All Eyes On The September Jobs Report

All Eyes On The September Jobs Report

Today’s Big Picture

US market futures point to a modestly lower open Friday morning. After the disappointing manufacturing and services data this week, all eyes will be on today’s Nonfarm Payrolls report, which is expected to see 145,000 jobs added in September, up from 130,000 in August with the unemployment rate holding at 3.7% and wages gaining +0.2%. Keep in mind that the General Motors (GM) strike will add some confusion to the data as striking workers aren’t counted in payrolls.

We’ll also be looking for any updates on the previous downward revisions to payrolls. In August the BLS cut job gain estimates for 2018 and early 2019 by about 500,000, the largest such downward revision in the past decade. Overall we’ve seen downward revisions for around 17 months – a sure sign that labor market dynamics ...

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Adding downside protection and naming a new Thematic Leader

Adding downside protection and naming a new Thematic Leader

Key points inside this issue

  • As more investors reassess coming growth expectations, we are adding ProShares Short S&P500 (SH) to hedge both the Thematic Leaders and the Select List. While not a thematic position but one that will limit near-term downside, we will evaluate this position on as needed basis in the coming weeks.
  • Calling Nokia up to the Thematic Leaders
  • Adding Skyworks Solutions to the Contender’s List
  • Cannabis rumors swirl around Altria

 

Adding some downside protection with SH shares

It’s not often we get a mid-week break for the stock market, and the reason behind yesterday’s stock market closure was a solemn one. It did offer a respite from the wild swing we saw in the market between Monday and Tuesday, which resulted in a demonstrable move lower for all the major market indices. As I shared on Monday, despite the seeming forward motion on US-China trade, there remains much work to be done and a number of headwinds that, as expected, are leading investors to question 2019 EPS growth prospects.

Yesterday, China’s Commerce Ministry released a statement calling trade talks between Presidents Xi and Trump at the G20 Summit in Argentina “very successful.” The statement said the Chinese and U.S. trade and economic delegations will “actively advance the work of consultation” in 90 days in accord with “a clear timetable” and “road map” but offered little concrete details. Odds are this will add to the uncertainty that led Monday’s rally to finish the day off its highs and helped drive the market lower on Tuesday.

In my view, this will keep the market on pins and needles as we digest the coming economic data points to be had that I shared on Monday as well as those for next week that include November reports for inflation, Retail Sales and Industrial Production. As more investors question earnings growth prospects vs. the current stock market multiple, the risk is we could see more downside, especially if those same investors suspect tariffs will indeed be eventually raised to 25% from 10% along with further interest rate hikes. A recent survey of 500 institutional investors by Natixis showed that 65% see a change coming, with the biggest threats being geopolitical tensions and rising interest rates. Between the wage data to be had in Friday’s Employment Report and next week’s PPI and CPI reports, we also run the risk of seeing potentially hawkish comments following today’s latest Fed Beige Book. That report showed tariff driven price increases have spread more broadly through the U.S. economy.

As we get these and other data points ahead of the Fed’s essentially baked in the cake rate hike on December 19, I’ll continue to heed the Thematic Signals we collect each week. Given the market mood, however, I’m adding some downside protection to help insulate subscriber assets in the near-term in the form of ProShares Short S&P500 (SH), an inverse ETF for the S&P 500.

  • As more investors reassess coming growth expectations, we are adding ProShares Short S&P500 (SH) to hedge both the Thematic Leaders and the Select List. While not a thematic position but one that will limit near-term downside, we will evaluate this position on as needed basis in the coming weeks.

 

Samsung set to bring 5G into the prime time

Amid the trade news between the United States and China out of the G-20 summit, there was other news that we’ve been waiting on patiently. Subscribers know that one of our core investment thesis for our positions in Dycom Industries (DY),  AXT Inc. (AXTI), Nokia (NOK) and to a lesser extent Applied Materials (AMAT) shares is the deployment of 5G networks and devices. In the last few months, we’ve heard of beta rollouts from both AT&T Inc. (T) and Verizon Communications Inc. (VZ) as well as fixed wireless testing that could be a replacement for broadband to the home. The thing that has been missing is the to-date elusive announcement on a 5G smartphone that will ride 5G networks and their data speeds, something that will make the speed of the current 4G LTE network look something out of the dial-up days. If you remember those days, you know what I’m talking about — all that’s missing is the wonky connect garble noise.

Let me rephrase: That announcement was elusive until this past Monday when Verizon shared that smartphone users in the United States will be able to use Verizon’s 5G wireless network in the first half of 2019 starting with devices from Samsung. While details of the devices were scant — no models or price points — it is expected that Samsung will be revealing a proof concept this week at the annual Qualcomm Inc. (QCOM) Snapdragon Summit in Maui, Hawaii. Given the location of the unveiling, it seems like a sure bet Qualcomm and its chipsets will be powering the device. No surprise, considering that Samsung long has been a core customer of Qualcomm.

The key point here is the largest smartphone company by volume will be debuting its first 5G market in the coming months.

 

Calling Nokia up to the Thematic Leaders

From our perspective, I see this development as confirming our view on a few levels. Operators are not ones to launch a network unless devices are available for them to monetize that network and all the investments that led to it. That’s a positive for Nokia as it confirms the pending multi-year upswing in 5G infrastructure demand is firmly in front of it, as is the opportunity for its IP licensing business. Second, given Verizon’s timetable of “the first half of 2019,” it means the supply chain soon will be firing up to deliver the components necessary for these devices, including the incremental number of RF (radio frequency) semiconductors needed for 5G. That means incremental wafer demand for AXT during what is a seasonally slow period for smartphones.

As a result, I am calling shares of Nokia up from the Select List to the Thematic Leaders to fill the Disruptive Innovatorsvoid. With Samsung, AT&T, and Verizon having now laid out a timetable for 5G deployments for both networks and devices, we now have a far firmer timetable for a pick up in demand for mobile infrastructure business as well as high margin licensing business. My price target on NOK shares remains $8.50.

  • We are adding Nokia (NOK) shares to the Thematic Leaders for our Disruptive Innovators investing theme. Our price target remains $8.50

 

Adding Skyworks Solutions to the Contender’s List

That incremental RF semiconductor demand for 5G I mentioned a few paragraphs above also means more power amplifiers, switches, filters and other components that will once again increase the dollar content per device for Skyworks Solutions (SWKS) and its competitors. We’ve owned SWKS shares before, and more recently they’ve been battered around as more signs of stalling smartphone demand have emerged leading suppliers to cut their forecasts.

I’ve no intention in jumping into that fray ahead of the seasonally slowest time of the year for smartphone demand – the first half of the calendar year. Rather, we’ll put a pin in SWKS shares, add them to the Contender List and look to revisit them as a Disruptive Innovator play as we either put the March quarter behind us or a new US-China trade deal is inked.

 

Cannabis rumors swirl around Altria

After we published Monday’s Tematica Investing issue, there was much chatter suggesting that Guilty Pleasure Thematic Leader Altria Group (MO) could be interested in acquiring Cronos Group (CRON), a Canadian cannabis company. That speculation sent CRON shares 11% higher on the day and also lifted MO.

As you know, I have held the view that Altria would look to diversify its business away from tobacco and ride the wave of cannabis legalization in the U.S. The key here is legalization across the entire U.S., which would ease manufacturing, distribution, sales and marketing efforts by Altria rather than being an ad-hoc effort. Until the federal ban is lifted, there are also issues with how a company such as Altria would deposit its revenue and profits.

For those looking at Cronos as a positive for Altria’s U.S. business, I think that is a bit presumptuous as the timing of U.S. cannabis legalization remains tenuous. A potential acquisition such as this, however, would give Altria a toehold in the cannabis space, which is legal in Canada, and allow it to learn the business and test market product for an eventual launch in the U.S. when the time is right.

For now, a potential acquisition of Cronos is just speculation, but in principle, it fits with our long-term view of where Altria is likely headed. Now we have to see what Altria does next.

 

 

Amazon and Qualcomm put Alexa assistant in more headphones

Amazon and Qualcomm put Alexa assistant in more headphones

It looks like we are approaching an inflection point with digital assistants as Qualcomm looks to expand where and how they are used by focusing on the wireless earbud market. The most recognized adoption of that technology for that purpose, which is in keeping with our Disruptive Innovators investing theme, has been Apple’s AirPods, which include connectivity with its own digital assistant Siri. To say the AirPods have been a hit would be an understatement, and while there are competitors in the wireless earbud market, it would appear the competition is only now going to heat up as Qualcomm brings Amazon’s Alexa into the playing field in a meaningful way.

It could be the enemy of my enemy is my friend given how Apple competes with Amazon in the digital assistant space, and Qualcomm is at odds over chips and royalties, but odds are it will foster more wearable digital assistant powered devices at better price points and hopefully foster far greater innovation as well. Underneath it all, Qualcomm is sticking with the strategy that made it a formidable mobile phone and smartphone chip company – being a merchant arms dealer that wins no matter who wins the war.

 

Microchip firm Qualcomm is joining Amazon.com to spread the use of Amazon’s Alexa voice assistant in wireless headphones, the companies said on Monday.

Under the deal, Qualcomm will release a set of chips that any maker of Bluetooth headphones can use to embed Alexa directly into the device. When the headphones are paired to a phone with the Alexa app on it, users will be able to talk to the voice assistant by tapping a button on the headphones.

The functionality would be similar to Apple Inc’s AirPods wireless earbuds, which enable users can tap the devices to talk to Apple’s virtual assistant, Siri.

Amazon and Alphabet’s Google, whose voice assistants have most often been found in their respective smart speakers for the home, are rushing to partner with headphone makers.

Models from Bose and Jabra feature Alexa built in, and Sony said earlier this year that a software update will make some of its headphone models work with Alexa. Google Assistant can be used on headphones from Bose, JBL and Sony, along with Google’s own Pixel Buds.

The Qualcomm partnership could expand that lineup. Qualcomm has developed a pre-made circuit that headphone makers can drop into their device to imbue it with Alexa.

Source: Amazon.com, Qualcomm to put Alexa assistant in more headphones

One step closer to 5G as Nokia shares standard-essential patent licensing rates

One step closer to 5G as Nokia shares standard-essential patent licensing rates

We are nearing the commercial deployments of 5G, one of the next-gen technologies that fall under our Disruptive Innovators investing theme. By sharing its 5G essential patent licensing rates, Nokia is offering one of the firmest signals that 5G devices will soon be a reality. Initial shipments are expected to begin in 2019 and reach more than 1.5 billion by 2025, which means not only vibrant outlook for Nokia and other core 5G IP holders but a powerful upgrade cycle that will benefit Digital Lifestyle and Digital Infrastructure companies.

 

With 5G NR devices set to hit the market next year, and supporting networks under construction around the world today, Nokia this week detailed the expected licensure rate for standard essential patents that the infrastructure vendor controls. The company said it will cap fees at €3, $3.46 based on current exchange rates, per 5G NR device.“

Nokia innovation combined with our commitment to open standardization has helped build the networks of today and lay the foundations for 5G NR,” Ilkka Rahnasto, head of Patent Business at Nokia, said in a statement. “This announcement is an important step in helping companies plan for the introduction of 5G NR capable mobile phones, with the first commercial launches expected in 2019.”

Qualcomm is another major 5G NR patent holder, and the company derives significant income from licensing its standard essential patents. Last year the San Diego-based chipmaker laid out its fee structure

.OEM branded handsets will have an effective run rate of 2.275% of the selling price for single-mode handsets, and 3.25% of the selling price for multi-mode devices. To give some hypothetical pricing, a patent licensing for a $100 multi-mode device would cost an OEM $3.25, while a $200 multi-mode device would cost the OEM $6.50. The company capped royalties at a $500 selling price, which equates to $16.25 for a multi-mode device.

Source: Nokia details licensing rates for 5G NR standard essential patents

With new antennas, Qualcomm signals 5G smartphones are coming “soon”

With new antennas, Qualcomm signals 5G smartphones are coming “soon”

We’re also looking for confirming data points for our investment themes, especially those that are poised to disrupt existing business models. In the case of 5G mobile technology, one of the meaningful questions is when we will see commercial deployments of both 5G networks and 5G devices. After all, a 5G network is pretty hard for AT&T or Verizon to monetize unless it has a service offering and that hinges on having 5G devices to deploy on its 5G network.

Today’s news that Qualcomm is shipping 5G antennas to its customers for testing and stands ready for “large-scale commercialization” likely means 5G devices are just quarters away instead of years away. As we move through 2Q 2018 earnings season, we’ll look for more timing signals for the launch of commercial 5G networks and devices.

 

Qualcomm today unveiled what it says is the world’s “first fully-integrated 5G NR mmWave and sub-6 GHz RF modules for smartphones and other mobile devices.” These are the QTM052 mmWave antenna module family and the QPM56xx sub-6 GHz radio frequency (RF) module, and they’ll pair with the company’s previously announced Snapdragon X50 5G modem — making next-gen phone networks a reality very soon.

If you recall, a bunch of major smartphone makers, including Samsung, LG, Sony, HTC and Xiaomi already said they’ll be working with Qualcomm, and most of them commited to delivering X50-powered phones by the first half of 2019. Those devices will likely use the new antenna and RF modules announced today. Qualcomm told Engadget it has already shipped samples out to its device partners, and will be working with them to figure out the best placement to minimize signal interference due to hand blocking.

According to the company’s statement, “a working mobile mmWave solution … was previously thought unattainable.” Now, however, Qualcomm said it is “ready for large scale commercialization,” which means we are that much closer to seeing 5G devices in the real world soon.

Source: Qualcomm’s 5G antennas are primed for next year’s phones

WEEKLY ISSUE: The Cherry on Top of Apple’s Quarter Earnings Beat

WEEKLY ISSUE: The Cherry on Top of Apple’s Quarter Earnings Beat

 

Key Points from this Alert:

  • After March quarter earnings that shut down the doomsayers, an upsized capital return program and ahead of the upcoming WWDC 2018 event in June, our price target on Apple (AAPL) shares remains $200.
  • What’s the Fed likely to say later today?
  • We are scaling into AXT (AXTI) shares on the Tematica Investing Select List at current levels and keeping our long-term $11 price target intact.
  • We are also adding to our position in LSI Industries (LYTS) shares at current levels, and our price target remains $11.

 

Apple delivers for the March quarter and upsizes its capital return program

Last night in aftermarket trading, Apple (AAPL) shares popped more than 3% after closing the day more than 2% higher as Apple delivered a March quarter that was a sigh of relief to many investors. More specifically Apple served up results on the top and bottom line that were ahead of expectations, guided current quarter revenue ahead of expectations and upsized not only its share repurchase program, but its dividend as well. Heading into the earnings report, investors had become increasingly concerned over iPhone shipments for the quarter, particularly for the iPhone X, following recent comments on high-end smartphone demand from Taiwan Semiconductor (TSM), Samsung and others. That set a low sentiment bar, which the company once again walked over.

What Apple delivered included iPhone shipments modestly ahead of expectations – 52.2 million vs. 52.0 million – and an average selling price that fell $70 to $729. Down but certainly not the disaster that many had fretted for the iPhone X. iPad shipments were also stronger than expected and Apple continued to grow its Services business with Mac sales in line with analyst forecasts. Looking at the Services business, Apple is well on track to deliver on its $50 billion revenue target by 2021 and that’s before we factor in what’s to come from its recent acquisitions of Shazam and Texture as well as its burgeoning original content moves. In my view, that original content move, which replicates a strategy employed by Netflix (NFLX) and Amazon (AMZN), will make Apple’s already incredibly sticky devices even more so.

Think of it as Tematica’s Content is King investing theme meets Connected Society and Cashless Consumption… and yes, I need a better name for that three-pronged tailwind combination.

On the guidance, Apple put revenue ahead of consensus expectations and signaled a modest dip in gross margins due to the memory pricing environment. Even so, the sequential comparison for revenue equates to a quarter over quarter drop of 12.5%-15.5%, which likely reflects a mix shift in iPhones toward non-iPhone models. Pretty much as expected and far better than the doomsayers were predicting.

The bottom line on the March quarter results and June quarter outlook was investors fretted about the iPhone X to an extreme degree… an overreactive degree… forgetting the company has a portfolio of iPhone products as well as other products and services. Some may see the report as giving investors a sigh of relief, but I see it more as a reminder that investors should not count Apple out as we move into an increasingly digital lifestyle.

Is the company still primarily tied to the iPhone? Yes, but it is more than just the iPhone and that is something that will become more apparent in the coming year. We’re apt to see more of that in a month’s time at the company’s annual World-Wide Developer Conference, which several months later will be followed by what continues to sound like an iPhone product line up with refresh with several models at favorable price points.

The added cherry on top of the company’s meet to beat quarter and outlook was the incremental $100 billion share repurchase program and the 16% increase in the dividend. That dividend boost brings the company’s annual dividend to $2.92 per share, which equates to a dividend yield of 1.7%. Looking at dividend yields over the last few years applied to the new dividend supports our $200 price target for Apple shares.

  • After March quarter earnings and ahead of the upcoming WWDC 2018 event in June, our price target on Apple (AAPL) shares remains $200.

 

What’s the Fed likely to say later today?

While many were focused on Apple’s earnings, others, like myself, were also getting ready for the Fed’s latest monetary- policy meeting, which concludes today. Market watchers expect the FOMC to leave interest rates unchanged, but recent data (as well as some comments that company executives have made this earnings season) suggest that we’re seeing a pickup in U.S. inflation.

For example, Caterpillar (CAT) last week shared that its margins likely peaked during the first quarter due to rising commodity prices, most notably steel. Meanwhile, the April IHS Markit Flash U.S. Composite Purchasing Managers Index report last week showed that average prices for goods and services “increased solidly. The rate of input price inflation was the quickest since July 2013.”

And on the manufacturing side, the report noted that “price pressures within the factory sector intensified, with the rate of input-cost inflation picking up to the fastest since June 2011.” Markit also wrote that the services sector “witnessed its average cost burdens climbing month over month as well.”

We also learned just this week that the U.S. Personal Consumption Expenditures Price Index (which happens to be the Fed’s preferred inflation metric) rose 2.4% year over year. While that’s down a few ticks from February’s 2.7%, the PCE came in well above the Fed’s 2% inflation target for the second month in a row.

And lastly, the April ISM Manufacturing Index’s price component edged up to 79.3 from 78.1 in March, easily marking 2018’s highest level so far.

All of these figures have likely caught the Fed’s eyes and ears. Make no mistake about it — the central bank will review them with a fine-toothed comb. The FOMC came out of its last policy meeting rather divided as to the number of rate hikes it expects for 2018. Some FOMC members preferring the three hikes that markets widely expect, but others on the committee increasingly leaned toward four.

In the grand scheme of things, four vs. three rate hikes isn’t a “yuge deal” (as President Donald Trump would say). In fact, more investors are likely expecting the higher numbers of hikes given the recent inflationary economic data. But that’s just the investor base. Odds are that any language in the FOMC’s post-meeting communique that points to an upsized pace of rate hikes is bound to catch the mainstream media and others off-guard.

And one way or another, the Fed’s comments are bound to make the wage data that we’ll be getting in this Friday’s U.S. April jobs report a key focus. A hotter-than- expected headline number will boost the odds that we’ll see a fourth rate hike this year.

But between now and then, expect to see lower-than-usual trading volumes as investors wait to see the latest economic figures while also digesting this week’s litany of earnings reports. Things could get a little wonky, as investors reset expectations for corporate earnings and FOMC hikes, but I’ll continue to let our thematic tailwinds be our guide.

 

Scaling into AXTI (AXTI) shares …

Last week was a challenging one for shares of AXT Inc. (AXTI) and LSI Industries (LYTS), and while that is painful and frustrating in the near-term, I view this as an opportunity to scale deeper into both positions at better prices. The silver lining is this will improve our cost basis for the longer term.

With regard to AXT, the smartphone industry has been currently transfixed on comments from Taiwan Semiconductor (TSM), Samsung and SK Hynix that all warned on demand for high-end smartphones. As we saw last night, those comments were not necessarily indicative of Apple’s iPhone shipments for the March quarter and as I pointed out above Apple has a portfolio of smartphones and a growing services business. Also, given comments from mobile infrastructure company Ericsson (ERIC) and chip-supplier Qualcomm (QCOM), 5G smartphones should be hitting in 2019, which we see fostering the beginning of a major upgrade cycle for the iPhone and other vendors.

This is a great example of focusing on the long-term drivers rather than short-term share-price movement. Later this week two of AXT’s customers — Skyworks Solutions (SWKS) and Qorvo (QRVO) — will report their quarterly results. I expect those reports to reflect the short-term concerns as well as the longer-term opportunity as wireless connectivity continues to move past smartphones. With AXT’s substrates an essential building block for the RF semiconductors, let’s remain patient as I keep our long-term price target at $11, following the company’s first-quarter 2018 results that beat expectations but also call for sequential improvement in both revenue and earnings per share.

  • We are scaling into AXT (AXTI) shares on the Tematica Investing Select List at current levels and keeping our long-term $11 price target intact.

 

… and buying more shares of LSI Industries (LYTS) as well

Now let’s turn to LSI Industries. Concerns about a sudden management change last week, just days ahead of the company’s quarterly earnings report, led LYTS shares to plummet 20% but rebound a bit later in the week even as LSI reported March-quarter results that missed both top-line and bottom-line expectations. While the search for a new CEO is underway, what was said during the earnings conference call was favorable, in my opinion, and supports my thesis on the shares.

First, let’s tackle the elephant in the room that is the sudden CEO departure. As one might expect, such a late in the quarterly reporting game resignation is bound to jar investors, but the near 29% move lower over the ensuing few days was more than extreme. That said, a sudden CEO departure raises many questions, and when it’s in a market that has been registering Fear on the CNNMoney Fear & Greed Index, investors tend to a shoot first and ask questions later mentality.

What I saw on the earnings conference call was a calm management team that is looking for a next-generation CEO. What I mean by that is one that understands the changes that are happening in the lighting market with increasing connectivity in lighting systems and signage. This to me says the desired CEO will be one with a technology background vs. one with a legacy lighting background. Much the way the lighting technology being used is being disrupted with LEDs and soon OLEDs, LSI needs a forward-thinking CEO, not one that only thinks of traditional light bulbs.

Second, the company’s lighting business is nearing the end of its transition to light- emitting diodes (LEDs) from traditional lighting solutions. During the March quarter, LSI’s LED business grew 14% year over year to account for 92% of the segment vs. roughly 80% in the year-ago quarter. Despite that success, the legacy lighting business continues to decline, with sales of those products falling by more than 55% year over year in the March quarter.

With one more quarter left in its transition to LEDs, the weight of the legacy lighting business likely won’t be a factor much longer, and that should allow the power of the LED business to benefit the bottom line. The LED business is riding the combined tailwinds of both environmentally friendly green technology as well as the improving nonresidential landscape.

Alongside its earnings report, LSI’s Board of Directors declared a regular quarterly cash dividend of $0.05 per share that is payable May 15 to shareholders of record as of May 7. The annualized dividend equates to LYTS shares offering a dividend yield of 3.4% at recent levels, well above its historical range of 1.5%-2.5% over the 2015-2017 period. Applying those historical dividend yields to the current annualized dividend yields a share price between $8-$13. The stock market liked this as LYTS shares rallied some 10% over the last several days, but we still have ample upside to my long-term $11 price target.

This tells me that there is much further to go fro LYTS shares in the coming months as LSI finds a CEO and gets its story back on track. Let’s remain patient with this one.Helping with that patient attitude was yesterday’s March Construction Spending Report, which revealed private nonresidential construction rose 3.8% year over year for the month on a non-seasonally adjusted basis.

  • We are adding to our position in LSI Industries (LYTS) shares at current levels, and our price target remains $11.

 

 

Weekly Issue: After the close corporate earnings anything but “steady as she goes”

Weekly Issue: After the close corporate earnings anything but “steady as she goes”

 

Key Points from This Alert:

1. We will continue to hold our existing all options positions:

2.  As we do this, we’re sharing a very speculative idea with subscribers that leverages the growing mobile banking market in India

 

As we enter the belly of the beast for 4Q 2017 earnings season, we are once again in the midst of a cold snap that is hitting much of the U.S. The cold temps make staying inside and pouring over the earnings call transcripts a little easier, I’m not going to lie, and that’s a good thing given the return of volatility to the market this week. In the beginning of the week, yields and the dollar were the driving impact of market pressure, but some of that pressure was relieved following the Fed’s “steady as she goes” comments exiting its first FOMC meeting for 2018.

As we moved into Wednesday, corporate earnings after the close of trading were another matter. First, there was Facebook’s (FB) results that simply slaughtered December quarter expectations, but the shares traded off as the company shared it is fine-tuning Facebook to focus on meaningful connections. As one might expect this is having an impact on the arguably addictive nature of Facebook, and the company shared it is seeing a decline in user’s hours per day. The longer-term bet is these changes will lead to people spending more time on Facebook. Clearly Wall Street was not buying it given the tradeoff in FB shares in after-market trading.

Also, after the close Qualcomm (QCOM) shared it is seeing higher than normal seasonal declines in its chip business, largely due to inventory builds in the smartphone market. In my view, this sets the stage for Apple’s (AAPL) earnings report after today’s close.

We also saw Citrix Systems (CTXS) deliver favorable results but results fell shy of whisper expectations for the quarter and that led the shares to move lower in after-market trading.

And so on… I point this out because the after-market trading confirms the view that we’ve been sharing here at Tematica – the continued melt up in the market has led it to becoming priced to perfection. As I wrote yesterday in the weekly Tematica Investing issue, when actual results and an outlook or even the internals in an earnings report and guidance are somewhat different than what Wall Street is looking for, odds are there will be pressure on a company’s shares.

Here’s the thing – today will have the greatest number of companies reporting with a number of high profile companies that include Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), United Parcel Service (UPS), MasterCard (MA), Ralph Lauren (RL), GoPro (GPRO), Visa (V) and others. There will be quite a bit to digest and put into content relative to the other companies that have reported.

I often say I like to “measure twice and cut once” like a smart carpenter, and that means holding off with a new options recommendation today and doing so until we are in calmer waters. If the market volatility continues in the coming days, it means call options will likely get cheaper. As this week’s reports are digested and “measured” we can circle back on call option positions for Facebook, Universal Display (OLED) and others, more likely than not at better prices.

As we wait for these opportunities to come to us, we will continue to hold our existing all options positions:

 

Sharing a very speculative idea

This week, I wanted to share with you a unique micro-cap stock operating in the cashless payment arena in India. To say it’s a highly speculative opportunity would be an understatement, but it’s a stock that I personally invested in last year and I wanted to share it with you, if for nothing more than to provide some perspective of how in many emerging markets across the world cashless payments are leapfrogging over setting up a centralized banking system as we are so accustomed to in developed markets. 

Last week, I and the rest of team Tematica attended the Inside ETF 2018 conference. As Lenore Hawkins and I shared on this week’s Cocktail Investing Podcast, Bitcoin was a frequent topic at the event. Bitcoin is an interesting resident in our Cashless Consumption investing theme – it’s a crowded market with more than 1,300 different coins that are gaining acceptance, even as its use is being restricted in countries like South Korea and China. Subscribers know that I always look for proof points and I saw one for Bitcoin when I recently paid my annual licensing fee to Microsoft for the use of Microsoft Office – I had the option to pay by credit card, debit card, PayPal and … Bitcoin.

Like I said, clearly part of our Cashless Consumption investing theme, and the under the hood technology behind it – Blockchain – falls under the purview of our Disruptive Technologies investing theme. As the availability of investible products for these two items become available, I’ll be taking a hard look at them for Tematica subscribers. I expect we’ll also have a guest or two to help break down Bitcoin and Blockchain on the podcast in the coming weeks.

While we can’t “invest” in Bitcoin, and the SEC is doing a good job to limit those viable opportunities, there are other ways for risk-tolerant investors to capitalize on our Cashless Consumption theme.

One of the more interesting markets when it comes to our Cashless Consumption investing theme is India. According to the World Bank, in India, there are 21.24 automated teller machines (ATMs) per 100,000 people compared to 223 per 100,000 people in North America and 47.55 per 100,000 across the globe. What about credit?  Well, as of March 2017, according to the World the Reserve Bank of India (RBI) only 30 million credit cards have been issued. That’s a record high, but in a country of 1.3 billion people, 30 million credit cards are a blip on the radar screen.

These, as well as similar comparative statistics for banking locations, paint a clear picture that India is under-banked. At the same time, only one-third of India’s 1.3 billion residents have access to the internet. Of those who are able to go online, just 14 percent make mobile payments at least once a week, according to research firm Kantar TNS. One might think the low level of mobile payments is due to lack of phones, but you’d be wrong, very wrong. According to Statista, in 2018 the number of cell phone users in India is forecasted to rise to 775 million. Yes, nearly 60% of the entire population has a cell phone, but very few if any have a bank account, let alone a credit card.

To me, all of this looks like a major pain point, and pain points tend to be addressed.

In this case, one company that is looking to solve this problem is MoneyOnMobile (MOMT) a micro-cap company that recently completed an equity offering, which cleaned up its balance sheet and added to its coffers. I’ve mentioned the company before, but to jog your memory, MoneyOnMobile enables Indian consumers to use mobile phones to pay for goods and services or transfer funds from one cell phone to another be it as a SMS text message, through the MoneyOnMobile application or internet site. To date over 170 million unique customers have had payments made easier through over 300,000 retail merchants across India and its payments platform. That presence has allowed Money on Mobile to serve between 3 million and 5 million customers each month over the past year.

Through the six months ended September 2017, Money on Mobile recorded revenue of $3.2 million, up 29% year over year, but digging into that last 10-Q filing we find its September quarter revenue gapped up more than 80% year over year. In reviewing the company’s monthly revenue statistics that it published, its November 2017 revenue was up more than 300% compared to November 2016.

The rising revenue combined with the recent equity offering and debt restricting that removed balance sheet concerns have led MOMT shares to move sharply higher closing last night at 0.53 compared to 0.32 at the end of 2017.

Here’s the thing – there are no call options on MOMT shares, and in fact I would argue that when we look at the 52-week trading history between $0.11-$0.60, while they are equity shares, they are really more like call options. I’ve made some individual stock recommendations here in the past at Tematica Options+, both on the long and short side, but given the market cap nature of the company, MOMT shares are far from a riskless investment.

I will share that earlier this year I purchased some MOMT shares because I like the company’s position in a pain point filled market. Much like Amplify Snacks (BETR), I also see MoneyOnMobile as a potential takeout candidate by the growing number of companies that are looking to tap the mobile payments market in India.

Now, this is where I remind you that we don’t buy companies surely on takeout speculation, but because of the thematic tailwinds behind their businesses. In the case of MoneyOnMobile that would be the intersection of our Cashless Consumption and Rise & Fall of the Middle Class investing themes. I see MoneyOnMobile as a high risk, high reward micro-cap opportunity and it is one that I intend to be patient with and hold for some time. I’d also add that I am fully aware that growing competitive market place in India could very well squeeze MoneyOnMobile. This is not a position for the faint of heart.

To me, this puts it somewhere between Tematica Investing and TematicaOptions+. I’ll place the shares on the TematicaOptions+ Select List, and I will update with position commentary like I would any other position on that list. Again, if you can’t stand a volatile ride I would say MOMT shares are not for you. Don’t be offended, I’m just trying to make sure subscriber eyes are wide open.

 

 

Apple: Don’t listen to the short-term chatter

Apple: Don’t listen to the short-term chatter

 

Over the last few days there has been a slew of headlines for Tematica Investing Select List holding Apple (AAPL), one of the core companies behind our Connected Society investing theme. There has been an upgrade of the shares as well as a downgrade, respectively, by investment firms Maxim and Longbow Research. That’s not the only push/pull that we’ve seen in the share price. The other has been favorable data vs. the historical seasonal downtick in smartphone volumes as we move from the December quarter into the March one.

The favorable data came in the form of the latest CIRP numbers, which indicate Apple increased its U.S. iPhone activations ten points in the final quarter of 2017, from a 29% share in the September quarter to 39% by December. More significantly, new phone activations were up five points year over year, from 34% in Q4 2016 to 39% in the same quarter last year.

Part of the downgrade at Longbow, which lowered its rating to Neutral from Buy, likely stems from the seasonal slowdown in smartphone sales we are once again hearing about from component suppliers. Given the magnitude of the iPhone on Apple’s overall business, it’s not surprising that this is once again coming into focus. Apple has previously warned that investors should avoid reading too much into supply chain speculation because of its size and complexity. With Apple having launched three new flagship products in 2017, including the higher-priced and higher-margin iPhone X, we’re not going to overthink this but we will be paying attention.

Apple is set to report its December quarter earnings on Feb. 1, which will give us all the key metrics for the quarter. Odds are Apple will offer some vague guidance on smartphone volumes, and the earnings conference call will likely be littered with folks trying to get Apple CEO Tim Cook and others to spill something. But Apple has been doing this a long time, and they are well rehearsed in not answering questions they don’t want to.

This means zeroing in on what is said by key suppliers in the Apple ecosystems both ahead of Apple’s reporting date and after. The day before Apple’s earnings, Qualcomm (QCOM) will issues it results. Soon after, we’ll hear from RF chip company Skyworks Solutions (SWKS) and chip company Cirrus Logic (CRUS), which focuses on audio and voice signal applications and reports on Feb. 5. Another company I’ll be listening to is Broadcom (AVGO), which supplies a variety of connectivity chips including Bluetooth and WiFi to the smartphone markets as well as others.

As we look to put these iPhone outlook puzzle pieces together, there are other moves afoot at Apple. Yesterday, as part of its tax repatriation moves, the company announced that over the next five years it expects to contribute $350 billion to the US economy, create 20,000 jobs in the process, and bump up its Advanced Manufacturing Fund to $5 billion from $1 billion. The stock market greeted that news with open arms as Apple shares moved higher. The real move to be had, however, will be when Apple shares its view on how tax reform will impact its 2018 EPS. Current estimates call for the company to earn $11.46 per share this fiscal year, up from $9.21 last year. We’re also be listening to see if Apple ups its quarterly dividend of $0.63 per share or authorizes another share repurchase program.

Understandably, that news took over the headlines, but there was other news to be had. According to a new report from Variety, following the pull out by HBO, Apple will take over the lease at a new Culver City, California 128,000-square-foot development. This adds to Apple’s Los Angeles area footprint in a meaningful way, seeing that Culver City is also the location where Beats is headquartered. The widespread belief is this will be the space where Apple houses its original content efforts. After sitting on the sidelines for a number of years, Apple is slowly dipping its toe into the content creation waters, moving past that silly Carpool Karaoke show with pending programs with Reese Witherspoon and Jennifer Aniston, Nichelle Tramble Spellman’s “Are You Sleeping,” and a 10-episode comedy sketch show starring Kristen Wiig.

Despite its reputation, Apple tends not to be a first mover, but rather one that makes its move at the tipping point of a technology or consumer behavior. We’ve seen this time and time again with new technologies and the iPhone, and we suspect we are seeing this with its push into original content. Given Apple’s array of connected devices and changing demands from viewers that increasingly opt to stream the content they want, when they want it, on the device they want it on without having to buy it, the direction makes perfect sense. From our perspective, here at Tematica, it was only a matter of time for Apple to make this move as it looks to follow the example set by Netflix – leverage original content to lure subscribers — to make its devices even stickier with consumers. Hopefully, Apple will have a stronger starting lineup than Amazon (AMZN) has with its original Prime Video offering.

Finally, it appears that we will soon see Apple’s virtual assistant in a smart speaker, better known as HomePod, hitting shelves. Reportedly, Apple supplier Inventec has started shipping the device, and expectations are that between Inventec and Hon-Hai Precison Industry, the other HomePod supplier, Apple will ship 10-12 million units in 2018. Much like other new non-iPhone products, including the Apple Watch, the HomePod probably won’t have a significant impact on Apple’s revenue and earnings during its first year, but it does help shore up Apple’s efforts in the Connected Home alongside Apple TV at a time when Amazon and Alphabet/Google are making inroads.

And here’s a wild thought, given all the digital assets at Apple’s disposal and its growing presence in the payments industry, how long until we hear rumors of an “AppleCoin”?

The bottom line on Apple is we continue to see the company as a core holding of our Connected Society and Cashless Consumption investing themes, and the added tailwind of our Content is King investing theme could improve its position in our increasingly digital lifestyle.

  • Our price target on Apple shares remains $200, and we are inclined to be buyers on weakness following the company’s December quarter earnings report on Feb. 1

 

BlackBerry’s accelerating transition lands it on the Tematica Contender List

BlackBerry’s accelerating transition lands it on the Tematica Contender List

We’re adding a new name to the Tematica Investing Contender List today, and it’a one that you may have heard something about before – BlackBerry (BBRY).

As you read that sentence there is a distinct probability that you said “huh?” or something similar to yourself or the person next to you.

Yes, we said BlackBerry, as in the company that was once the dominant smartphone manufacturer until it was outflanked by Apple (AAPL) with the iPhone, which as we all know revolutionized the smartphone industry. Back in the day, we had BlackBerry’s named device and while it was ahead of the competitors when it came to email, the reality was  the device had a horrible internet browser, a click wheel that made maneuvering around the screen challenging to say the least and its phone capabilities paled in comparison to other mobile phones at the time. In short, it was ripe for disruption and Apple did just that.

All of this helps explain the “huh?” reaction you likely had.

Here’s the thing, one of the traps that investors fall into is thinking things remain the same at companies. Sometimes that is true, and we’re seeing as part of the reason activist investor Nelson Peltz was gunning for a seat on the board of Proctor & Gamble (PG) – more on this is another post. In the case of BlackBerry, it has been a turnaround in the making that has spanned several years with revenue falling from $6.8 billion in 2014 to $1.05 billion for the 12 months ending this past August.

Now, this is where things start to get interesting because during that time period the company managed to not only shrink its bottom line losses from $1.99 per share in 2014, over the last 12 months it delivered EPS of $0.13. Current consensus expectations sit at $0.06 per share for the current year, rising to $0.08 next year even as revenue is forecasted to decline further. From a stock perspective, this means the shares are still uber expensive even if we back out the roughly $3.00 per share the company has in net cash. That’s one reason why the shares are only making it onto the Contender List, and I’ll share a few more before too long.

The nagging question is what is driving the bottom line improvement even as revenue is expected to fall further over the coming quarters?

It’s the transition in the business model from hardware to software services, which carry richer gross margins, and focuses on security. This transition brought BlackBerry back onto our radar screens as part of our Safety & Security investment theme. As we all know in reading the headlines, there isn’t likely to be any slowdown in the speed of cyber-attacks, and this is helping fuel BlackBerry’s transition. In the recently reported August quarter, its software services business accounted for just under 80% of overall revenue vs. 44% in the year-ago quarter. To show the power of that transition, gross margins in the recently completed August quarter rose to nearly 74% vs. 29% in the year-ago quarter. Lending a helping hand, the comparatively lower margin device business fell to just $16 million in revenue vs. $105 million in the August 2016 quarter. This accelerating transition helps explain why BBRY shares have climbed 15% over the last three months vs. 6.6% for the Nasdaq Composite Index and 5.3% for the S&P 500.

As this transformation continues, another item to watch at BlackBerry is its embedded software business, a key part of our Asset-Lite investment theme.  The initial licensing focus for BlackBerry has been in the automotive industry with regard to autonomous cars. Recently Delphi Automotive (DLPH) announced that it chose BlackBerry QNX for its Centralized Sensing Localization and Planning platform, which is a fully integrated autonomous driving solution. Given our recent Cocktail Investing Podcast with Audi on prospects for autonomous cars, we know this is a development that still has several years to go until it is ready for prime time. That said, the win for BlackBerry at Delphi is certainly encouraging.

Finally, BlackBerry has had some success leveraging its licensing business, which includes software licensing, intellectual property licensing, and technology licensing. As we know given the position in Nokia (NOK) on the Tematica Investing Select List, licensing businesses tend to carry very favorable margins, but it’s also one that moves in fits and starts not a smooth, continuous line. We also know that it’s a business that takes time to convert prospects and opportunities into revenue and profits, and in the case of BlackBerry, there are others such as Qualcomm (QCOM), InterDigital (IDCC) and Nokia that have competing licensing businesses. This means we’re not apt to see leaps and bounds of improvement with this Blackberry business in a short period of time, but more likely periodic wins.

The bottom line is that BlackBerry’s transition to a Safety & Security and Asset Lite Business Model is accelerating, it has yet to really reap the rewards on its bottom line. With the shares currently trading at 142x expected 2018 earnings and well into overbought territory, we are going to place BBRY shares on the Contender List and watch for either a pullback in the shares to $8 to $9 at which they have support or signs its EPS generation is poised to accelerate in a meaningful manner over the coming quarters.

 

 

SPECIAL ALERT – Adding Nokia shares to the Tematica Select List

SPECIAL ALERT – Adding Nokia shares to the Tematica Select List

 

  • We are issuing a Buy on  Nokia Corp. (NOK) shares with an $8.50 price target.

  • At this time, there is no recommended stop-loss level and we would look to scale into the shares aggressively near $5.50.

 

Yes, you are reading that correctly. After recently adding Nokia Corp. (NOK) shares to the Contender List, we are now adding them to the Tematica Select List given continued progress in its higher margin, intellectual property (IP) business, Nokia Technologies. We’ve seen the power of this Asset-Lite Business Model investment theme before with Qualcomm (QCOM) and InterDigital (IDCC) and it has the power to not only transform Nokia, but deliver EPS  upside relative to expectations.

To jog people’s memory, in the most recent quarter the Nokia Technologies division accounted for 7% of Nokia’s overall revenue, but delivered 37% of operating profit. To be clear, we like the operating leverage in this business. In the coming quarters, we also expect Nokia to benefit from continued wireless infrastructure buildout from both existing 3G and 4G networks as well as eventual deployments on 5G networks.

 

So why add NOK shares to the Select List now?

Early this morning it was announced Nokia won an arbitration battle against LG Electronics, which follows recent deals with Samsung, Apple (AAPL) and Xiaomi Electronics, a Chinese smartphone company. From LG Nokia will receive both a one-time payment, which was not disclosed, as well as recurring revenue that is expected to be in the realm of $275-$300 million. This is a meaningful bump to Nokia’s IP, which had sales of 616 million euros in the first half of 2017, and gives far more comfort in the likelihood of the company hitting 2018 EPS expectations of $0.37, up from this year’s consensus EPS of $0.30. Also too, as Nokia continues to stack up licensees, it becomes increasingly easier to win over its remaining IP targets.

Our price target on Nokia shares is $8.50, which equates to 23x expected 2018 EPS or 1.0 on a price to earnings growth ratio (PEG) basis using the company EPS growth over the 2016-2018 time frame. Given the degree of upside to be had, we are adding NOK shares to the Select List with Buy. At this time, there is no recommended stop-loss level and we would look to scale into the shares aggressively near $5.50.

Over the coming quarters, we expect to see more movement in the company’s wireless infrastructure business as 5G moves from testing and beta to deployment. With Nokia Technologies, the company has booked some impressive wins, and it can turn its attention to Huawei, which according to data compiled by IDC is now the third largest smartphone vendor behind Samsung and Apple. Also, as Apple brings augmented reality into the mainstream with its new iPhone models and does the same with health applications with Apple Watch, this opens the door for other technology licensing opportunities at Nokia given its portfolio of connected health, augment and virtual reality as well as other technologies. What this will require is patience with the shares, but given we are not only thematic investors but ones that have a longer than the herd time horizon that’s just fine with us.