big ones, the only difference is the size of the fee. Given the size of the business as well as the team, the question is will USAT undertake nip and tuck acquisitions that add to its capabilities and expand its footprint or would it look to make a bolder move, potentially swallowing a larger player? We’re fans of the former, while the latter tends to result in some of those headaches such as product, facility, technology and spending integration and rationalization, as well as layoffs.

Given the global proliferation of mobile payments and the first-hand experience I had in Singapore, we’re going to stick with USAT shares for the time being. Based on any potential acquisition, we’ll look to digest the implications and what it may mean for holding the shares.

  • Our price target on USA Technologies (USAT) shares remains $6.

 

 

Disruptive Voice Technology Continues to Take Hold

Last night we shared the news that Barclays (BRC) has enabled voice payments to be made using Apple’s (AAPL) Siri functionality. This is another step forward in the disruptive use of voice technology as an interface across smartphones, intelligent speakers and soon other applications. As more and more applications come to market, we continue to be bullish on shares of Nuance Communications (NUAN) despite the slow tumble they’ve experienced over the last several weeks. As a reminder, the company has inked technology deals with Apple as well as Facebook (FB) to power their respective messaging chat bots even as the use of voice technology proliferates.

  • We remain bullish on Nuance (NUAN) shares, and our price target stands at $21.

 

 

Even Though DY Remains in Radio-Silence, We Continue to Be Patient

Next week Dycom Industries (DY) will report its quarterly results on Wednesday morning (August 30). Despite the ever-increasing need to add incremental wireless capacity and build out next generation wireline networks, in part for wireless data backhaul, to keep up with data demand, DY shares have sunk some 28% over the last three months. This equates to a round trip in the position from a high of just over $110 back to our blended cost basis of $76.68 on the Tematica Select List.

Frustrating to say the least. That frustration is compounded by the lack of news to be had from the company. Its last communique was at the Stifel Industrials Conference back in June. We know network spending at its key customers — AT&T (T), Verizon (VZ) and Comcast (CMCSA) — remains on track as they look to bring incremental 4G and gigabit internet capacity on stream, while beta-ing 5G capacity. Comcast’s recent launch of Xfinity Wireless also likely means additional wireless capital spending will be had in the coming quarters.

  • We’ll continue to be patient with Dycom Industries (DY), which is hovering in oversold territory.
  • Should the shares retreat further into the mid-$60s, we’re inclined to once again scale into the position, improving our cost basis along the way. 

 

 

Revisiting Position Ratings as the Stock Market Grinds Higher

Revisiting Position Ratings as the Stock Market Grinds Higher

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Since our last issue, the stock market continued to move higher on the news that President Trump will soon be sharing his tax overhaul plan and Fed Chairwoman’s Yellen’s congressional testimony yesterday. We review Yellen’s comments below in greater detail, but the point is the Fed, in aggregate, sees enough oomph in the economy to keep its stated goal of up to three rate increase this year in the mix. Candidly, we didn’t expect Yellen to deviate from the script given the next Fed meeting is still several weeks away, and far more data will be had ahead of it.

With the market climbing, we had a number of strong performers on the Tematica Select List, including recently added Disruptive Technology company Nuance Communications (NUAN) and  Safety & Security play PureFunds ISE Cyber Security ETF (HACK). Both of those remain Buys at current levels. Several other positions are closing in fast on their respective price targets. Last week we trimmed back the position in Costco Wholesale (COST) and reduced it to a Hold from Buy. We’d note that’s a true Hold, not to be interpreted in the herd mindset as a loose Sell recommendation. We continue to see Costco benefitting from our Cash-strapped Consumer theme and its plan to open additional warehouse clubs, which boosts higher margin membership fee income.

Similarly, this morning we are reducing our ratings on both Universal Display (OLED) and PowerShares NASDAQ Internet Portfolio ETF (PNQI) from Buy to Hold. Both have enviable runs, the former as more talk of Apple’s next iPhone iteration heats up and the potential of OLED screen and the latter given the moves we’ve enjoyed in our Facebook (FB) and Alphabet (GOOGL) shares. As we adjust these ratings, we’re also going to layer in stop losses as well:

  • We will set the OLED stop loss at $60, which ensures a gain of at least 13 percent.
  • And set a stop loss at $88 for PNQI shares, which ensures a 5 percent gain.

Positions that we’ll be watching closely as they move closer to our price targets include AMN Healthcare (AMN), Facebook FB), Alphabet (GOOGL) and Disney (DIS) shares.

 


What’s all the Yellin’ About Yellen?

As we mentioned above, yesterday Fed Chairwoman Janet Yellen began her two day session in front of Congress for her semiannual testimony on monetary policy. Last night Tematica Chief Investment Officer, Chris Versace, joined CGTN’s Global Business to discuss the testimony, which was very much a non-surprise given the Fed Chair is not likely to tip the Fed’s policy hand in between meetings, particularly when we have ample economic data ahead and we’ve yet to get the particulars on several Trump policies. In her prepared speech to the Senate Banking Committee yesterday, Yellen said the central bank can continue to raise interest rates slowly although it would be “unwise” to wait too long. Pretty much more of the same if you ask us.

Over the last few months, the pace of manufacturing activity has picked up as evidenced by the monthly ISM manufacturing data and manufacturing PMI metrics from Markit Economics. And while it has us thinking another hike is in the cards, we agree with Yellen that with little meat on the Trump policy bone as yet, the Fed might hold out until more specifics are shared before boosting rates. This also means much more economic data to factor into their economic group-think. Odds are this means a rate hike is more likely at the May FOMC meeting than at the March one.

Today Yellen takes the stage in front of the House Financial Services Committee, and while it’s a bit mean to say we do tend to get a hearty chuckle out of watching some of those folks ask questions they don’t really understand. That good fun aside, we don’t expect Yellen to deviate from the Fed script anytime soon.


Updates, Updates, Updates

Over the last few days, there were several noteworthy items for a few of our Tematica Select List holdings. The following is a roundup of those developments.

The Walt Disney Co. (DIS)    Content is King

Disney raised admission prices for U.S. theme parks, by as much as $5 for certain one-day tickets at the Magic Kingdom theme park in Orlando and Disneyland. The cost of a regular ticket at the Magic Kingdom, effective yesterday, is now $115, while the same at Disneyland is now $110. The $124 peak price at Magic Kingdom, which includes many summer days and holidays, is unchanged.

As a consumer, we may cringe at the Disney’s ticket prices, but there is no denying its parks remain a key attraction, and new exhibits/rides, such as Frozen and eventually Star Wars, will only serve to keep people coming. From an investor perspective, price increases like these tend to drive margin expansion and profits, and that’s something we certainly like.

  • Our price target on Disney remains $125, and we continue to rate DIS shares a Buy. 

 

AT&T (T)  Connected Society

AT&T competitor Verizon (VZ) announced it was returning to unlimited data plans, in part to combat Sprint (S) and T-Mobile USA (TMUS). Typically, there tends to be a herd mentality when such programs are introduced, which means we’ll be watching to see if AT&T joins the fray — and if so, how the company tiers its product offering.

Also with AT&T, when asked about the pending merger with Time Warner (TWX), CEO Randall Stephenson said, “We still think we’ll be closed by the end of the year.” That matches recent comments from Time Warner, and likely means AT&T shares will be somewhat rangebound until the proposed merger clears its review by the Department of Justice. Time Warner shareholders will meet today to decide on the company’s proposed $86B merger with AT&T — a “yes” vote is expected.

  • We continue to rate T shares a Hold, with a $45 price target. All things being equal, we’d look to revisit our rating on the shares below $40.
Amazon (AMZN)    Connected Society

As it relates to our position in Amazon, over the weekend there was news that FedEx (FDX) has launched FedEx Fulfillment, a logistic network for small and medium businesses. Given the accelerating shift to digital commerce (one of our key investment pillars for AMZN shares), it comes as little surprise that FedEx would seek to replicate Amazon’s Fulfilled By Amazon (FBA) business. For FBA transactions, Amazon receives a portion of each sale, but could, at the same time, be competing with the vendor.

The differentiator, in our view, is Amazon’s Prime service, which offers “free” two-day delivery for the shopper, and a growing list of items/services. Given the overall shift to digital commerce, odds are this rising tide will lift several boats, but to us, the real question is how vendors will offset shipping costs paid by shoppers. If they stick it to shoppers, this effort by FedEx could be more sizzle than steak.

 

AMN Healthcare (AMN)    Aging of the Population

The December JOLTS report showed yet another month-over-month increase in health-care and social assistance jobs, which led to a 12 percent increase in December 2016 compared to December 2015. Meanwhile, hiring levels in December remained relatively unchanged, up only 2.1 percent year over year.

In our view, this confirms the difficulty in finding quality staff, which bodes well for AMN’s business. Longer term, by 2020, the U.S. is expected to need 1.6 million more direct-care workers than in 2010, which equates to a 48 percent increase for nursing, home-health and personal-care aides over the decade, due primarily to the aging of 78 million baby boomers.

Our intent remains to nibble on AMN shares closer to $35 to build out the position at better prices. AMN will report its quarterly earnings tomorrow (Feb. 16) and consensus expectations call for EPS of $0.54 and revenue of $476.4 million.

  • We have a $47 price target on AMN and at current levels, that leaves 21 percent upside; as such we will look to revisit the rating and the price target after the company’s earnings announcement.

 

Dycom Industries (DY)  Connected Society

Our shares of this Connected Society infrastructure play rose more than 2 percent since last week following the news that CenturyLink’s (CTL) 2017 capital spending will be $2.6 billion vs. $3.0 billion in 2016. While overall spending is ticking down, on its earnings call CenturyLink management shared that its “broadband investments for 2017 are expected to actually be a little higher than 2016 levels.” Combined with 2017 capital spending plans for AT&T, Verizon, and Comcast, it looks like total capital spending on broadband and wireless will be up modestly year over year with a greater portion of spending on network capacity and new technologies (5G, Gigabit fiber).

We continue to see Dycom as a prime beneficiary of that wireless and wireline capital spending. We are going to sit tight and be patient with the position given our view that, worst case, it’s only a matter of time for next-generation network technologies to be deployed.

  • We rate Dycom shares a Buy with a $115 price target.

 

International Flavors & Fragrances (IFF) Rise & Fall of the Middle Class

After today’s market close, IFF will report its December quarter earnings. Consensus expectations have the company delivering EPS of $1.16 on revenue of $752.3 million. As we’ve shared previously, flavor and fragrance competitor results set a sound footing for IFF’s quarterly earnings that will be reported this week (Feb. 15).

We remind subscribers that given IFF’s international exposure, currency is likely to weigh on its December-quarter results as well as its near-term outlook. But, as we have said before, we see that largely reflected in the share price over the last few months.

  • We continue to see ample upside to our $145 price target over the coming quarters fueled by rising disposable income, particularly in the emerging markets, but also from the shift in consumer preferences to natural/organic flavors.

 

Nuance Communications (NUAN)  Disruptive Technology

Following solid December-quarter earnings last week, shares of this voice technology company rose more than 6 percent over the last several days, bringing our return in the shares to roughly 9 percent. In our view, the performance in the most recent quarter shows that despite all the headway we are hearing about Amazon’s (AMZN) Alexa voice digital assistant and similar offerings from Alphabet (GOOGL), there is ample opportunity in this expanding voice technology market for Nuance and its offerings to the health-care, mobile/auto, enterprise and imaging markets.

During the conference call Nuance shared that while there has been growing interest in voice interface technology in the last few years, the arrival of Amazon and Alphabet products has accelerated the pace of investment across several Nuance customer verticals. These opportunities along with Nuance’s expanding solution set, which includes artificial intelligence and analytics, bodes well for the company’s competitive position in the coming quarters.

Longer term, Tractica forecasts total voice digital assistant revenue will grow from $1.6 billion in 2015 to $15.8 billion in 2021. That is also likely to put Nuance on the M&A contender list for those larger entities that need to expand their voice technology capabilities.

  • Our price target on the shares remains $21 and our rating a Buy. All things being equal, the line at which we will revisit that rating is around $19

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