Weekly Issue: Factors making the stock market melt up a head-scratcher

Weekly Issue: Factors making the stock market melt up a head-scratcher

Key points inside this issue

  • Our long-term price target on Disruptive Innovator leader Nokia (NOK) shares remains $8.50.
  • We will continue to be long-term shareholders with Disruptive Innovator Select List resident Universal Display (OLED). Given the improving outlooks, our near-term price target for OLED shares is getting lifted to $150 from $125, and I will revisit that target as we move through the balance of 2019.

 

Reading the latest from the Oracle of Omaha

Over the weekend, the Oracle of Omaha, Warren Buffett, released his annual letter to shareholders of Berkshire Hathaway (BRK.A). This letter has become a must-read among institutional and individual investors alike because it not only reveals changes in Berkshire’s top investment portfolio positions, but it also has contained ample comments on the economy and markets as well as an investing lesson or two.

Out of the gate, we learned that once again Team Buffett outperformed the major stock market indices in 2018. As Buffett got underway, he casually reminded readers to be buyers of “ably managed businesses, in whole or part, that possess favorable and durable economic characteristics” and to do so at sensible prices. While it may seem somewhat self-serving this sounds very much like our thematic investing strategy that looks to identify companies benefitting from structural economic, demographic, psychographic and technological changes at prices that offer commanding upside vs. potential downside.

In the past, Buffett has commented that stocks are akin to pieces of paper and it’s the businesses behind them that are the drivers of revenue and profits. It’s an idea we are very much in tune with as we view ourselves as buyers of thematically well-positioned business first, their shares second. No matter how attractive a stock’s price may be, if its business is troubled or facing thematic headwinds, it can be a tough pill to swallow.

As Buffett later noted, “On occasion, a ridiculously high purchase price for a given stock will cause a splendid business to become a poor investment — if not permanently, at least for a painfully long period.” I certainly agree with that statement because buying a stock at the wrong price can make for a painful experience. There are times, to be patient, but there are also times when the thesis behind owning a stock changes. In those times, it makes far more sense to cut bait in favor of better-positioned companies.

Buffett then shared that “prices are sky-high for businesses possessing decent long- term prospects,” which is something we’ve commented on several times in recent weeks as the stock market continued to melt up even as earnings expectations for the near term have moved lower. We’ll continue to take the advice of Buffett and focus on “calculating whether a portion of an attractive business is worth more than its market price,” for much like Buffett and his team work for Berkshire shareholders, Tematica and I work for you, our subscribers.

Mixed in among the rest of the letter are some on Buffett’s investing history, which is always an informative read, and a quick mention that “At Berkshire, we hope to invest significant sums across borders” and that it continues to “hope for an elephant-sized acquisition.” While I can’t speak to any acquisition, especially after the debacle that is now recognized as Kraft Heinz (KHC), the focus on investing across borders potentially speaks to our New Global Middle-class and Living the Life investing themes. Given Buffett’s style, I suspect Team Buffett is more likely to tap into the rising middle-class over luxury and travel.

Several times Buffett touched on his age, 88 years, as well as that of its key partner Charlie Munger, who is 95. There was no meaningful revelation on how they plan to transition the management team, but odds are that will be a topic of conversation, as will Kraft Heinz Co. (KHC) at the annual shareholder meeting that is scheduled for Saturday, May 4. More details on that can be found at the bottom of the 2018 shareholder letter.

If I had to describe the overall letter, it was a very solid one, but candidly not one of the more memorable ones. Perhaps that reflects 2018 as a whole, a year in which all major market indices fell into the red during the last quarter of the year, and a current environment that is characterized by slowing global growth.

 

More signs that the domestic economy is a-slowin’

In recent issues of Tematica Investing and in the recent Context & Perspectives pieces penned by Tematica’s Chief Macro Strategist Lenore Hawkins, we’ve shared how even though the U.S. economy looks like the best one on the global block, it is showing signs of slowing. We had further confirmation of that in the recent December Retail Sales Report as well as the January Industrial Production data that showed a drop in manufacturing activity. The December Durable Orders report that showed orders for non-defense capital goods excluding aircraft dropped 0.7% added further confirmation. Moreover, the report showed a downward November revision for the category to a fall of 1.0% vs. the prior 0.6% decline.

Much the way we focus on the order data inside the monthly ISM and IHS Markit PMI reports, the order data contained inside the monthly Durable Orders report gives us a sense of what is likely to come in near-term. These declining orders combined with the January declines in Industrial Production suggest slack is growing in the manufacturing economy, which means orders for new production equipment are likely to remain soft in the near-term. 

This past Monday we received another set of data that point to a slowing U.S. economy. We learned the Chicago Fed National Activity Index (CFNAI) fell to -0.43 in January from +0.05 in December. This index tracks 85 indicators; we’d note that in January, 35 of those indicators made positive contributions to the index, but that 50 made negative contributions, which produced the month-over-month decline.

Before we get all nervous over that negative January reading for the CFNAI, periods of economic expansion have been associated with index values above -0.70, which means the economy continued to expand in January, just at a much slower pace compared to December. Should the CFNAI reading fall below -0.70 in February or another coming month, it would signal a contraction in the domestic economy.

In response, Buffett likely would say that he and the team will continue to manage the portfolio for the long term, and that’s very much in sync with our thematic investing time frame.

 

Watch those dividends… for increases and for cuts!

Ahead of Buffett’s shareholder letter, shares of Kraft Heinz (KHC) tumbled in a  pronounced manner following several announcements, one of which included the 35% cut in its quarterly dividend to $0.40 per share from $0.625 per share. That’s a huge disappointment given the commonplace expectation that a company is expected to pay its dividend in perpetuity. It can increase its dividend or from time to time declare a special dividend, but as we’ve seen time and time again, the cutting of a company’s dividend is a disaster its stock price. We’ve seen this when General Motors (GM) and General Electric (GE) cut their respective dividends and again last week when Kraft made a similar announcement.

Those three are rather high profile and well-owned stocks, but they aren’t the only ones that have cut quarterly dividend payments to their shareholders. In December, L Brands (LB), the company behind Victoria’s Secret and Bath & Body Works, clipped its annual dividend by 50% to $1.20 per share from $2.40 per share and its shares dropped from $35 to $24 before rebounding modestly. On the company’s fourth-quarter earnings conference call, management of Century Link (CTL)  disclosed it would be cutting the telecom service provider’s annual dividend from $2.16 to $1.00 per share. Earlier this month, postal meter and office equipment company Pitney Bowes (PBI) declared a quarterly dividend of $0.05 per share, more than 73% fall from the prior dividend of $0.1875 per share. Other dividend cuts in recent weeks were had at Owens & Minor (OMI), Manning & Napier (MN), Unique Fabricating (UFAB), County Bancorp (ICBK), and Fresh Del Monte (FDP).

What the majority of these dividend cuts have in common is a challenged business, and in some cases like that for Pitney Bowes, the management team and Board have opted to carve out a new path for its capital allocation policy. For Pitney, it means shifting the mix to favor its share buyback program over dividends given the additional $100 million authorization that was announced which upsized its program to $121 million.

As I see it, there are several lessons to be had from these dividends:

One, outsized dividend yields as was the case back in September with L Brands can signal an opportunity for dividend income-seeking investors, but it can also represent a warning sign as investors exit shares in businesses that look to have operating and/or cash flow pressures.

This means that Two, we as investors always need to do the homework to determine what the prospects for the company’s business. As we discussed above, Buffett’s latest shareholder letter reminds investors to be buyers of “ably-managed businesses, in whole or part, that possess favorable and durable economic characteristics” and to do so at sensible prices. Through our thematic lens, it’s no surprise that L Brands and Pitney Bowes are hitting the headwinds of our Digital Lifestyle investing theme, while Kraft Heinz is in the grips of the consumer shift to Cleaner Living. Perhaps Kraft should have focused on something other than cost cuts to grow its bottom line.

Third, investors make mistakes and as we saw with the plummet in the share price at Kraft Heinz, it can happen to Buffett as well. There’s no shame in making a mistake, so long as we can learn from it.

Fourth and perhaps most important, while some may look at the growing number of dividend cuts on a company by company basis, if we look at them in aggregate the pace is greater than the number of such cuts, we saw in all of 2018. While we try not to overly excited one way or another, the pace of dividend cuts is likely to spur questions over the economy and where we are in the business cycle.

 

Putting it all together

As we move into March, more than 90% of the S&P 500 group of companies will have reported their quarterly results. As those results have been increasingly tallied over the last few weeks, we’ve seen EPS expectations move lower for the coming quarters and as of Friday’ stock market close the consensus view is 2019 EPS growth for the S&P 500 will be around 4.7%. That is significantly lower than the more than 11% EPS growth that was forecasted back at the start of the December quarter.

For those keeping score, the consensus for the current quarter points to a 2% growth rate. However, we’re starting to see more analysts cut their outlooks as more figures are reported. For example, JPMorgan (JPM) now sees the current quarter clocking in at 1.5% due to slower business investment spending. For now, JP sees a pick-up in the June quarter to a 2.25% forecast. But in our view, this will hinge on what we see in the coming order data.

Putting it all together, we have a slowing economy, EPS cuts that are making the stock market incrementally more expensive as has moved higher over the last 9 weeks, marking one of the best runs it has had in more than 20 years, and a growing number of dividend cuts. Sounds like a disconnect in the making to me.

Clearly, the stock market has been melting up over the last several weeks on increasing hopes over a favorable trade deal with China, but as I’ve been saying for some time, measuring the success of any trade agreement will hinge on the details. Should it fail to live up to expectations, which is a distinct possibility, we could very well see a “buy the rumor, sell the news” situation arise in the stock market.

We will continue to tread carefully in the near-term, especially given the likelihood that following the disappointing December Retail Sales report and consumer-facing data, retailers are likely to deliver underwhelming quarterly results. Despite favorable weather in December, we saw that yesterday with Home Depot (HD),  and historically it’s been a pretty good yardstick for the consumer. In all likelihood as the remaining 10% of the S&P 500 companies report, we’re going to see further negative revisions to that current 4.7% EPS growth rate for this year I talked about.

 

Tematica Investing

A few paragraphs above, I touched on the strength of the stock market thus far in 2019, and even though concerns are mounting, we have seen pronounced moves higher in a number of the Thematic Leaders as you can see in the chart below. We’ll continue to monitor the changing landscapes and what they may bring. For example, in the coming weeks both Apple and Disney (DIS) are expected to unveil their respective streaming services, and I’ll be listening closely for to determine what this means for Digital Lifestyle leader Netflix (NFLX).

Nokia and Mobile World Congress 2019

We are two days into Mobile World Congress 2019, arguably THE mobile industry event of the year and one to watch for our Digital Lifestyle, Digital Infrastructure, and Disruptive Innovator themes. Thus far, we’ve received a number of different device and network announcements from the event.

On the device side, more 5G capable handsets have been announced as well as a number of foldable smartphones that appear to be a hybrid between a large format smartphone and a tablet. Those foldable smartphones are sporting some hefty price tags as evidenced by the $2,600 one for Huawei’s model. Interesting, but given the size of the device as well as the price point, one has to question if this is a commercially viable product or simply a concept one. Given the pushback that we are seeing with big-ticket smartphones that is resulting in consumers not upgrading their smartphones as quickly as they have in the past, odds are some of these device announcements fall more into the concept category.

On the network side, the news to center on comes from Verizon (VZ), which said it expects to have its 5G network in 30 U.S. cities by the end of 2019. That’s hardly what one would call a vibrant, national 5G network, and makes those commercial 5G launches really a 2020 event for the mobile carriers and consumers. It does mean that over the next several quarters, those mobile operators will continue to build out their 5G networks, which is positive for our shares of Nokia (NOK). As the 5G buildout moves beyond the U.S. into Europe and Asia, this tailwind bodes rather well for the company and helps back its longer-term targets. 

This 5G timetable was also confirmed by comments from Intel (INTC) about the timing of 5G chipsets, which are now expected to be available by the end of 2019 and are not likely to hit devices until 2020. Given the timing of CES in early January and the Mobile World Congress 2020 in February, odds are it means we will see a number of device announcements in early 2020 that will hit shelves in the second half of the year. Many have been wondering when Apple (AAPL) will have a 5G powered iPhone, and based on the various chipset and network comments, odds are the first time we’ll hear about such a device is September-October 2020. 

If history is to be repeated, we are likely to see something similar to what we saw with the first 3G and 4G handsets. By that, we mean a poor consumer experience at least until the 5G networks are truly national in scale and the chipsets become more efficient. One of the issues with each additional layer of mobile technology is it requires additional radio frequency (RF) chips, which in turn not only consume more power but also present internal design issues that out of the gate could limit the size of the battery. Generally speaking, early versions of these new smartphones tend to have less than desirable up-times. This is another reason to think Apple will not be one of those out of the gate 5G smartphone companies, but rather it will repeat its past strategy of bringing its product to market at the tipping point for the chipsets and network deployments. 

Circling back to our Nokia shares, while there are just over a handful of 5G smartphones that have been announced, some of which are expected to become available later this year, over the coming 18 months we will see a far greater number of 5G devices. This should drive Nokia’s high margin, IP licensing business in the coming quarters. As this occurs, Nokia’s mobile infrastructure should continue to benefit from the growing number of 5G networks being built out, not only here in the US but elsewhere as well.

  • Our long-term price target on Disruptive Innovator leader Nokia (NOK) shares remains $8.50

 

Universal Display shares get lit up

Last week I previewed the upcoming earnings report from Select List resident Universal Display (OLED) and following that news the shares were off with a bang! Universal posted earnings of $0.40 per share, $0.08 per share better than the consensus expectations, on revenue that matched the Wall Street consensus of $70 million. Considering the tone of the smartphone market, I view the company’s quarterly results as “not as bad a feared” and, no surprise, the guidance reflects the continued adoption of organic light-emitting displays across a growing number of devices and vendors. For the current year, Universal has guided revenue to $325 million-$350 million, which is likely to be a step function higher as we move through the coming quarters reflecting the traditional year-end debut of new smartphones, TVs and other devices.

Longer-term, we know Apple (AAPL) and others are looking to migrate more of their product portfolios to organic light-emitting diode displays. This shift will drive capacity increases in the coming several quarters — and recent reports on China’s next round of display investing seems to confirm this happening per its latest Five-Year Plan. As we have seen in the past, this can lead to periods of oversupply and pricing issues for the displays, but the longer-term path as witnessed with light-emitting diodes (LEDs) is one of greater adoption. 

As display pricing improves as capacity grows, new applications for the technology tend to arise. Remember that while we are focused on smartphones and TVs in the near-term, other applications include automotive lighting and general lighting. Again, just like we saw with LEDs.

  • We will continue to be long-term shareholders with Disruptive Innovator Select List resident Universal Display (OLED). Given the improving outlooks, our near-term price target for OLED shares is getting lifted to $150 from $125, and I will revisit that target as we move through the balance of 2019.

 

 

Weekly Issue: Favorable signposts have us adding a call option position

Weekly Issue: Favorable signposts have us adding a call option position

Key points inside this issue

  • We will continue to be long-term shareholders with Disruptive Innovator Select List resident Universal Display (OLED). Given the improving outlooks, our near-term price target for OLED shares is getting lifted to $150 from $125, and I will revisit that target as we move through the balance of 2019.
  • We are issuing a Buy on and adding the Nokia Corp. (NOK) December 2019 7.00 calls (NOK191220C0000700) that closed last night at 0.38 to the Options+ Select List with 0.20 stop loss.
  • We will continue to hold the Del Frisco’s Restaurant Group (DFRG) September 20, 2019, 10.00 calls (DFRG190920C00010000) that closed last night at 1.00, but we will boost our stop loss to 0.80, which will ensure a minimum return of 33% based on our 0.60 entry point.

 

Reading the latest from the Oracle of Omaha

Over the weekend, the Oracle of Omaha, Warren Buffett, released his annual letter to shareholders of Berkshire Hathaway (BRK.A). This letter has become a must-read among institutional and individual investors alike because it not only reveals changes in Berkshire’s top investment portfolio positions, but it also has contained ample comments on the economy and markets as well as an investing lesson or two.

Out of the gate, we learned that once again Team Buffett outperformed the major stock market indices in 2018. As Buffett got underway, he casually reminded readers to be buyers of “ably managed businesses, in whole or part, that possess favorable and durable economic characteristics” and to do so at sensible prices. While it may seem somewhat self-serving this sounds very much like our thematic investing strategy that looks to identify companies benefitting from structural economic, demographic, psychographic and technological changes at prices that offer commanding upside vs. potential downside.

In the past, Buffett has commented that stocks are akin to pieces of paper and it’s the businesses behind them that are the drivers of revenue and profits. It’s an idea we are very much in tune with as we view ourselves as buyers of thematically well-positioned business first, their shares second. No matter how attractive a stock’s price may be, if its business is troubled or facing thematic headwinds, it can be a tough pill to swallow.

As Buffett later noted, “On occasion, a ridiculously high purchase price for a given stock will cause a splendid business to become a poor investment — if not permanently, at least for a painfully long period.” I certainly agree with that statement because buying a stock at the wrong price can make for a painful experience. There are times, to be patient, but there are also times when the thesis behind owning a stock changes. In those times, it makes far more sense to cut bait in favor of better-positioned companies.

Buffett then shared that “prices are sky-high for businesses possessing decent long- term prospects,” which is something we’ve commented on several times in recent weeks as the stock market continued to melt up even as earnings expectations for the near term have moved lower. We’ll continue to take the advice of Buffett and focus on “calculating whether a portion of an attractive business is worth more than its market price,” for much like Buffett and his team work for Berkshire shareholders, Tematica and I work for you, our subscribers.

Mixed in among the rest of the letter are some on Buffett’s investing history, which is always an informative read, and a quick mention that “At Berkshire, we hope to invest significant sums across borders” and that it continues to “hope for an elephant-sized acquisition.” While I can’t speak to any acquisition, especially after the debacle that is now recognized as Kraft Heinz (KHC), the focus on investing across borders potentially speaks to our New Global Middle-class and Living the Life investing themes. Given Buffett’s style, I suspect Team Buffett is more likely to tap into the rising middle-class over luxury and travel.

Several times Buffett touched on his age, 88 years, as well as that of its key partner Charlie Munger, who is 95. There was no meaningful revelation on how they plan to transition the management team, but odds are that will be a topic of conversation, as will Kraft Heinz Co. (KHC) at the annual shareholder meeting that is scheduled for Saturday, May 4. More details on that can be found at the bottom of the 2018 shareholder letter.

If I had to describe the overall letter, it was a very solid one, but candidly not one of the more memorable ones. Perhaps that reflects 2018 as a whole, a year in which all major market indices fell into the red during the last quarter of the year, and a current environment that is characterized by slowing global growth.

 

More signs that the domestic economy is a-slowin’

In recent issues of Tematica Investing and in the recent Context & Perspectives pieces penned by Tematica’s Chief Macro Strategist Lenore Hawkins, we’ve shared how even though the U.S. economy looks like the best one on the global block, it is showing signs of slowing. We had further confirmation of that in the recent December Retail Sales Report as well as the January Industrial Production data that showed a drop in manufacturing activity. The December Durable Orders report that showed orders for non-defense capital goods excluding aircraft dropped 0.7% added further confirmation. Moreover, the report showed a downward November revision for the category to a fall of 1.0% vs. the prior 0.6% decline.

Much the way we focus on the order data inside the monthly ISM and IHS Markit PMI reports, the order data contained inside the monthly Durable Orders report gives us a sense of what is likely to come in near-term. These declining orders combined with the January declines in Industrial Production suggest slack is growing in the manufacturing economy, which means orders for new production equipment are likely to remain soft in the near-term. 

This past Monday we received another set of data that point to a slowing U.S. economy. We learned the Chicago Fed National Activity Index (CFNAI) fell to -0.43 in January from +0.05 in December. This index tracks 85 indicators; we’d note that in January, 35 of those indicators made positive contributions to the index, but that 50 made negative contributions, which produced the month-over-month decline.

Before we get all nervous over that negative January reading for the CFNAI, periods of economic expansion have been associated with index values above -0.70, which means the economy continued to expand in January, just at a much slower pace compared to December. Should the CFNAI reading fall below -0.70 in February or another coming month, it would signal a contraction in the domestic economy.

In response, Buffett likely would say that he and the team will continue to manage the portfolio for the long term, and that’s very much in sync with our thematic investing time frame.

 

Watch those dividends… for increases and for cuts!

Ahead of Buffett’s shareholder letter, shares of Kraft Heinz (KHC) tumbled in a  pronounced manner following several announcements, one of which included the 35% cut in its quarterly dividend to $0.40 per share from $0.625 per share. That’s a huge disappointment given the commonplace expectation that a company is expected to pay its dividend in perpetuity. It can increase its dividend or from time to time declare a special dividend, but as we’ve seen time and time again, the cutting of a company’s dividend is a disaster its stock price. We’ve seen this when General Motors (GM) and General Electric (GE) cut their respective dividends and again last week when Kraft made a similar announcement.

Those three are rather high profile and well-owned stocks, but they aren’t the only ones that have cut quarterly dividend payments to their shareholders. In December, L Brands (LB), the company behind Victoria’s Secret and Bath & Body Works, clipped its annual dividend by 50% to $1.20 per share from $2.40 per share and its shares dropped from $35 to $24 before rebounding modestly. On the company’s fourth-quarter earnings conference call, management of Century Link (CTL)  disclosed it would be cutting the telecom service provider’s annual dividend from $2.16 to $1.00 per share. Earlier this month, postal meter and office equipment company Pitney Bowes (PBI) declared a quarterly dividend of $0.05 per share, more than 73% fall from the prior dividend of $0.1875 per share. Other dividend cuts in recent weeks were had at Owens & Minor (OMI), Manning & Napier (MN), Unique Fabricating (UFAB), County Bancorp (ICBK), and Fresh Del Monte (FDP).

What the majority of these dividend cuts have in common is a challenged business, and in some cases like that for Pitney Bowes, the management team and Board have opted to carve out a new path for its capital allocation policy. For Pitney, it means shifting the mix to favor its share buyback program over dividends given the additional $100 million authorization that was announced which upsized its program to $121 million.

As I see it, there are several lessons to be had from these dividends:

One, outsized dividend yields as was the case back in September with L Brands can signal an opportunity for dividend income-seeking investors, but it can also represent a warning sign as investors exit shares in businesses that look to have operating and/or cash flow pressures.

This means that Two, we as investors always need to do the homework to determine what the prospects for the company’s business. As we discussed above, Buffett’s latest shareholder letter reminds investors to be buyers of “ably-managed businesses, in whole or part, that possess favorable and durable economic characteristics” and to do so at sensible prices. Through our thematic lens, it’s no surprise that L Brands and Pitney Bowes are hitting the headwinds of our Digital Lifestyle investing theme, while Kraft Heinz is in the grips of the consumer shift to Cleaner Living. Perhaps Kraft should have focused on something other than cost cuts to grow its bottom line.

Third, investors make mistakes and as we saw with the plummet in the share price at Kraft Heinz, it can happen to Buffett as well. There’s no shame in making a mistake, so long as we can learn from it.

Fourth and perhaps most important, while some may look at the growing number of dividend cuts on a company by company basis, if we look at them in aggregate the pace is greater than the number of such cuts, we saw in all of 2018. While we try not to overly excited one way or another, the pace of dividend cuts is likely to spur questions over the economy and where we are in the business cycle.

 

Putting it all together

As we move into March, more than 90% of the S&P 500 group of companies will have reported their quarterly results. As those results have been increasingly tallied over the last few weeks, we’ve seen EPS expectations move lower for the coming quarters and as of Friday’ stock market close the consensus view is 2019 EPS growth for the S&P 500 will be around 4.7%. That is significantly lower than the more than 11% EPS growth that was forecasted back at the start of the December quarter.

For those keeping score, the consensus for the current quarter points to a 2% growth rate. However, we’re starting to see more analysts cut their outlooks as more figures are reported. For example, JPMorgan (JPM) now sees the current quarter clocking in at 1.5% due to slower business investment spending. For now, JP sees a pick-up in the June quarter to a 2.25% forecast. But in our view, this will hinge on what we see in the coming order data.

Putting it all together, we have a slowing economy, EPS cuts that are making the stock market incrementally more expensive as has moved higher over the last 9 weeks, marking one of the best runs it has had in more than 20 years, and a growing number of dividend cuts. Sounds like a disconnect in the making to me.

Clearly, the stock market has been melting up over the last several weeks on increasing hopes over a favorable trade deal with China, but as I’ve been saying for some time, measuring the success of any trade agreement will hinge on the details. Should it fail to live up to expectations, which is a distinct possibility, we could very well see a “buy the rumor, sell the news” situation arise in the stock market.

We will continue to tread carefully in the near-term, especially given the likelihood that following the disappointing December Retail Sales report and consumer-facing data, retailers are likely to deliver underwhelming quarterly results. Despite favorable weather in December, we saw that yesterday with Home Depot (HD),  and historically it’s been a pretty good yardstick for the consumer. In all likelihood as the remaining 10% of the S&P 500 companies report, we’re going to see further negative revisions to that current 4.7% EPS growth rate for this year I talked about.

 

Tematica Investing

A few paragraphs above, I touched on the strength of the stock market thus far in 2019, and even though concerns are mounting, we have seen pronounced moves higher in a number of the Thematic Leaders as you can see in the chart below. We’ll continue to monitor the changing landscapes and what they may bring. For example, in the coming weeks both Apple and Disney (DIS) are expected to unveil their respective streaming services, and I’ll be listening closely for to determine what this means for Digital Lifestyle leader Netflix (NFLX).

Nokia and Mobile World Congress 2019

We are two days into Mobile World Congress 2019, arguably THE mobile industry event of the year and one to watch for our Digital Lifestyle, Digital Infrastructure, and Disruptive Innovator themes. Thus far, we’ve received a number of different device and network announcements from the event.

On the device side, more 5G capable handsets have been announced as well as a number of foldable smartphones that appear to be a hybrid between a large format smartphone and a tablet. Those foldable smartphones are sporting some hefty price tags as evidenced by the $2,600 one for Huawei’s model. Interesting, but given the size of the device as well as the price point, one has to question if this is a commercially viable product or simply a concept one. Given the pushback that we are seeing with big-ticket smartphones that is resulting in consumers not upgrading their smartphones as quickly as they have in the past, odds are some of these device announcements fall more into the concept category.

On the network side, the news to center on comes from Verizon (VZ), which said it expects to have its 5G network in 30 U.S. cities by the end of 2019. That’s hardly what one would call a vibrant, national 5G network, and makes those commercial 5G launches really a 2020 event for the mobile carriers and consumers. It does mean that over the next several quarters, those mobile operators will continue to build out their 5G networks, which is positive for our shares of Nokia (NOK). As the 5G buildout moves beyond the U.S. into Europe and Asia, this tailwind bodes rather well for the company and helps back its longer-term targets. 

This 5G timetable was also confirmed by comments from Intel (INTC) about the timing of 5G chipsets, which are now expected to be available by the end of 2019 and are not likely to hit devices until 2020. Given the timing of CES in early January and the Mobile World Congress 2020 in February, odds are it means we will see a number of device announcements in early 2020 that will hit shelves in the second half of the year. Many have been wondering when Apple (AAPL) will have a 5G powered iPhone, and based on the various chipset and network comments, odds are the first time we’ll hear about such a device is September-October 2020. 

If history is to be repeated, we are likely to see something similar to what we saw with the first 3G and 4G handsets. By that, we mean a poor consumer experience at least until the 5G networks are truly national in scale and the chipsets become more efficient. One of the issues with each additional layer of mobile technology is it requires additional radio frequency (RF) chips, which in turn not only consume more power but also present internal design issues that out of the gate could limit the size of the battery. Generally speaking, early versions of these new smartphones tend to have less than desirable up-times. This is another reason to think Apple will not be one of those out of the gate 5G smartphone companies, but rather it will repeat its past strategy of bringing its product to market at the tipping point for the chipsets and network deployments. 

Circling back to our Nokia shares, while there are just over a handful of 5G smartphones that have been announced, some of which are expected to become available later this year, over the coming 18 months we will see a far greater number of 5G devices. This should drive Nokia’s high margin, IP licensing business in the coming quarters. As this occurs, Nokia’s mobile infrastructure should continue to benefit from the growing number of 5G networks being built out, not only here in the US but elsewhere as well.

  • Our long-term price target on Disruptive Innovator leader Nokia (NOK) shares remains $8.50

 

Universal Display shares get lit up

Last week I previewed the upcoming earnings report from Select List resident Universal Display (OLED) and following that news the shares were off with a bang! Universal posted earnings of $0.40 per share, $0.08 per share better than the consensus expectations, on revenue that matched the Wall Street consensus of $70 million. Considering the tone of the smartphone market, I view the company’s quarterly results as “not as bad a feared” and, no surprise, the guidance reflects the continued adoption of organic light-emitting displays across a growing number of devices and vendors. For the current year, Universal has guided revenue to $325 million-$350 million, which is likely to be a step function higher as we move through the coming quarters reflecting the traditional year-end debut of new smartphones, TVs and other devices.

Longer-term, we know Apple (AAPL) and others are looking to migrate more of their product portfolios to organic light-emitting diode displays. This shift will drive capacity increases in the coming several quarters — and recent reports on China’s next round of display investing seems to confirm this happening per its latest Five-Year Plan. As we have seen in the past, this can lead to periods of oversupply and pricing issues for the displays, but the longer-term path as witnessed with light-emitting diodes (LEDs) is one of greater adoption. 

As display pricing improves as capacity grows, new applications for the technology tend to arise. Remember that while we are focused on smartphones and TVs in the near-term, other applications include automotive lighting and general lighting. Again, just like we saw with LEDs.

  • We will continue to be long-term shareholders with Disruptive Innovator Select List resident Universal Display (OLED). Given the improving outlooks, our near-term price target for OLED shares is getting lifted to $150 from $125, and I will revisit that target as we move through the balance of 2019.

 

Tematica Options+

It would have been wonderful to have been long Universal Display (OLED) calls, but again given what we’ve heard in recent weeks about the tone of the smartphone market, its results were far more “not as bad as feared” and I suspect in the short-term drove a fair amount of short covering. I still like the long-term prospects for the adoption of the technology, and it’s something to watch as adoption heats up.

By comparison, after months of what seemed like modest forward progress coming out of Mobile World Congress, the pace of 5G is about to get into gear from both a device and network perspective. As we move through 2019, that pace is poised to accelerate even further, which should bring favorable operating leverage to both businesses tucked inside Nokia.

For that reason, I am adding the Nokia Corp. (NOK) December 2019 7.00 calls (NOK191220C0000700) that closed last night at 0.38 to the Options+ Select List. The duration should capture that expected swell in 5G activity, and as we move through the coming months, I’ll consider a layered strategy that could include adding 2020 calls to the mix. Given the time span, we’ll set a wider stop loss berth than usual at 0.20.

 

 

WEEKLY ISSUE: Companies continue to serve up weaker guidance

WEEKLY ISSUE: Companies continue to serve up weaker guidance

Key points inside this issue

  • The outlook for earnings continues to wane even as the trade-related market melt-up continues.
  • Our price target on Amazon (AMZN) shares remains $2,250.
  • Our price target on Alphabet (GOOGL) shares remains$1,300.
  • Our price target on Costco Wholesale (COST) shares remains $250.
  • Our price target on Universal Display (OLED) shares remains $125.
  • Our price target on Nokia (NOK) shares remains $8.50

 

The outlook for earnings continues to wane even as the trade-related market melt-up continues

Domestic stocks continued to trend higher last week as the December-quarter issues that plagued them continued to be dialed back. Said another way, the expected concerns — the Fed, the economy, the government shutdown, geopolitical issues in the eurozone, and U.S.-China trade talks — haven’t been as bad as feared a few months ago.

In recent weeks, we have seen the Fed take a more dovish approach and last week’s data, which included benign inflation numbers and fresh concerns over the speed of the economy following the headline December Retail Sales Report and Friday’s manufacturing-led contraction in the January Industrial Production Index, reaffirm the central bank is likely to stand pat on interest rate hikes. We see both of those reports, however, feeding worries over increasing debt-laden consumers and a slowing U.S. economy. 

Granted, economic data from around the globe suggest the U.S. economy remains one of the more vibrant ones on a relative basis, which also helps explain both the melt-up in both the domestic stock market as well as the dollar. On Thursday we learned that economic growth in the eurozone was basically flat on a sequential basis in the December quarter, rising a meager 0.2%. Year-over-year growth stood at just 1.2% for the final quarter of 2018. This came after news that the eurozone economic powerhouse that is Germany had no growth itself in the fourth quarter after a contraction of 0.2% in the third quarter. Italy experienced its second consecutive quarter of economic contraction, putting it in a technical recession.

 

All of this put further downward pressure on the euro versus the U.S. dollar, which means dollar headwinds remain for multinational companies. And we still have another major headwind that is the lack of any Brexit deal. With three pro-EU Conservatives having resigned this morning from Prime Minister Theresa May’s party to join a new group in Parliament, there is no an even slimmer chance of Brexit deal being put in place ahead of next week.

So, what has been fueling the rebound in the stock market?

Among other factors, the deal to avoid another federal government shutdown, which was followed by the “national emergency” declaration that will potentially give President Trump access to roughly $8 billion to fund a border wall. We’ll see how this all plays out in the coming days, alongside the next step in U.S.-China trade talks that are being held this week in Washington. While “much work remains” on the working Memorandum of Understanding, trade discussions last week focused on several of the larger structural issues that we’ve been more concerned about — forced technology transfer, intellectual property rights, cyber theft, and currency.

Early this morning, it’s being reported that President Trump is softening on the March 1 phase in date for the next round of tariff increases, which is likely to give the market some additional trade optimism and see it move higher. We remain hopeful, but we expect there to be several additional steps to go that will set the stage for any final agreement that will likely be consummated at a meeting between Presidents Trump and Xi. And yes, the final details will matter and will determine if we get a “buy the rumor, sell the news” event.

Even as the trade war continues at least for now, we continue to see companies positioning themselves for the tailwinds associated with Living the Life and New Global Middle-class investing theme opportunities to be had in China. If you missed a recent Thematic Signal discussing how Hilton (HLT) is doing just that, you can find it here.

And then there are earnings

Over the last several weeks, we’ve been tracking and sharing the declining outlook for S&P 500 earnings for 2019. As we closed last week, roughly 80% of the S&P 500 companies had reported their quarterly earnings and issued outlooks. In aggregating the data, the new consensus calls for a 2.2% year-over-year decline in earnings for the current quarter, low single-digit earnings growth in the June and September quarters, and 9.1% growth in the December quarter. In full, the S&P 500 group of companies are now expected to grow their collective 2019 EPS by 5% to $169.53, which means that as those expectations have fallen over the last several months, the 2019 move in the market has made the stock market that much more expensive.

In my view, we are once again seeing a potentially optimistic perspective on earnings for the second half of the year. While a U.S.-China trade deal and infrastructure spending bill could very well lead to a better second half of 2019 from an earnings perspective, the unknown remains the vector and velocity of the rest of the global economy.  As discussed above, the US is looking like the best house on the economic block, but as I share below there are valid reasons to think that it too continues to slow.

 

Last week I touched on a Thematic Signal about the record level of auto loan delinquencies, and in the last few days, we’ve learned that student-loan delinquencies surged last year, hitting consecutive records of $166.3 billion in the September 2018 quarter and $166.4 billion in the December 2018 one. I’ve also noticed an uptick in credit-card delinquencies this past January as companies ranging from American Express (AXP) to JPMorgan (JPM) and other credit card issuers reported their monthly data. What I find really concerning is this record level of delinquencies is occurring even as the unemployment rate remains at multi-year lows, which suggests more consumers are seeing their disposable income pressured. While this isn’t a good sign for a consumer-led economy, it certainly confirms the tailwind associated with our Middle-class Squeeze investing theme.

 

Tematica Investing

 December Retail Sales shock some, confirm Costco and others

December Retail Sales have been published by the Commerce Department and to say the results were different than most were expecting is an understatement. And that’s even for those of us that were watching data of the kind I mentioned above.  Normally, holiday shopping tends to build as we close out the year, but according to the report, consumers pulled back in December as monthly retail sales fell 1.3% compared to November.

Yes, you read that right – they fell month over month, but as we know that is only one way to read the data. And while sequential comparisons are helpful, they do little to help us track year over year growth. From that perspective, retail sales in December 2018 rose 2.1% year over year with stronger gains registered at Clothing & Clothing Accessories Stores (+4.7%), Food Services & Drinking Places (+4.0%), Nonstore retailers (+3.7%) and Auto & other motor vehicles (+3.4%). That’s not to say there weren’t some sore spots in the report – there were, but there are also the ones that have been taking lumps for most of 2018. Sporting goods, hobby, musical instrument, & book stores fell 13% year over year in December, bringing the December quarter drop to 11% overall. Department Stores also took it on the chin in December as their retail sales fell 2.8% year over year. These declines are largely due to the accelerating shopping shift to digital from brick & mortar that are associated with our Digital Lifestyle investing theme.

Despite the headline weakness, I once again see the report as confirming for Thematic King Amazon (AMZN) and to a lesser extent Select List resident Alphabet (GOOGL) given its Google shopping engine. Not only is Amazon benefiting from the accelerating shift to digital commerce, but also from its own private label efforts, which span basic electronic accessories to furniture and apparel. It goes without saying that comparing the December Retail Sales report with Costco Wholesale’s (COST) monthly same-store sales reports shows Costco continues to win consumer wallet share.

 

As a reminder, Costco’s December same-store sales rose 7.5% in December (7.1% excluding gasoline prices and foreign exchange) and 6.6% in January (7.3%). And it remains on path opening new warehouse locations with 768 exiting January, up 3.0% year over year. That should continue to spur the company’s high margin membership fee income in the coming quarters. My suspicion is others are catching onto this given the 7% increase in COST shares thus far in 2019, the vast majority of which has come in the last week. We’ll continue to hold ‘em.

  • Our price target on Amazon (AMZN) shares remains $2,250.
  • Our price target on Alphabet (GOOGL) shares remains $1,300.
  • Our price target on Costco Wholesale (COST) shares remains $250.

 

Turning to this week’s data

This week’s shortened trading week brings several additional key pieces of economic data. And following the disappointing December Retail Sales report, these reports are bound to be closely scrutinized as the investment community looks to home in on the speed of the domestic economy. 

In addition to weekly mortgage applications, and oil and natural gas inventory data, tomorrow we’ll also get the December Durable Orders report and January Existing Home sales data. Given the drop-off in mortgage applications of late as well as weather issues, it’s hard to imagine a dramatic pick-up in the housing data since the end of 2018. Rounding out the economic data will be our first February look at the economy with the Philly Fed Index.

 Speaking of the Fed, today we’ll see the release of the Fed’s FOMC minutes from its January meeting. Considering the comments emanating from Fed heads lately as well as the lack of inflation in the January CPI and PPI data, there should be few surprises in terms of potential interest rate hikes in the near term. The looming question is the speed at which the Fed will normalize its balance sheet, which likely means that will be an area of focus as investors parse those minutes.

 

Here come Universal Display and Mobile World Congress 2019

As long as we’re looking at calendars, after Thursday’s market close Select List resident Universal Display (OLED) will report its quarterly results. To say the shares have found some legs in 2019 would be a bit of an understatement given their resurgence over the last several weeks.

 

We know Digital Lifestyle Select List company Apple (AAPL) has shared its plans to convert all of its iPhone models to organic light emitting diode displays by 2020, and that keeps us in the long-term game with OLED shares. Given the current tone of the smartphone market, however, we could see Universal Display serve up softer than expected guidance.

We’ll continue to hold OLED shares for the duration and look for signs that other device companies, including other smartphone vendors but other devices as well, are making the shift to organic light emitting diodes next week during Mobile World Congress 2019 (Feb. 25-28). The event is a premier one mobile industry as it tends to showcase new devices and technologies, and as you might imagine means a number of announcements. This means it’s not only one to watch for organic light emitting diode adoptions, but we are also likely to see much news on 5G virtual reality and augmented reality, key aspects of our Disruptive Innovators investing theme, as well. And with 5G in mind, we could very well hear of more 5G network launches as well, which means keeping my Nokia (NOK) and Digital Infrastructure ears open as well as my Digital Lifestyle ones.

  • Our price target on Universal Display (OLED) shares remains $125.
  • Our price target on Nokia (NOK) shares remains $8.50.

 

 

WEEKLY ISSUE: Reversing Course on Lending Club Calls

WEEKLY ISSUE: Reversing Course on Lending Club Calls

Key points inside this issue

The outlook for earnings continues to wane even as the trade-related market melt-up continues

Domestic stocks continued to trend higher last week as the December-quarter issues that plagued them continued to be dialed back. Said another way, the expected concerns — the Fed, the economy, the government shutdown, geopolitical issues in the eurozone, and U.S.-China trade talks — haven’t been as bad as feared a few months ago.

In recent weeks, we have seen the Fed take a more dovish approach and last week’s data, which included benign inflation numbers and fresh concerns over the speed of the economy following the headline December Retail Sales Report and Friday’s manufacturing-led contraction in the January Industrial Production Index, reaffirm the central bank is likely to stand pat on interest rate hikes. We see both of those reports, however, feeding worries over increasing debt-laden consumers and a slowing U.S. economy. 

Granted, economic data from around the globe suggest the U.S. economy remains one of the more vibrant ones on a relative basis, which also helps explain both the melt-up in both the domestic stock market as well as the dollar. On Thursday we learned that economic growth in the eurozone was basically flat on a sequential basis in the December quarter, rising a meager 0.2%. Year-over-year growth stood at just 1.2% for the final quarter of 2018. This came after news that the eurozone economic powerhouse that is Germany had no growth itself in the fourth quarter after a contraction of 0.2% in the third quarter. Italy experienced its second consecutive quarter of economic contraction, putting it in a technical recession.

 

All of this put further downward pressure on the euro versus the U.S. dollar, which means dollar headwinds remain for multinational companies. And we still have another major headwind that is the lack of any Brexit deal. With three pro-EU Conservatives having resigned this morning from Prime Minister Theresa May’s party to join a new group in Parliament, there is no an even slimmer chance of Brexit deal being put in place ahead of next week.

So, what has been fueling the rebound in the stock market?

Among other factors, the deal to avoid another federal government shutdown, which was followed by the “national emergency” declaration that will potentially give President Trump access to roughly $8 billion to fund a border wall. We’ll see how this all plays out in the coming days, alongside the next step in U.S.-China trade talks that are being held this week in Washington. While “much work remains” on the working Memorandum of Understanding, trade discussions last week focused on several of the larger structural issues that we’ve been more concerned about — forced technology transfer, intellectual property rights, cyber theft, and currency.

Early this morning, it’s being reported that President Trump is softening on the March 1 phase in date for the next round of tariff increases, which is likely to give the market some additional trade optimism and see it move higher. We remain hopeful, but we expect there to be several additional steps to go that will set the stage for any final agreement that will likely be consummated at a meeting between Presidents Trump and Xi. And yes, the final details will matter and will determine if we get a “buy the rumor, sell the news” event.

Even as the trade war continues at least for now, we continue to see companies positioning themselves for the tailwinds associated with Living the Life and New Global Middle-class investing theme opportunities to be had in China. If you missed a recent Thematic Signal discussing how Hilton (HLT) is doing just that, you can find it here.

And then there are earnings

Over the last several weeks, we’ve been tracking and sharing the declining outlook for S&P 500 earnings for 2019. As we closed last week, roughly 80% of the S&P 500 companies had reported their quarterly earnings and issued outlooks. In aggregating the data, the new consensus calls for a 2.2% year-over-year decline in earnings for the current quarter, low single-digit earnings growth in the June and September quarters, and 9.1% growth in the December quarter. In full, the S&P 500 group of companies are now expected to grow their collective 2019 EPS by 5% to $169.53, which means that as those expectations have fallen over the last several months, the 2019 move in the market has made the stock market that much more expensive.

In my view, we are once again seeing a potentially optimistic perspective on earnings for the second half of the year. While a U.S.-China trade deal and infrastructure spending bill could very well lead to a better second half of 2019 from an earnings perspective, the unknown remains the vector and velocity of the rest of the global economy.  As discussed above, the US is looking like the best house on the economic block, but as I share below there are valid reasons to think that it too continues to slow.

 

Last week I touched on a Thematic Signal about the record level of auto loan delinquencies, and in the last few days, we’ve learned that student-loan delinquencies surged last year, hitting consecutive records of $166.3 billion in the September 2018 quarter and $166.4 billion in the December 2018 one. I’ve also noticed an uptick in credit-card delinquencies this past January as companies ranging from American Express (AXP) to JPMorgan (JPM) and other credit card issuers reported their monthly data. What I find really concerning is this record level of delinquencies is occurring even as the unemployment rate remains at multi-year lows, which suggests more consumers are seeing their disposable income pressured. While this isn’t a good sign for a consumer-led economy, it certainly confirms the tailwind associated with our Middle-class Squeeze investing theme.

 

Tematica Investing

 December Retail Sales shock some, confirm Costco and others

December Retail Sales have been published by the Commerce Department and to say the results were different than most were expecting is an understatement. And that’s even for those of us that were watching data of the kind I mentioned above.  Normally, holiday shopping tends to build as we close out the year, but according to the report, consumers pulled back in December as monthly retail sales fell 1.3% compared to November.

Yes, you read that right – they fell month over month, but as we know that is only one way to read the data. And while sequential comparisons are helpful, they do little to help us track year over year growth. From that perspective, retail sales in December 2018 rose 2.1% year over year with stronger gains registered at Clothing & Clothing Accessories Stores (+4.7%), Food Services & Drinking Places (+4.0%), Nonstore retailers (+3.7%) and Auto & other motor vehicles (+3.4%). That’s not to say there weren’t some sore spots in the report – there were, but there are also the ones that have been taking lumps for most of 2018. Sporting goods, hobby, musical instrument, & book stores fell 13% year over year in December, bringing the December quarter drop to 11% overall. Department Stores also took it on the chin in December as their retail sales fell 2.8% year over year. These declines are largely due to the accelerating shopping shift to digital from brick & mortar that are associated with our Digital Lifestyle investing theme.

Despite the headline weakness, I once again see the report as confirming for Thematic King Amazon (AMZN) and to a lesser extent Select List resident Alphabet (GOOGL) given its Google shopping engine. Not only is Amazon benefiting from the accelerating shift to digital commerce, but also from its own private label efforts, which span basic electronic accessories to furniture and apparel. It goes without saying that comparing the December Retail Sales report with Costco Wholesale’s (COST) monthly same-store sales reports shows Costco continues to win consumer wallet share.

 

As a reminder, Costco’s December same-store sales rose 7.5% in December (7.1% excluding gasoline prices and foreign exchange) and 6.6% in January (7.3%). And it remains on path opening new warehouse locations with 768 exiting January, up 3.0% year over year. That should continue to spur the company’s high margin membership fee income in the coming quarters. My suspicion is others are catching onto this given the 7% increase in COST shares thus far in 2019, the vast majority of which has come in the last week. We’ll continue to hold ‘em.

  • Our price target on Amazon (AMZN) shares remains $2,250.
  • Our price target on Alphabet (GOOGL) shares remains $1,300.
  • Our price target on Costco Wholesale (COST) shares remains $250.

 

Turning to this week’s data

This week’s shortened trading week brings several additional key pieces of economic data. And following the disappointing December Retail Sales report, these reports are bound to be closely scrutinized as the investment community looks to home in on the speed of the domestic economy. 

In addition to weekly mortgage applications, and oil and natural gas inventory data, tomorrow we’ll also get the December Durable Orders report and January Existing Home sales data. Given the drop-off in mortgage applications of late as well as weather issues, it’s hard to imagine a dramatic pick-up in the housing data since the end of 2018. Rounding out the economic data will be our first February look at the economy with the Philly Fed Index.

 Speaking of the Fed, today we’ll see the release of the Fed’s FOMC minutes from its January meeting. Considering the comments emanating from Fed heads lately as well as the lack of inflation in the January CPI and PPI data, there should be few surprises in terms of potential interest rate hikes in the near term. The looming question is the speed at which the Fed will normalize its balance sheet, which likely means that will be an area of focus as investors parse those minutes.

 

Here come Universal Display and Mobile World Congress 2019

As long as we’re looking at calendars, after Thursday’s market close Select List resident Universal Display (OLED) will report its quarterly results. To say the shares have found some legs in 2019 would be a bit of an understatement given their resurgence over the last several weeks.

 

We know Digital Lifestyle Select List company Apple (AAPL) has shared its plans to convert all of its iPhone models to organic light emitting diode displays by 2020, and that keeps us in the long-term game with OLED shares. Given the current tone of the smartphone market, however, we could see Universal Display serve up softer than expected guidance.

We’ll continue to hold OLED shares for the duration and look for signs that other device companies, including other smartphone vendors but other devices as well, are making the shift to organic light emitting diodes next week during Mobile World Congress 2019 (Feb. 25-28). The event is a premier one mobile industry as it tends to showcase new devices and technologies, and as you might imagine means a number of announcements. This means it’s not only one to watch for organic light emitting diode adoptions, but we are also likely to see much news on 5G virtual reality and augmented reality, key aspects of our Disruptive Innovators investing theme, as well. And with 5G in mind, we could very well hear of more 5G network launches as well, which means keeping my Nokia (NOK) and Digital Infrastructure ears open as well as my Digital Lifestyle ones.

  • Our price target on Universal Display (OLED) shares remains $125.
  • Our price target on Nokia (NOK) shares remains $8.50.

 

Tematica Options+

Last week we added a Middle-class Squeeze position with Lending Club (LC) March 2019 4.00 calls (LC190315C0000400)to the Select List, and despite the move higher in recent days ahead of the company’s earnings report last night, the calls were little changed. While LendingClub reported a 35% increase in personal loan applications in 2018 to more than 14 million with double-digit growth in both loan volumes and revenue it served up softer than expected December quarter results and guided the first half of 2019 below expectations. It continues to expect positive earnings in 2019, but that’s not expected to happen now until the second half of the year.

Given the March strike data associated with the LendingClub calls, combined with last night’s developments, odds are the shares will not rebound in such time as to make it worth holding onto them. As such, we will look to limit our losses on the trade, shedding them today at market.

 

Del Frisco’s to report on March 12

Turning to the Del Frisco’s Restaurant Group (DFRG) September 20, 2019, 10.00 calls (DFRG190920C00010000)that closed last night at 1.00, up more than 65% from our 0.60 entry point two weeks ago, the company has announced it will report its December quarter results on March 12. Because the company pre-announced it results in early January, the quarterly results won’t be much of a surprise. In my opinion, the company has stretched out its reporting timetable in order to evaluate potential bids. We know the company has beefed up its Board of late with an eye to maximizing a would be takeout transaction, and with ample private equity and corporate cash on the sidelines, odds are rather good that Del Frisco’s won’t be a stand-alone public company by this time next year.

 

New touch-integrated OLED screens could make 2019 iPhones thinner, lighter and cheaper

New touch-integrated OLED screens could make 2019 iPhones thinner, lighter and cheaper

We’ve long said that pain points tend to give way to solutions and that is potentially proving out in the smartphone market that has been grappling with the transition to organic light emitting diode displays, which has popped smartphone average selling prices. Given price-demand concerns for new iPhones and other smartphone models utilizing OLED displays, we’re hearing about another innovation being developed that should reduce the cost burden as well as enable thinner and lighter models in the coming quarters. Disrupting the disruptor as it were.

For Apple, this could be a very welcome solution that jumpstarts its iPhone business either ahead of or in tandem with the debut of 5G iPhone models. The question we’re pondering is how Apple, Samsung, and others will balance ASPs for smartphones using this potentially cheaper solution vs. margins on those devices?

 

A supply-chain report says that Apple will be using a new form of screen technology to make at least one of its 2019 iPhone models thinner and lighter — a trend Apple has bucked with recent flagship versions.

The report says that Apple has decided to use touch-integrated flexible OLED panels, which have a different construction to current iPhone screens …

Current screens use a separate touch-sensitive layer sitting on top of the display itself. By integrating touch-sensitivity into the OLED screen, it will allow devices to be somewhat thinner and lighter.

The report claims that the technology should be ready for use next year, but says that initial supplies will be constrained, suggesting that the new screens might be used only in next year’s highest-end model. However, as the tech is expected to be cheaper than a separate touch-sensitive layer, it is likely to be rolled out into all models as capacity increases in future years.

Source: Apple reported to use new touch-integrated OLED screens to make 2019 iPhone thinner and lighter – 9to5Mac

Weekly Issue: Market Turbulence Is Good News for Our Protective Position

Weekly Issue: Market Turbulence Is Good News for Our Protective Position

Key points from this issue:

 

A few weeks ago, given the growing list of concerns that emerged during September, I added the ProShares Short S&P500 (SH) November 2018 28.00 (SH181116C00028000) calls to the Tematica Options+ Select List at 0.22. Over the last several days, those concerns — from a slowing US economy to the impact of rising Treasury yields, growing signs of inflation and more pain at the gas pump to what looks to even more escalation in tariffs between the US and China — came home to roost, leading to one of the more painful weeks in the stock market this year.

The biggest pressure was felt on growth stocks, particularly those with high valuations, but toward the end of yesterday’s 3.1%-4.1% drop in the major US stock market indices, few were left untouched. That move combined with the ones of prior days led to our being stopped out of the Universal Display (OLED) January 2019 130.00 calls (OLED190118C00130000) as well as the Amazon (AMZN) Feb 2019 2000.00 (AMZN190215C02000000) calls. The good news, if we can call it that, is our stop losses set at 7.00 for the OLED calls and 100.00 for the AMZN ones limited our losses to 20%-25%  compared to what they could have been if left unchecked as of last night’s market close.

That downward pressure in the market popped our ProShares S&P 500 (SH) calls, leaving them to close at 0.90 – up more than 300% from our 0.22 entry point. That is a heckuva move, but given my concern to be had with the upcoming earnings season we are going to do the following:

As we profit from these current tumultuous times, we will sit on the sidelines at both Tematica Investing and here at Tematica Options+ and wait as the ripple effect of the above concerns reverberates through growth expectations for the S&P 500 group of companies. The glass half full view is this will give us the opportunity to buy and trade quality companies at better prices. As Oscar Wilde said, “To do nothing at all is the most difficult thing in the world, the most difficult and the most intellectual.”

Weekly Issue: Adding Two Calls Ahead of the Holiday Season

Weekly Issue: Adding Two Calls Ahead of the Holiday Season

Key points in this issue

 

The NRF issues its 2018 holiday spend forecast,
and we add 2 new call positions

Yesterday, the National Retail Federation published its 2018 holiday retail sales forecast, which covers the November and December time frame and excludes automobiles, gasoline, and restaurants sales. On that basis, the NRF expects an increase between 4.3%-$4.8% over 2017 for a total of $717.45- $720.89 billion. I’d note that while the NRF tried to put a sunny outlook on that forecast by saying it compares to “an average annual increase of 3.9% over the past five years” what it did not say is its 2018 forecast calls for slower growth compared to last year’s holiday shopping increase of 5.3%.

That could be some conservatism on their part or it could reflect their concerns over gas prices and other aspects of inflation as well as higher interest costs vs. a year ago that could sap consumer buying power this holiday season. Last October the NRF expected 2017 holiday sales to grow 3.6%-4.0% year over year, well short of the 5.3% gain that was recorded so it is possible they are once again underestimating the extent to which consumers will open their wallets this holiday season. While I am bullish, we can’t rule out there are consumer-facing headwinds on the rise, and that is likely to accelerate the shift to digital shopping this holiday season, especially as more retailers prime the digital sales pump.

On its own Amazon would be a natural beneficiary of the seasonal pick up in shopping, but as I’ve shared before it has been not so quietly growing its private label businesses and staking out its place in the fashion and apparel industry. These moves as well as Amazon’s ability to competitively price product, plus the myriad way it makes money off its listed products and the companies behind them, mean we are entering into what should be a very profitable time of year for Amazon and its shareholders.

We already own the shares in Tematica Investing, but for some extra oomph here at Options+ I’m adding the Amazon (AMZN) Feb 2019 2000.00 (AMZN190215C02000000) calls that closed last night at 146.30. That strike price will capture the company’s December 2018 quarter earnings report as well as the post-holiday shopping that tends to happen each and every year.

As we move through the soon to be upon us September quarter earnings season, I’ll be assessing and collecting other retail outlooks for this holiday shopping season. Given the timing for this option position, I’m going to set a wider than usual stop loss at 100.00, and as the calls move higher, I’ll look to tighten it up.

 

I’ve long said that United Parcel Service (UPS) shares are a natural beneficiary of the shift to digital shopping. With a seasonal pickup once again expected that has more companies offering digital shopping and more consumers shopping that way, odds are package volumes will once again outpace overall holiday shopping growth year over year. From a financial perspective, that means a disproportionate share of revenue and earnings are to be had at UPS, and from an investor’s perspective, that means multiple expansion is likely to be had. Therefore, as we add those Amazon calls to our holdings, we will also do the same with UPS as follows:

 

As warnings flares are had, we’re sticking with our S&P 500 inverse calls

This week we received some favorable September economic news in the form of the ADP Employment Report as well as the ISM Services Index with both crushing expectations. Despite these reports, has barely budged this week, which suggests to me investors are expecting a sloppy September quarter earnings season for the market. No doubt there will be some bright spots, but in aggregate we are seeing a number of headwinds compared to this time last year that could weigh on corporate outlooks.

Already we’ve had a number of companies issuing softer than expected outlooks due to rising input costs, trade and tariffs, the slower speed of the economy compared to the June quarter, and concerns over higher gas prices and the impact on consumers. A great example of that was had yesterday when shares of lighting and building management company Acuity Brands (AYI) fell more than 13% after it reported fiscal fourth-quarter profit that beat expectations, but margins fell amid a sharp rise in input costs. The company said costs were “well higher” for items such as electronic components, freight, wages, and certain commodity-related items, such as steel, due to “several economic factors, including previously announced and enacted tariffs and wage inflation due to the tight labor market…”

Acuity is not the first company to report this and odds are it will not be the last one as September quarter earnings begins to heat up next week. As the velocity of reports picks up, we could be in for a bumpy ride as investors reset their growth and profit expectations for the December quarter and 2019. Therefore, we will continue to hold over inverse S&P 500 calls, which thus far are little changed from where we added them last week.

 

Checking in on our Universal Display calls

Over the last few weeks, we’ve seen a growing reception for Apple’s (AAPL) new iPhone models, both of which utilize the organic light emitting diode display technology that is made possible by Universal Display’s chemical and intellectual property business. We’ve also started to see adoption outside of Apple with other smartphone companies and in other markets as well (TVs, automotive lighting), which confirms to me adoption rates are on the upswing. This bodes very well for Universal’s business in the second half of 2018 and beyond as well as our January 2019 calls.

The next known catalyst for OLED shares and these calls is November 1, when Apple will report its September quarter results. I’ll be on the lookout for additional signs of OLED adoption between now and then, but for now let’s stick with our OLED calls.

 

 

Weekly Issue: ADDING SOME DOWNSIDE PROTECTION

Weekly Issue: ADDING SOME DOWNSIDE PROTECTION

Key points from this issue:

 

Adding some downside protection 

In yesterday’s weekly issue of Tematica Investing, I shared a number of data points and surveys that raise several flags that could wind up being headwinds as get ready to enter the September quarter earnings season. Despite the usually behind the curve Federal Reserve bumping up its 2018 GDP forecast to 3.1% from the prior 2.8% yesterday following its September FOMC policy meeting, the situation I am seeing in the hard economic data points to growing inflation in the systems and rising trade concerns as the next phase of President Trump’s tariffs and China’s response take hold. From a company’s perspective, this points to rising input costs and a tinge of uncertainty that could lead to conservative guidance relative to expectations.

As we saw, EPS expectations for the back half of 2018 have already started to inch lower. Moreover, recent EPS beats from the likes of Jabil (JBL), KBHome (KBH), Nike (NKE) and others, have led to the respective shares selling off. We’d expect to see that when we get a disappointing report like the one this week from Bed, Bath & Beyond (BBBY), but when EPS beats are following by a pullback one way or another it tells us stocks are close to being priced to perfection. Not surprising given the strong run-up in the stock market this year, last year and in 2016 that has the S&P 500 up 42% since the end of 2015.

In my view, this means we should add some downside protection to our two active call option positions that are Altria (MO) January 2019 65.00 (MO190118C00065000) calls and the Universal Display (OLED) January 2019 130.00 (OLED190118C00130000) calls. In examining the timetable for September quarter earnings, I’m opting to use November dated calls for the calls for the inverse ETF of the S&P 500 that is the ProShares Short S&P 500 (SH) shares. We’ll stick with out of the money calls and that means a strike price at 28.00.

Putting it together means adding the on ProShares Short S&P500 (SH) November 2018 28.00 (SH181116C00028000) calls that closed last night at 0.22 to our holdings. As we add this protective position, we’ll also want to limit potential downside and in this case, it means setting a protective stop loss at 0.14.

  • We are issuing a Buy on ProShares Short S&P500 (SH) November 2018 28.00 (SH181116C00028000) calls that closed last night at 0.22. With this addition, we will set a protective stop loss at 0.14

 

Checking in on our Altria and Universal Display calls

As I stated above, I continue to have a Buy rating on both the Altria (MO) January 2019 65.00 (MO190118C00065000) and the Universal Display (OLED) January 2019 130.00 calls (OLED190118C00130000)calls. We’re coming up on the $0.80 per share dividend payment from Altria, it’s first at that level and if history holds that should be a positive catalyst for the underlying MO shares.

For our Universal Display calls, survey data points to solid uptake rates for Apple’s new iPhone XS and XSMax as well as the iPhone X, with the larger format XSMax being the best of the bunch. This means that half of Apple’s iPhone portfolio will have organic light emitting diode displays, up from just one model until very recently.

In just under two weeks, on Oct. 9, Alphabet/Google (GOOGL) will unveil its latest Pixel 3 smartphone, which is also expected to have that technology. In addition to smartphone models, the ZTE Axon 9 Pro, and Sony Xperia XZ23 will soon hit the market joining recent ones from Huawei, Samsung, Asus and Xiaomi — and they all will have some form of OLED display.

We are also seeing more introductions of the technology into the TV market, with products from LG, Sony, Toshiba and Philips either having already launched in some markets or poised to be launched in the coming months.

The bottom line is we are starting to see the uptake in OLED technology that was talked about earlier this year and that’s very positive for our Universal Display position, and sets the company up for what is likely to be a very positive September-quarter earnings report and favorable December quarter guidance.

WEEKLY ISSUE: Confirming Data Points for Apple and Universal Display

WEEKLY ISSUE: Confirming Data Points for Apple and Universal Display

Key points inside this issue:

  • The Business Roundtable and recent data suggest trade worries are growing.
  • Our price target on Costco Wholesale (COST) shares remains $250.
  • Our price target on Apple (AAPL) and Universal Display (OLED) shares remain $225 and $150, respectively.
  • Changes afoot at S&P, but they still lag our thematic investing approach

 

While investors and the stock market have largely shaken off concerns of a trade war thus far, this week the stakes moved higher. The U.S. initiated the second leg of its tariffs on China, slapping on $200 billion of tariffs on Chinese imports of food ingredients, auto parts, art, chemicals, paper products, apparel, refrigerators, air conditioners, toys, furniture, handbags, and electronics.

China responded, not only by canceling expected trade talks, but by also implementing tariffs of its own to the tune of $60 billion on U.S. exports to China. Those tariffs include medium-sized aircraft, metals, tires, golf clubs, crude oil and liquified natural gas (LNG). Factoring in those latest steps, there are tariffs on nearly half of all U.S. imports from China and over 50% of U.S. export to China.

Should President Trump take the next stated step and put tariffs on an additional $267 billion of products, it would basically cover all U.S. imports from China. In terms of timing, let’s remember that we have the U.S. mid-term elections coming up before too long — and one risk we see here at Tematica is China holding off trade talks until after those elections.

On Monday, the latest Business Roundtable survey found that two-thirds of chief executives believed recent tariffs and future trade tension would have a negative impact on their capital investment decisions over the next six months. Roughly one-third expected no impact on their business, while only 2% forecast a positive effect.

That news echoed the recent September Flash U.S. PMI reading from IHS Markit, which included the following commentary:

“The escalation of trade wars, and the accompanying rise in prices, contributed to a darkening of the outlook, with business expectations for the year ahead dropping sharply during the month. While business activity may rebound after the storms, the drop in optimism suggests the longer term outlook has deteriorated, at least in the sense that growth may have peaked.”

Also found in the IHS Markit report:

“Manufacturers widely noted that trade tariffs had led to higher prices for metals and encouraged the forward purchasing of materials… Future expectations meanwhile fell to the lowest so far in 2018, and the second-lowest in over two years, as optimism deteriorated in both the manufacturing and service sectors.”

As if those growing worries weren’t enough, there has been a continued rise in oil prices as OPEC ruled out any immediate increase in production, the latest round of political intrigue inside the Washington Beltway, the growing spending struggle for the coming Italian government budget and Brexit.

Any of these on their own could lead to a reversal in the CNN Money Fear & Greed Index, which has been hanging out in “Greed” territory for the better part of the last month. Taken together, though, it could lead companies to be conservative in terms of guidance in the soon-to-arrive September quarter earnings season, despite the benefits of tax reform on their businesses and on consumer wallets. In other words, these mounting headwinds could weigh on stocks and lead investors to question growth expectations for the fourth quarter.

What’s more, even though S&P 500 EPS expectations still call for 22% EPS growth in 2018 vs. 2017, we’ve started to see some downward revisions in projections for the September and December quarters, which have softened 2018 EPS estimates to $162.01, down from $162.60 several weeks ago. Not a huge drop, but when looking at the current stock market valuation of 18x expected 2018 EPS, remember those expectations hinge on the S&P 500 group of companies growing their EPS more than 21% year over year in the second half of 2018.

 

Any and all of the above factors could weigh on corporate guidance or just rattle investor’s nerves and likely means a bumpy ride over the ensuing weeks as trade and political headlines heat up. As it stands right now, according to data tabulated from FactSet, heading into September quarter earnings, 74 of 98 companies in the S&P 500 that issued guidance, issued negative guidance marking the highest percentage (76%) since 1Q 2016 and compares to the five year average of 71%.

Not alarmingly high, but still higher than the norm, which means I’ll be paying even closer than usual attention to what is said over the coming weeks ahead of the “official” start to September quarter earnings that is Alcoa’s (AA) results on Oct. 17 and what it means for both the Thematic Leaders and the other positions on the Select List.

 

Today is Fed Day

This afternoon the Fed’s FOMC will break from its September meeting, and it is widely expected to boost interest rates. No surprise there, but given what we’ve seen on the trade front and in hard economic data of late, my attention will be on what is said during the post-meeting press conference and what’s contained in the Fed’s updated economic forecast. The big risk I see in the coming months on the Fed front is should the escalating tariff situation lead to a pick-up in inflation, the Fed could feel it is behind the interest rate hike curve leading to not only a more hawkish tone but a quicker pace of rate hikes than is currently expected.

We here at Tematica have talked quite a bit over consumer debt levels and the recent climb in both oil and gas prices is likely putting some extra squeeze on consumers, especially those that fall into our Middle-Class Squeeze investing theme. Any pick up in Fed rate hikes means higher interest costs for consumers, taking a bigger bite out of disposable income, which means a step up in their effort to stretch spending dollars. Despite its recent sell-off, I continue to see Costco Wholesale (COST) as extremely well positioned to grab more share of those cash-strapped wallets, particularly as it continues to open new warehouse locations.

  • Our price target on Costco Wholesale (COST) shares remains $250.

 

Favorable Apple and Universal Display News

Outside of those positions, we’d note some favorable news for our Apple (AAPL) shares in the last 24 hours. First, the iPhone XS Max OLED display has reclaimed the “Best Smartphone Display” crown for Apple, which in our view augurs well for other smartphone vendors adopting the technology. This is also a good thing for our Universal Display (OLED) shares as organic light emitting diode displays are present in two-thirds of the new iPhone offerings. In addition to Apple and other smartphone vendors adopting the technology, we are also seeing more TV models adoption it as well. We are also starting to see ultra high-end cars include the technology, which means we are at the beginning of a long adoption road into the automotive lighting market. We see this confirming Universal’s view that demand for the technology and its chemicals bottomed during the June quarter. As a reminder, that view includes 2018 revenue guidance of $280 million-$310 million vs. the $99.7 million recorded in the first half of the year.

Second, Apple has partnered with Salesforce (CRM) as part of the latest step in Apple’s move to leverage the iPhone and iPad in the enterprise market. Other partners for this strategy include IBM (IBM), Cisco Systems (CSCO), Accenture (ACN) CDW Corp. (CDW) and Deloitte. I see this as Apple continuing to chip away at the enterprise market, one that it historically has had limited exposure.

  • Our price target on Apple (AAPL) and Universal Display (OLED) shares remain $225 and $150, respectively.

 

Changes afoot at S&P, but they still lag our thematic investing approach

Before we close out this week’s issue, I wanted to address something big that is happening in markets that I suspect most individuals have not focused on. This week, S&P will roll out the largest revision to its Global Industry Classification Standard (GICS) since 1999. Before we dismiss it as yet another piece of Wall Street lingo, it’s important to know that GICS is widely used by portfolio managers and investors to classify companies across 11 sectors. With the inclusion of a new category – Communication Services – it means big changes that can alter an investor’s holdings in a mutual fund or ETF that tracks one of several indices. That shifting of trillions of dollars makes it a pretty big deal on a number of fronts, but it also confirms the shortcomings associated with sector-based investing that we here at Tematica have been calling out for quite some time.

The new GICS category, Communications Services, will replace the Telecom Sector category and include companies that are seen as providing platforms for communication. It will also include companies in the Consumer Discretionary Sector that have been classified in the Media and Internet & Direct Marketing Retail subindustries and some companies from the Information Technology sector. According to S&P, 16 Consumer Discretionary stocks (22% of the sector) will be reclassified as Communications Services as will 7 Information Technology stocks (20% of that sector) as will AT&T (T), Verizon (VZ) and CenturyLink (CTL). Other companies that are folded in include Apple (AAPL), Google (GOOGL), Disney (DIS), Twitter (TWTR), Snap (SNAP), Netflix (NFLX), Comcast (CMCSA), and DISH Network (DISH) among others.

After these maneuverings are complete, it’s estimated Communication services will be the largest category in the S&P 500 at around 10% of the index leaving weightings for the other 11 sectors in a very different place compared to their history. In other words, some 50 companies are moving into this category and out of others. That will have meaningful implications for mutual funds and ETFs that track these various index components and could lead to some extra volatility as investors and management companies make their adjustments. For example, the Technology Select Sector SPDR ETF (XLK), which tracks the S&P Technology Select Sector Index, contained 10 companies among its 74 holdings that are being rechristened as part of Communications Services. It so happens that XLK is one of the two largest sector funds by assets under management – the other one is the Consumer Discretionary Select Sector SPDR Fund (XLY), which had exposure to 16 companies that are moving into Communications Services.

So what are these moves really trying to accomplish?

The simple answer is they taking an out-of-date classification system of 11 sectors – and are attempting to make them more relevant to changes and developments that have occurred over the last 20 years. For example:

  • Was Apple a smartphone company 20 years ago? No.
  • Did Netflix exist 20 years ago? No.
  • Did Amazon have Amazon Prime Video let alone Amazon Prime 20 year ago? No.
  • Was Facebook around back then? Nope. Should it have been in Consumer Discretionary, to begin with alongside McDonald’s (MCD) and Ralph Lauren (RL)? Certainly not.
  • Did Verizon even consider owning Yahoo or AOL in 1999? Probably not.

 

What we’ve seen with these companies and others has been a morphing of their business models as the various economic, technological, psychographic, demographic and other landscapes around them have changed. It’s what they should be doing, and is the basis for our thematic investment approach — the strong companies will adapt to these evolving tailwinds, while others will sadly fall by the wayside.

These changes, however, expose the shortcomings of sector-based investing. Simply viewing the market through a sector lens fails to capture the real world tailwinds and catalysts that are driving structural changes inside industries, forcing companies to adapt. That’s far better captured in thematic investing, which focuses on those changing landscapes and the tailwinds as well as headwinds that arise and are driving not just sales but operating profit inside of companies.

For example, under the new schema, Microsoft (MSFT) will be in the Communications Services category, but the vast majority of its sales and profits are derived from Office. While Disney owns ESPN and is embarking on its own streaming services, both are far from generating the lion’s share of sales and profits. This likely means their movement into Communications Services is cosmetic in nature and could be premature. This echoes recent concern over the recent changes in the S&P 500 and S&P 100 indices, which have been criticized as S&P trying to make them more relevant than actually reflecting their stated investment strategy. For the S&P 500 that is being a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value.

As much as we could find fault with the changes, we can’t help it if those institutions, at their core, stick to their outdated thinking. As I have said before about other companies, change is difficult and takes time. And to be fair, for what they do, S&P is good at it, which is why we use them to calculate the NJCU New Jersey 50 Index as part of my work New Jersey City University.

Is this reclassification to update GICS and corresponding indices a step in the right direction?

It is, but it is more like a half step or even a quarter step. There is far more work to be done to make GICS as relevant as it needs to be, not just in today’s world, but the one we are moving into. For that, I’ll continue to stick with our thematic lens-based approach.

 

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.