Category Archives: Tematica Options+

Dear Subscribers:


For the past several years, you placed your trust in me to help you navigate the waters of options trading. We’ve done this through several different services, most recently the Tematica Options+ service and we’ve had some tremendous success at times — and of course, some not so successful periods as well.


Given the recent turbulence in the market, navigating the options trading landscape has become a challenge. As I wrote in last week’s issue, we’re dealing with a market that can turn against us with a single tweet or news headline, despite the underlying fundamentals. It’s for this reason that I’ve come to the decision to hand the Tematica Options+ reigns off to someone that is a dedicated full-time options trader that can utilize all the tools of the trade. That someone is Bob Lang of Explosive Options.


By now, you should have received an email from Bob about your new membership at Explosive Options. Click here to view the email online. We’re going to keep the Tematica Options+ content up on our site for a few more days and you’ll continue to have full access until then.


Thank you again for all your support. I can’t think of a better person to take the options reigns for you than Bob!



Chris Versace

Weekly Issue: A market that could turn on a tweet, makes for difficult options trading environment

Weekly Issue: A market that could turn on a tweet, makes for difficult options trading environment

Key points in this issue

  • Trade uncertainties continue to boil stoking concerns that have yet to be fully reflected in 2019 earnings expectations and economic projections. 
  • As trade uncertainties and their repercussions grip the stock market, we’ll continue to heed the signs and signals that power our thematic investing lens that has led to a favorable performance with the Thematic Leaders thus far in 2019.
  • An uncertain stock market that could turn on a tweet or a headline, makes for difficult options trading environment, which is why we’re sitting on the sidelines near-term. 

Trade uncertainties continue to rise…

Last week, U.S. trade tensions expanded past China and potentially the eurozone to include Mexico. Meanwhile, retailer earnings continued to be disappointing and reported economic data reinforced the prevailing narrative of a slowing global economy. On Friday, China’s manufacturing data for May not only registered in contraction territory but came in weaker than expected, adding to those global growth concerns, while President Trump’s surprise Mexican import tariffs applied yet another of layer uncertainty for investors and the stock market to grapple with. For the week in full, all the major stock market indices declined, erasing any gains they had on a quarter-to-date basis coming into the shortened trading week.

Over the weekend, China’s retaliatory tariffs kicked in on the $60 billion target list of imported U.S. goods. Ahead of that, on Friday China threatened to unveil an unprecedented hit-list of “unreliable” foreign firms, groups and individuals that harm the interests of Chinese companies. In addition to those tariffs, over the weekend, China released a white paper saying global trade problems were started by the United States, and the United States “has been unreliable during talks.” This is looking more and more like that playground drama and finger pointing that I was worried about. 

The  culmination of that plus potential tariffs on Mexico, the removal of India from special trade status and potential trade issues with the eurozone has companies from Walmart (WMT) and Middle-Class Squeeze Thematic Leader Costco Wholesale (COST) to Clean Living Thematic Leader Chipotle Mexican Grill (CMG) talking about potentially higher costs. And yes, this is at a time when the latest economic data points to a slowing global and US economy. As we exit May, the Atlanta Fed Now survey pegs current quarter GDP at 1.2%, while the New York Fed Nowcast is calling for 1.5%. Both forecasts are well below the most recent 3.1% revision for March quarter GDP. 

The week  ahead will bring several pieces of May data that we will assess to determine the velocity tied to that slowing vector. These include the usual monthly PMI reports for China, Japan, the eurozone and the U.S., as well as the May ISM Reports for manufacturing and nonmanufacturing, and several looks at May job creation. Also this week, we’ll get the April consumer credit report data, and I expect to look through this carefully given our Middle-Class Squeeze investing theme and my growing concern over the consumer’s ability to spend. If there is data inside that report which points to climbing consumer debt, it would likely mean an intensifying headwind for the domestic economy. 

… and have yet to be reflected in earnings expectations

Last week, we noted that as the velocity of earnings slows, it will be replaced by a flurry of investor conferences. As this happens, we will be parsing company comments at these events to determine what, if anything, has changed since they reported their March-quarter results. This goes for the current quarter as well as the back half of the year. 

We’ve already seen current quarter EPS estimates for the S&P 500 group of companies fall over the last several weeks but expectations for the second half of the year are still looking for 11% growth compared to the first half. In my view, these mounting trade and economic concerns have yet to play out on second half expectations, which means they will likely come into greater focus in the coming weeks. The likely narrative to be had will be tariff related cost increases that will not only pressure margins and earnings but also stoke inflation as well. Should that come about, it will be a very different story than the one the stock market has been used to and as we know, a change in the expected story is not met with sunshine and candy. 

Barring any forward progress on the trade front, given the outlook and increasing uncertainty there is far greater risk in my opinion to the downside for those expectations. And while some may hold out hopes for a trade deal at the G-20 meeting later this month, both J.P. Morgan and Morgan Stanley say it’s looking likely that there will not be a deal at the G-20 summit in Japan this month. 

The bottom line is this – we are likely in for a bumpy stock market ride in the coming weeks with the day to day movement reflecting the latest trade and tariff comments. 

Tematica Investing

Given the current and likely near-term environment, we will continue to follow the signs and signals that power our thematic investing lens. While the market uncertainty has brought some short-term lumps for AMN Healthcare (AMN), comments continue to point to the 5G buildout and network deployment to be had. That along with the pressure being placed on Chinese telecom company Huawei should keep us bullish on Digital Infrastructure leader Dycom Industries (DY) as well as Disruptive Innovator leader Nokia Corp. (NOK). 

The last two weeks have been a tough time for retailer stocks given for the most part falling same-store comparisons. In the face of that, which is due in part to the ongoing shift to digital shopping that is helping power Thematic King Amazon (AMZN), I continue to favor Middle-Class Squeeze leader Costco Wholesale (COST)  given its membership business model that continues to grow as the company expands its warehouse footprint. 

Later today, Apple (AAPL) will hold the keynote address at its 2019 World Wide Developer Conference. Historically this event has previewed a number of new products, both hardware and software, that will be coming from Apple late this year. At a minimum, we expect updates on all of the company’s operating systems, and perhaps further clues on soon to be rolled out services such as AppleTV+. With the latter in mind, I’ll be watching is shared with an eye for Digital Lifestyle leader Netflix (NFLX). 

Tematica Options+

Last week we added a put position in The Gap, and the company’s dismal quarterly earnings report popped that trade nicely. At the same time, our Del Frisco’s call option trade that was predicated on intensifying takeout chatter was stopped out as the stock market fell apart late last week. Here’s the thing, both of those positions were held for only a few days each before being stopped out with gain in the Gap puts offsetting the declines in the Del Frisco calls. 

To me the wide swings in the market and increasing uncertainty epitomizes the challenges of trading options in the near-term. While it may not be a popular decision, this week we’re going to stick with one of Warren Buffet’s key investing rules – “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1” and stay on the sidelines.

Could we put on a new call or put trade, sure we could but we run the risk of the market pivoting on the latest tweet or trade headline that could lead to the demise of that position in relatively short order. Let’s preserve capital and live to trade another day, when the outlook is devoid of as many potential landmines that we have today. 

Weekly Issue: Gap’s Upcoming Dividend Crunch

Weekly Issue: Gap’s Upcoming Dividend Crunch

UPDATE AS OF 12:00 ET, May 29, 2019:

Dear subscribers,

Many thanks to a faithful subscriber that pointed out an incorrect options link for our Gap (GPS) put trade this morning. We recently switched back to Yahoo! Finance as a reference point for those trades, but in the bid to get a timely trade out I did not verify the link and it was for the incorrect month rather than September. 

As such, I am amending the trade:

We are issuing a Buy on The Gap September 2019 (GPS) 20.00 puts (190920P00020000-GPS-PUT) that are currently trading at 1.66 and setting a stop loss at 2.50

In the above trade, you’ll notice that I’ve switched back to Nasdaq for trade link purposes. 

Again, my apologies, but I still see the Gap’s dividend as very vulnerable in the coming months. 

Chris V. 

Key points inside this issue

  • Given the favorable upside to downside risk in AT&T (T) shares, the defensive mobile business and enviable dividend, we are adding T shares to the Select List with a $40 price target as part of our Digital Lifestyle investing theme. 
  • We are adding The Gap September 2019 (GPS) 20.00 puts (190920P00020000-GPS-PUT)that closed last night at 0.91 to the Options+ Select List and setting a stop order at 1.40.

For the stock market, uncertainty remains the name of the game

The stock market looked poised to rebound Friday following President Trump’s prediction of a swift end to the trade war with China. However, the rally faded as investors and traders braced for potential weekend uncertainty on the trade front.

The fade in the stock market capped off a week in which all the major indices closed lower for the fifth consecutive time, pushing their quarter-to-date returns into the red. That has continued in this week as trade tensions escalated further complete with US Secretary of State Mike Pompeo saying the U.S. “may or may not” get a trade deal with China. As we all know, if there is one thing the stock market does not like it’s uncertainty and currently, we have that in spades. 

In addition to increasing trade concerns, which included fallout on technology suppliers from the Huawei ban, the latest round of economic data still points to a slowing global economy. Last week, the U.S. economy saw a slump on April core capital goods orders and continued declines in the May IHS Markit Flash U.S. PMI, with soft orders for the month. In response, the New York Fed’s Nowcasting forecast for the current quarter fell to 1.4% on Friday from 1.8% on the prior one, very near the 1.3% forecast by the Atlanta Fed’s GDPNow. We saw similar month-over-month declines in the April IHS Markit Flash Eurozone PMI and Nikkei Flash Japan Manufacturing PMI, which further points to a slowing global economy.

The bottom line: As we exited last week and entered this one, we have an uncertain outlook on the U.S.-China trade front as the global economy continues to slow.

This likely means the market will teeter totter on the latest trade talk comments in the near term. But, as we’ve seen in recent weeks, it will take real progress to convince us and other investors those negotiations are moving forward.

With the earnings season wrapping up, it also means we will soon be entering investor conference season, during which companies will share developments in their respective industries and businesses. Given the factors addressed above, we could very well see them revise their near-term forecasts to the downside. Should that come to pass it more than likely means the recent market declines will be added to. 

From my perspective, it means examining and adding companies that sit at the intersection of our 10 investing themes and have defensive business models, preferably with a domestic focused business. It just so happens I have one in mind…

Tematica Investing

Ringing up AT&T shares to the Select List

As trade tensions have heated up and we continue to get more economic data pointing to a slowing domestic economy, we are adding to our position in AT&T given its sticky mobile service that is essentially a digital utility in today’s world, the enviable dividend near 6.3%, and prospects for investors to revisit how they value the shares once the company launches its own streaming platform, WarnerMedia. 

Digging into each of these reasons a bit further, in today’s world in which people have an unquenchable thirst for mobile content be it streaming music, video, podcasts; messaging and emailing; shopping or paying bills, smartphones and other connected devices are increasingly “must-haves” in today’s connected world. Plain and simple, AT&T’s mobile business is a Digital Lifestyle access point for consumers. 

In my view that not only makes for a sticky business model in today’s connected world, but an inelastic one as well. This means which means there is a high probability those subscribers will pay those bills to keep themselves connected. This makes AT&T and other major mobile network companies rather defensive in today’s environment. 

With AT&T, the dividend yield, which is far higher than the 4.0% at Verizon (VZ:NYSE) infers modest downside but also implies upside to be had as the company continues to reassure investors it is right sizing its balance sheet with ample cash flow to remain a company that has been steadily inching up its quarterly dividend for more than 20 years. Recently AT&T sold its 10% stake in Hulu for $1.43 billion to Disney (DIS) and management has commented it has several other “asset monetization alternatives” underway. 

The opportunity we see with AT&T shares in the coming months is a valuation transformation similar to the one we recently saw with Select List resident Walt Disney (DIS) that boosted its share price to $130-$135 from $110-$115. Similar to Disney and Disney+, AT&T is slated to launch its own streaming service later this year that will leverage the Time Warner library. Unlike Disney, AT&T exited March with a mobile subscriber base that tallied 79.7 million in size, which offers a target-rich platform for service bundling. As we saw with the final episode for Game of Thrones, which had a reported 19.3 million viewers, people will flock to content they want to watch. Odds are AT&T will offer standalone subscriptions to WarnerMedia rather than an AT&T mobile service bundle only, if only to address how it will AT&T monetize WarnerMedia outside of markets it offers mobile service. 

To us that makes AT&T shares a near-term safe harbor stock that is on the cusp of changing how investors value it. That valuation transformation is likely to unlock the share value associated with the synergies to be had with the AT&T-Time Warner merger. And we haven’t even touched on its  advertising and analytics business, Xandr, that also stands to benefit from the WarnerMedia launch. More on that as we better understand the relationship to be had between the two business units. 

Over the 2011-2018 period, AT&T shares traded in a dividend yield range from a low of 4.9% to a high of 6.1% vs. the current 6.3%. Again, this suggests limited downside from the current share price provided the company continues to make its quarterly dividend payments to shareholders, something the management team has committed to. That historical range established potential peak and trough price levels for AT&Ts’ shares between $34-$42 based on its expected 2019 dividend payment of $2.05 per share. 

  • Given the favorable upside to downside risk in AT&T (T) shares, the defensive mobile business and enviable dividend, we are adding T shares to the Select List with a $40 price target as part of our Digital Lifestyle investing theme. 

Tematica Options+

The Gap: Another retailer staring down a dividend cut

In the year-ago quarter, roughly 30 companies slashed their dividends, nearly half of which were in the oil and gas sector, including several Master Limited Partnerships and companies that paid monthly distributions to shareholders. Dividend cuts continued in the back half of 2018, and already this year we’ve seen several high profile dividend cuts, including those at Owens & Minor (OMI), which slashed its quarterly dividend to 0.25 cents from 7.5 cents, and Manning & Napier (MN) that took a hatchet to its quarterly dividend, cutting it to $0.02 per share, down from $0.08 per share. Alongside these cuts, both companies announced other initiatives to bolster the existing business with the cuts conserving cash flow to offer “financial flexibility.” Other notable dividend cuts so far in 2019 include those at Tupperware (TUP), CenturyLink (CTL) and Pitney Bowes (PBI).

Dividend cuts are never an easy pill for investors to swallow as it signals something is amiss with the business given it can no longer support what is expected to be an ongoing distribution to shareholders. It also tends to drive a meaningful fall in the company’s share price. 

Sometimes it can be a structural change that is battering an industry, or it can reflect a management team’s inability to either recognize the changing landscape or ineffectively responding. Generally speaking, there are three reasons why a company cuts its dividend – a pronounced downturn in the industry, balance sheet leverage with L Brands being a great example of this last year, and a change in a company’s capital allocation policy. That last one was the “reason” cited by Owens in Minor last year as it “right-sized” its dividend as it “transforms” its business. To me, this calls into question why such a dramatic change was needed at Owens & Minor, and odds are it meant the management team really missed the ball. 

Last week’s retail earnings showcased a number of retailer misses given what can only be described as a reminder for the challenging brick & mortar retailer environment associated with our Digital Lifestyle and Middle-Class Squeeze investing themes. I touch on this in this week’s podcast. Recently apparel and accessories company Guess (GES) cut its quarterly dividend in half from $0.225 to $0.1125 and floated $300 million in senior notes via a private placement of which $170 million is targeted for Guess’s share repurchase program. Not exactly a sound strategy in my opinion given the challenges its business continues to face. 

Odds are there will be other retailers that announce dividend cuts in the coming quarters, but one that is more likely to do so in the near-term is Gap (GPS). Not only is the business model challenged on several fronts between our Digital Lifestyle and Middle-Class Squeeze investing themes, but it has also made the strategic decision to split off its Old Navy business.

Here’s the thing – Old Navy generated 47% of Gap’s 2018 revenue and Gap has been paying a quarterly dividend of $0.2425 for the last several quarters. How does it expect to continue doing that when it gets rid of nearly half of its revenue stream? To me, this strongly suggests that Gap will be revisiting its quarterly dividend payment to the downside.  

Gap will report its quarterly earnings after Thursday’s (May 30th) market close, and the company may or may not address the dividend hot potato, but it will have to in the coming months. For that reason, we are adding The Gap September 2019 (GPS) 20.00 puts (190920P00020000-GPS-PUT)that closed last night at 0.91. We’ll keep a tight leash on this given the market volatility with a stop order at set at 1.40.

Weekly Issue: Adding an M&A Driven Position

Weekly Issue: Adding an M&A Driven Position

Key points inside this issue

  • US-China trade takes the center stage… as expected
  • What Trump’s restrictions on Huawei mean for our thematic positions
  • Our price target on Apple (AAPL) shares remains $225 
  • Our price target on Universal Display (OLED) of $150 remains under review
  • Our price target on Alphabet/Google (GOOGL) shares remains $1,300
  • Our price target on Nokia Corp. (NOK) shares remains $8.50
  • We are issuing a Buy on the Del Frisco’s Restaurant Group (DFRG) September 2019 7.50 calls (DFRG190621C00007500) that closed last night at 0.50. As we add this M&A driven trade to our holdings, we’ll set a stop loss at 0.25 and seek to raise that level as the shares and the calls climb further. 

US-China trade takes the center stage… as expected

As expected, the market last week and again this week is primarily driven by trade and geopolitical headlines first, and economic data second, followed by corporate earnings. Those headlines include not just the mounting trade war between the U.S. and China, but also U.S.-Iran tensions. We also now have the realization that after six weeks of talks we are no closer to a Brexit deal, with Prime Minister Theresa May set to depart during the first week of June. 

Still, there was some trade relief as early on Friday President Trump said he would delay for six months tariffs on imports of cars and car parts from Europe and Japan.

While the market enjoyed some relief on that news, as we prepared for the weekend the focus was back on U.S.-China trade battle following comments from China that until the U.S., in its view, is sincere about negotiations, “it is meaningless for its officials to come to China and have trade talks.”  Candidly, we here at Tematica find this fascinating given the news behind last weekend’s tariff move by President Trump, who stated it was in response to China, not the U.S., walking back trade progress. 

The net effect led the market to see US-China trade talks as stalling, stoking the flames uncertainty in the process. While this could devolve into a game of “no, you first” commonly seen on schoolyard playgrounds, I will continue to watch for signs of progress ahead of the Group of Twenty economic meeting in Japan next month, where President Xi and Donald Trump are expected to meet. As a reminder, those two heads of state met in Argentina during December and were able to put trade negotiations back on track. 

Hopefully, that will be the case again. If not, it means the investment community will have to factor the impact of the recent tariff hike and pending ones on growth expectations for the economy and corporate earnings. Barring signs of reprieve, the likely revision will be downward, and we’ve already seen plenty of that of late when it comes to June quarter earnings expectations for the S&P 500. 

We’ve also seen GDP expectations for the June quarter come down hard vs. the 3.2% print for the March quarter. As I discussed before, one of the key drivers of that upside surprise was inventory growth. The thing is given the faster slowing pace denoted in the economy, odds are those inventories won’t be depleted in the near-term. 

Following the disappointing April retail sales report and April industrial production numbers, the Atlanta Fed cut its GDPNow forecast for the current quarter to 1.2% from 1.6% 10 days ago. As it digested the data, the New York Fed’s NowCast reading for the quarter sank to 1.8%, from its 2.2% reading last week. However, with these revised GDP forecasts, it’s important to remember the reported economic data has yet to include the impact of President Trump’s upsized trade tariffs, or the China tariff response slated to begin June 1.

The net effect of the week, which we would characterize as a teeter totter of uncertainty, saw the major market indices trade off, adding to their move lower over the last month. That continued into the weekend as tensions with Iran rose further.

The question that will be coming to the forefront very soon

As we move into the second half of the current quarter, the Dow is down modestly quarter to date, the small-cap heavy Russell 2000 is essentially flat, while the S&P 500 and Nasdaq Composite Index are up modestly.

With 90% of the S&P 500 having reported March-quarter earnings, it’s looking like aggregate earnings for the 500 companies will wind up essentially flat year over year. That’s better than expected several weeks ago, but not as strong as the start of the earnings season suggested.

One question that will likely arise as we move further into the second half of the quarter will center on the confidence level of the consensus view for June-quarter earnings for the S&P 500 companies. Currently, those earnings are expected to grow 5% sequentially, but decline 1% year over year. 

Again, as more economic data, the balance of corporate earnings, and tariffs, are factored into the forecast equation, we’re likely to see further movement in those expectations. 

For 2019 in full, the S&P 500 is now slated to grow EPS by 4.1% — well below forecasted levels as we approached the end of 2018 — and at current levels, that has the S&P 500 trading at 17x 2019 earnings based on last Friday’s market close.

What to do now?

Given the confluence of uncertainty and the risk of downward economic and earnings growth expectations, we are likely to see the market trade sideways over the next few weeks. We’ve got our market hedging ProShares S&P 500 (SH) position in place at Tematica Investing, and we’ll continue to stick with the companies on the Thematic Leaderboard. Given the pullback in the market, as I cast about for new contenders for us, I’ll be on the hunt for defensively positioned companies that are growing their earnings faster than the S&P 500 and are also trading at a discount relative to the market multiple. Not exactly shooting fish in the barrel, but as I said, we’re on the hunt.

Tematica Investing

What Trump’s restrictions on Huawei mean for our thematic positions

Yesterday, we saw the fallout of the Trump administration’s restriction on Huawei as companies like Alphabet (GOOGL), Qualcomm (QCOM), Intel (INTC), Xilinx (XLNX) and others sever ties with the Chinese telecommunications and smartphone company. While this could be a tactic by President Trump to bring China back to the trade negotiating table, the restrictions are poised to deal a blow to companies that supply key technologies from software in the case of Google Android to chips to Huawei. Some estimates suggest Huawei, one the world’s biggest providers of telecom equipment, purchases some $20 billion of semiconductors each year.

From our perspective here at Tematica Investing, this blow to Huawei is a positive for our Nokia (NOK) and Apple (AAPL) shares, but a modest negative one for Universal Display (OLED) and to a lesser extent Alphabet shares. Recently Huawei passed Apple as the second largest smartphone vendor by market share, and these developments could crimp Huawei’s ability to supply not just smartphones, but also its ability to produce 5G capable ones without Qualcomm chipsets. We know the president has talked about 5G being a key competitive technology issue, and it comes as little surprise that he would flex this to get China back to the negotiating table.

 With Universal Display, Huawei was an expected adopter of organic light emitting diode displays and given its market size in the smartphone market any disruption could dial back expectations for that adoption. That said, Apple’s ability to regain smartphone market share could soften that blow. Longer-term we continue to see smartphone vendors adopting organic light emitting diode displays due to their superior color and image quality and more favorable battery consumption, something that will be a key factor as initial 5G handsets come to market. In recent weeks, we’ve signaled we would look to add to our OLED position at favorable prices and that has us watching the shares very closely in the near-term.

With regard to Alphabet/Google, I don’t see a major revenue impact primarily because Search & Advertising is such a large component of the company’s revenue and profit stream. In the March quarter, Google’s advertising revenue accounted for 85% of the quarter’s revenue, pretty much intact with the March 2018 quarter. 

Perhaps the biggest beneficiary is Disruptive Innovator Thematic Leader Nokia Corp. The shares got some lift yesterday in response to the dilemma that Huawei will be in as key chip suppliers restrict their sales.  While we’ll have to see how these restrictions play out in terms of duration, I’ve been sharing the rising tide of concern over reported backdoor access in Huawei’s equipment. This clearly kicks it to the next level and puts a major crimp in Huawei’s ability to service existing network infrastructure wins as well as those for 5G. Could we see some existing 5G contracts get put back out to bid? Certainly possible, and that is a potential opportunity for Nokia.

  • Our price target on Apple (AAPL) shares remains $225 
  • Our price target on Universal Display (OLED) of $150 remains under review
  • Our price target on Alphabet/Google (GOOGL) shares remains $1,300
  • Our price target on Nokia Corp. (NOK) shares remains $8.50

Tematica Options+

A few weeks back we jettisoned our shares of Guilty Pleasure steakhouse company Del Frisco’s Restaurant Group (DFRG), throwing in the towel given concerns over an elongated strategic review process. After we did this, the shares slumped further, however, they sharply rebounded this week on the news that at least three suitors — including Darden (DRI) — are seen as likely bidders for Del Frisco’s Restaurant Group (DFRG) according to reports from The Deal. 

According to the report, final bids value Del Frisco’s at around $9 a share and Darden is seeking to buy the whole business. Ruth’s Hospitality (RUTH), which owns Ruth’s Chris Steak House, as well as Landry’s, the owner of Morton’s Steakhouse, are interested in Del Frisco’s steakhouses.

While I’m not inclined to add a potential takeout candidate back to the Thematic Leaders, I will add the following call option position to Tematica Options+:

Weekly Issue: Looking to Avoid the Dead Cat Bounce

Weekly Issue: Looking to Avoid the Dead Cat Bounce

Key points inside this issue

  • As trade concerns escalate, investors brace for an expectations reset.
  • Safety & Security Thematic Leader is up big year to date, and new body camera and digital records products hitting later this year should accelerate the company’s transition. Our long-term price target on AAXN shares remains $90.
  • The April Retail Sales Report should offer confirmation for Thematic King Amazon (AMZN) as well as Middle-class Squeeze Thematic Leader Costco Wholesale (COST). 
  • Given the wide swings in the market over the last few days and the risk of a dead cat bounce, we are once again remaining on the sidelines when it comes to a new option recommendation. 

Given the wide swings in the market over the last few days that are tied back to the changing US-China trade talk landscape, I thought it prudent to share my latest thoughts even if it’s a day earlier than usual. 

As trade concerns escalate, investors brace for an expectations reset

As we discussed in the last issue of Tematica Investing, we knew that coming into last week, it was going to be a challenging one. Trade tensions kicked up to levels few were expecting 10 days ago and as the week progressed the tension and uncertainty crept even higher. We all know the stock market is no fan of uncertainty, but when paired with upsized tariffs from both the US and China that will present new economic and earnings headwinds, something that was not foreseen just a few weeks ago, investors will once again have to revisit their expectations for the economy and earnings. And yes, odds are those past and even more recent expectations will be revisited to the downside. 

What was originally thought to have been President Trump looking to squeeze some last- minute trade deal points out of the Chinese instead turned out to be more of a response to China’s attempt to do the same. This revealed the tenuous state of U.S./China trade talks. Last Friday morning, the U.S. had boosted tariffs to 25% from 10% on $200 billion worth of Chinese goods with President Trump tweeting there is “absolutely no need to rush” and that “China should not renegotiate deals with the U.S. at the last minute.” Even as the new tariffs and tweets arrived, trade negotiations continued Friday in Washington with no trade deal put in place, which dashed the hopes of some traders. Candidly, I didn’t expect a trade deal to emerge given what had transpired over the prior week. 

That hope-inspired rebound late Friday in the domestic stock market returned to renewed market pressure over the weekend and into this week as more questions over U.S.-China trade have emerged. As we started off this week, the trade angst between the U.S. and China has edged higher as China has responded to last week’s U.S. tariff bump by saying it would increase tariffs on $60 billion of U.S. goods to 25% from 10% beginning June 1st. Clearly, the latest round of tweets from President Trump won’t ease investor concern as to how the trade talks will move forward from here.

As the trade war rhetoric kicks up alongside tariffs, the next date to watch will be the G-20 economic summit in Japan next month. According to Trump economic adviser Larry Kudlow, there is a “strong possibility” Trump will meet Chinese President Xi and this morning President Trump confirmed that. 

The cherry or cherries on top of all of this is the growing worries over increasing tension with Iran, which is weighing on the market this morning, and yet another 2019 growth forecast cut by the EU that came complete with a fresh warning on Italy’s debt levels. Growth projections by the European Commission showed a mere 0.1% for GDP growth this year in Italy. The country has the second-largest debt pile in the EU and, according to the latest forecasts by the commission, the Italian debt-to-GDP ratio will hit 133% this year and rise to 135% in 2020. I point these out not to worry or spook you, but rather remind you there are other issues than just US-China trade that have to be factored into our thinking.

The natural market reaction to all of these concerns is to adopt a “risk off” attitude, which, as we’ve seen before, can ignite a storm of “fire first, ask questions later.” And as should be no surprise, that has fueled the sharp move lower in the major market indices. Over the last several days, the S&P 500, which as we know if the barometer used by most institutional and professional investors, fell 4.7% while the small-cap heavy Russell 2000 dropped 5.7%.

At times like this, it pays to do nothing. Hard to believe but as you’ve often heard few will step in to catch a falling knife and given the sharp declines, we also run the risk of a dead cat bounce in the market. We should be patient until the market finds its footing, which means parsing what comes next on the economic and earnings as well as trade front.  

I’ll continue to look for replacements for open Thematic Leader slots as well as other contenders poised to benefit from our pronounced thematic tailwinds. In the near-term, that will mean focusing on ones that also have a more U.S.-focused business model, a focus on inelastic and consumable products. Another avenue that investors are likely to revisit is dividend-paying companies, particularly those that fall into the Dividend Aristocrats category because they’ve consistently grown their dividends for the past 10 years. As I sift through the would-be contenders, I’ll be sure to look for those that intersect our investing themes and the aristocrats. 

Tematica Investing

As the stock market has come under pressure, a number of our Thematic Leaders, as well as companies on the Select List, have given back some of their year-to-date gains. One that has rallied and moved higher in spite of the market sell-off is Safety & Security Thematic Leader Axon Enterprises (AAXN) and are up some 48% year to date. That makes it the second-best performer on the Thematic Leaderboard year to date behind Clean Living company Chipotle Mexican Grill (CMG) that is up nearly 60% even after the market’s recent bout of indigestion.

Axon reported its March quarter earnings last week, which saw revenue grow 14% year over year as Axon continues to shift its business mix from Taser hardware to its Software & Sensor business that fall under the Axon Body and Axon Records businesses. During the company’s earnings conference call, the management team shared its next gen products will be available during the back half of the year. These include the Axon Body, its first camera with LTE live streaming, will launch during the September quarter and Axon Records, its first stand-alone software product. Records w will launch with a major city police department and it is already testing with a second major police department. As far as the new Axon Body product, I suspect the untethering of this camera could spur adoption much the way Apple’s (AAPL) Apple Watch saw a pronounced pick up when it added cellular connectivity to its third model. 

These new products, which leverage the intersection between our Digital Infrastructure investing theme and our Safety & Security one, should accelerate the transition to a higher margin, recurring revenue business in the coming quarters. In other words, Axon’s transformation is poised to continue and as that happens investors will be revisiting how they value the company’s business. More than likely that means further upside ahead for AAXN shares. 

  • Our price target on Safety & Security Thematic Leader Axon Enterprises (AAXN) remains $90.

Here comes the April Retail Sales Report

Later this week, we’ll get the April Retail Sales Report, which should benefit for the late Easter holiday this year. Up until the March report, this data stream was disappointing during December through February but even so from a thematic perspective the reports continued to reinforce our Digital Lifestyle and Middle-class Squeeze investing themes. 

When we look at the April data, I’ll be looking at both the sequential and year over year comparisons for Nonstore retailers, the government category for digital shopping and the category that best captures Thematic King Amazon (AMZN). I’ll also be looking at the general merchandise stores category with regard to Middle-Class Squeeze Thematic Leader Costco Wholesale (COST). Costco has already shared its April same-store sales, which rose 7.7% in the US despite having one less shopping day during the month compared to last year. Excluding the impact of gas prices and foreign exchange, Costco’s April sales were up 5.6% year over year. From my perspective, the is the latest data point that shows Costco continues to take consumer wallet share. 

With reported disposable income data inside the monthly Personal Income & Spending reports essentially flat for the last few months and Costco continuing to open new warehouse locations, which should spur its high margin membership revenue, I continue to see further upside ahead in COST shares. And yes, the same applies to Amazon shares as well.

  • Our $250 price target for Middle-class Squeeze Thematic Leader Costco Wholesale (COST) is under review.

Tematica Options+

For the last two weeks, we’ve sat on the sidelines in terms of a new call option position. Given the sharp move lower in that time –roughly 4.5% for the S&P 500 and more than 5.7% for the small-cap heavy Russell 2000, which included last Friday’s sharp reversal before giving it all back and earlier this week – it has been a volatile time for trading options. 

Coming after the market’s sharp move lower on Monday, one of my concerns is avoiding a potential dead cat bounce in the stock market, which we’ve seen happen before in the past during quick swings to the downside. The key during times like this is to preserve capital rather than get whipsawed. Being prudent rather than overly risky. 

As we move through the week, we’ll get the April Retail Sales report. As we get and dissect that report, I’ll be assessing a new call option prospect in either TJX Companies (TJX) or Ross Stores (ROST), both of which have domestic-focused businesses and are riding our Middle-class Squeeze investing theme. 

Weekly Issue: Renewed concern over trade is weighing on the market

Weekly Issue: Renewed concern over trade is weighing on the market

Key points inside this issue:

  • Getting the check on shares of Del Frisco’s Restaurant Group
  • Rather than risk an options whipsaw in a volatile market, we’ll sit on the sidelines this week 

Trump brings volatility back into the market

Volatility has returned to the market, not due to the March quarter earnings season, which in aggregate is shaping up so far to be better than expected but rather to the latest development on the US-China trade front. Over the weekend President Trump said he planned to increase tariffs on $200 billion of Chinese goods to 25% from 10% this Friday even as negotiations for a U.S.-China trade deal are set to resume on Wednesday. In addition, Trump threatened to impose 25% tariffs on an additional $325 billion of Chinese goods “shortly.”

Recall that at the start of this year Trump was poised to boost tariffs to the 25% level but opted to postpone such a move as the U.S. and China began to hold trade talks. The thing that makes this latest threat rather interesting is the reports that China and U.S. were close to a trade deal, with an agreement potentially as soon as this Friday.

As I noted several months ago, odds are Trump is using some of the tactics he laid out in his book, “The Art of the Deal.” One of those tactics is “use your leverage,” and this is the one Trump is likely employing with this weekend’s talk of tariffs following last week’s IHS Markit PMI data.

That data showed the China manufacturing economy slowing in April as its PMI reading fell to 50.2 for the month, down from 50.8 in March, and its new order component also slowed month over month. Per IHS Markit, “Data indicated that subdued sales largely stemmed from weaker foreign demand, as new export business fell for the second time in the past three months.” While the IHS Markit April PMI data for the U.S. also cooled compared to March, other indicators point to the domestic economy continuing to grow at or near 2%.

In my view, the likely scenario is Trump is “using his leverage” given the state of the Chinese economy to garner incremental concessions from China as the next round of trade talks begins later this week. We will see how this develops in the coming weeks, especially as the administration appears to be hell bent on enacting this new round of tariffs on Friday. 

My strong suspicion is this is all playing out like an episode of “The Apprentice” — as we near the last key segment of the show, the drama ramps up considerably ahead of the big reveal, which is pretty much what we suspected all along. In other words, I see this latest salvo by President Trump and ramping up the drama, and odds are we will see some forward progress on the US-China trade front. 

Again, that is my suspicion and we don’t invest on suspicions, but rather on the addressing the evolving landscape. As such, I’ll look to position the Thematic Leaders and the Tematica Select List as needed come a trade resolution or another round of tariffs, that could spark a retaliatory move by China. Either way, more to come!

The Eurozone gets another growth haircut

As if the latest act in the US-China trade war and recent economic data isn’t enough for you, yesterday the European Commission cut its growth forecast the EU in general and for Germany in particular and warned on the ballooning debt level for Italy.  The EU now sees the 19-nation single currency bloc growing 1.2% this year, which is down from the already tepid level of 1.3% it called for in February. 

The EU also warned that Italy’s public debt would balloon to a record of almost 134% of GDP in 2019 and grow even further in 2020 to 135% of GDP, well over commitments made to Brussels and more than double the EU’s 60% limit. Clearly,  we haven’t heard the last of this, and let’s not forget  with negotiations for the EU’s divorce with the UK stalled and no agreement in sight we run the risk of a no-go Brexit deal. 

The moral of the investing story this week is that risks to the market’s vapid increase year to date in 2019 remain even though the March quarter earnings season is, so far, coming in ahead of expectations. 

While former Intel CEO Andy Grove made “only the paranoid survives” famous, I still prefer this quote from Warren Buffett at times likes this – “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”

Tematica Investing

The renewed concern over trade has weighed on the market in general and on shares of not only the Thematic Leaders but also those that reside on the Tematica Select List. As I discussed above, it’s too soon to tell if this is a real threat or something designed to prod the Chinese at the negotiating table. As usual, the herd is shooting first and asking questions later, which has rarely served long-term investors well. As we look at the majority of the Thematic Leaders and companies that have earned their place on the Select List, the thematic tailwinds continue to favor them. 

Should the trade landscape change in a meaningful way – read that as Trump goes forward with the threatened tariff increase and/or China retaliates – then we will likely see expectations for economic growth and earnings be meaningfully reset. The likely knee jerk reaction will be for investors to flee multinational companies in favor of those whose businesses have greater exposure to domestic economy. Should this scenario come to pass, I’ll be focusing our thematic lens on domestic opportunities, but let’s wait a few days and see what happens. As always, the devil is in the details. 

Getting the check on Del Frisco’s shares

Above I said the vast majority of Thematic Leaders are performing well thus far in 2019. One that has been under pressure of last has been Guilty Pleasure thematic leader Del Frisco’s Restaurant Group (DFRG). We’ve been patient with the company, which since December has been conducting a strategic review. However, following the company’s March quarter results that beat on the top line, but missed on EPS, we are exiting the name. 

While the company saw comparable restaurant sales increase 1.3% during the quarter compared to year-ago levels, margins felt the impact of new location openings, which is slated to continue as DFRG expands its restaurant footprint in the coming quarters. Then there is the issue of the company’s strategic review. Per the earnings press release,

“… we are limited in what we can disclose or comment, but the Board is continuing to work with Piper Jaffray and Kirkland & Ellis in a diligent manner. No assurances can be made with regard to the timeline for completion of the strategic review, or whether the review will result in any particular outcome.”

Remember, this review began in December, and it’s been hinted that part of what’s been dragging the process out is multiple buyers for different pieces of Del Frisco’s. Our growing concern is that even if a partial or full M&A transaction arrives, given the margin prospects for the coming quarters any takeout premium could be modest at best.

Turning to Del Frisco’s balance sheet, the company had $4.6 million in cash at the end of the March quarter, down from $8.5 million at the end of 2018. Even after accounting for non-recurring items during the quarter, Del Frisco’s still delivered a net loss of $3.4 million for the quarter. And with new location openings expected to weigh on margins near-term, odds are the company will continue to bleed cash.

And that brings us back full circle to something that may be delaying a potential M&A transaction. A smart buyer will look to squeeze the company it wishes to buy in order to get the best possible acquisition price, which benefits not only the buying company’s shareholders but also the integration and cost savings process.

Clearly this holding is not working out exactly as planned, and it has been rather frustrating. As new details inside of Del Frisco’s have become available, my growing concern is that either no M&A deal will emerge, and if it does, we run the risk of takeout offers being near current share price levels.

In my view, either of the above scenarios would be read as a disappointment given that inside the current DFRG share price there is likely some implied takeout valuation factor. Currently DFRG shares are trading at more than 12x enterprise value to 2019 EBITDA expectations vs. 11.2x for competitor Ruth’s Hospitality (RUTH).

To sum it up, I see the risks associated with holding DFRG shares mounting, with any resolution not likely to recoup the losses to date that we’ve endured. Better to get out now and minimize additional losses is my thinking.

  • We are issuing a Sell on shares of Del Frisco’s Restaurant Group (DFRG) and removing them from the Thematic Leaders. 

Tematica Options+

Last week we sat on the sidelines given the swings we saw unfolding in the market as the March quarter earnings deluge continued. This week we have more swings due to the new “wrinkle” in US-China trade talks. While I shared my suspicions as to what is likely to be happen, we don’t place trades based on hopes, fears or anything like that, but rather on homework, due diligence and thematics. Over the next few days, we run the risk once again of being stopped out rather quickly one way or the other should the drama build further. 

Let’s sit on the sidelines, preserve our capital and strike when the time is right. 

Weekly Issue: Looking to Wade Back into the Mix Next Week Amid Calmer Waters

Weekly Issue: Looking to Wade Back into the Mix Next Week Amid Calmer Waters

Key points inside this issue:

  • Earnings season notables from Amazon, Disney, Alphabet/Google and Nokia
  • We are sitting out this week with a new option recommendation, waiting for the market to find its footing rather than get stopped out due to either an earnings season swing one way or the other. 

Despite a better than expected March quarter GDP print, April signs point to a slowing global economy ahead

Last Friday we received the better than expected initial March GDP quarter print of 3.2%, which was well ahead of the expected range of 2.3%-2.5% depending on the source. Digging into that report, we found that inventory build was a key factor in the upside surprise. In our weekly Roundup comments, we shared that such builds tend to be temporary factor for the economy, and we’ll be watching to see the speed at which that inventory build is utilized in what the data shows to be a slowing global economy. To gauge that speed of inventory digestion, it means examining some of the key economic data, and this being the start of the month, there is no shortage of that to be had. 

Yesterday morning we received the IHS Markit Caixin China General Manufacturing PMI reading for April and at 50.2, it was down meaningfully from 50.8 in March. Technically still in expansion territory, but barely so. Inside the report, new export orders returned to contractionary territory, suggesting cooling overseas demand, and while “stocks of purchased items returned to contractionary territory, the measure for stocks of finished goods fell more markedly. 

Granted this is somewhat better than the data from a few months ago that showed China’s manufacturing economy contracting full on, but the April data does not suggest a meaningful upturn is imminent. 

Over the next few days, we’ll get the April IHS Markit PMI data for Japan, eurozone and the US, but yesterday’s National Association of Business Economics’ (NABE’s) April survey of economists showed 53% of respondents now see the economy growing by more than 2% this year. That’s down from 67% in January. When we factor in the initial GDP print of 3.2% for the March quarter, it suggests a more pronounced slowdown in the coming quarters than was thought at the start of 2019. That likely means business’s ability to chew through that March quarter inventory build will not be brisk and will serve as an economic headwind in the current quarter. 

Like always, I’ll be watching the economic tea leaves in the coming days and weeks as we look to zero in on the true speed of the domestic and larger global economy. This includes keeping tabs on what appears to be the never-ending US-China trade conversation. Yesterday morning, it was reported that Treasury Secretary Steven Mnuchin suggested the U.S. and China are closing in on a trade deal. Our position remains the same as it has been for some time – hopeful, but we acknowledge the details of any agreement will be what matters most, not headlines touting victory.

Tematica Investing

As we all know, we are smack dab in the middle of the March quarter earnings season, and there have been some high-profile beats, but also some high-profile misses complete with revised outlooks to the downside. Stepping back, the market is coming to grips with the data we’ve received over the last few months and its impact on company business models. In some cases, as we saw with results from Clean Living Thematic Leader Chipotle Mexican Grill, or those from Procter & Gamble Co. (PG) and The Hershey Co. (HSY), specific corporate strategies are paying off. Meanwhile, results from 3M (MMM), Tesla (TSLA), The Sherwin-Williams Co. (SHW), GATX (GATX), The Gorman-Rupp Co. (GRC), and others, remind us that pockets of the global economy have slowed considerably. 

I expect this dichotomy to continue into next week as the March-quarter earnings season continues. As we and the market digest these reports, the coming of additional economic data, and any progress on trade talks, we’ll be able to triangulate on the next likely move for the market as we move further into the second trading month of the quarter.

Now let’s review some of the recent results for stocks on the Thematic Leaderboard and the Select List:

Amazon (AMZN)     Thematic King

Shares of Amazon climbed following the company’s March-quarter results last week that simply crushed expectations. The likely follow through on those results was offset by Amazon once again providing in-line guidance which is likely to prove to be conservative. From an operations perspective, sales and profit growth were posted by the company’s two largest business segments — North America and AWS — while continued revenue growth at International and cost containment dramatically shrank that segment’s operating profit drag during the quarter. And while Amazon’s advertising business shrank quarter over quarter as the holiday shopping season subsided, year over year the company grew that business by 34%, putting to rest chatter concerning its level of growth. 

Perhaps the most noteworthy item exiting the company’s earnings call was the announcement that free Prime two-day shipping would become free one-day shipping. In my view, this changes the table stakes for retail, and will no doubt lead to share gains for Amazon ahead of the upcoming Prime Day, but also as we move through the remainder of the year. Our price target on Amazon shares remains $2,250.

Walt Disney (DIS)    Digital Lifestyle

Disney shares continued their march higher this week, adding to impressive gains in recent weeks that were sparked by the formal unveiling of its Disney+ streaming service. Fueling the move higher were several items, including the growing euphoria surrounding “Avengers: Endgame,” its latest tent pole franchise film that as expected pierced the $1 billion level at the box office in record time. Also last week, Comcast (CMCSA) shared it will sell its ownership stake in Hulu to Disney, which I expect will shore up its forthcoming Disney+ offering. 

As I have shared previously, as Disney+ gains traction, I expect Wall Street will re-think how it values DIS shares. Disney will report its quarterly results on May 8 and no doubt remind investors of its vibrant film slate for the balance of 2019. With both of those factors in mind, I am boosting our price target on DIS shares to $140 from $125.

Alphabet/Google (GOOGL)       Disruptive Innovators

Earlier this week, Alphabet/Google reported mixed March quarter results with a beat on the bottom line, but quarterly revenue that fell shy of Wall Street consensus forecasts. Heading into the report, our GOOGL shares were up more than 22% year to date, even as recent reports from Facebook, Inc. (FB), Amazon and Twitter  (TWTR) showed them gaining in digital advertising. Google bears have been pointing to growing traction from, Inc. (AMZN) in the digital advertising space, which continues to attract advertising spend from radio, TV and print. All of this set a very high bar for Google in terms of expectations, as it has been putting up 20% revenue growth in a string of recent quarters.

By the numbers, Google delivered EPS $11.90 per share vs. the expected consensus of $10.61 expected on revenue of $36.34 billion, vs. $37.33 billion expected. Digging into that 17% revenue increase year over year, Google’s core advertising revenue rose 15.3% year over year, down sharply from the 20%-24.4% range during 2018. 

To some extent, this is the law of large numbers at play, and if we take a longer view, we see Google’s advertising revenue rose some 43% in the March 2019 quarter compared to the March 2017 quarter. Digging deeper into the figures, we find that YouTube, in particular, had difficult year-over-year comparisons following advertising changes implemented in early 2018.

So, what’s the issue?

According to forecasts from the likes of eMarketer, digital advertising spend is expected to grow 19%-20% this year compared to 2018.

It would appear that Google is off to a slow start in 2019, especially compared to the 26% year-over-year gain in advertising revenue put up by Facebook during its March quarter. Again, some perspective — Facebook’s March quarter advertising revenue was $14.9 billion, which is impressive, but is far behind the $30.7 billion captured by Google during the same quarter.

Despite its size, there are opportunities for Google to grab incremental digital advertising spend share in the coming quarters. Two such examples include new shoppable ad units in Google Images, which would allow brands companies to highlight multiple products available for sale in sponsored image results. The other ties to the company’s comping streaming gaming service introduced at its Game Developers Conference, allowing developers to reengage players with relevant ads across Google’s properties. And then there is Google’s position in mobile search and advertising as mobile utility continues to increase across the globe.

In short, Google’s core advertising business has several drivers of growth remaining. That said, I will monitor these and other efforts to grow the advertising business to ensure these plans are capturing revenue as expected. As one might expect, some across Wall Street trimmed their price targets, while the bears take the expected victory lap. I’ll continue to focus on the next 12-18 months, not the next few weeks. Our price target on GOOGL shares remains $1,300.

Nokia Corp. (NOK) Disruptive Innovators

Last Thursday morning, we received the March Durable Orders and Shipments report, which showed a 2.7% sequential increase in total orders and a 0.3% increase for shipments on the same basis. That’s a favorable order figure and suggests better-than-expected strength in the economy. However, with this report in particular, we need to ferret out the drivers between core capital goods, defense and aircraft. In doing so, we find core capital goods, the data series that ties best with the industrial and manufacturing economy, saw orders rise 6.6% month over month, while core capital goods shipments advanced 0.2%.

Digging a bit deeper into the March Durable Orders and Shipments report, we find considerable order strength in Communications Equipment (+9.0% month over month), Transportation (+7.0%) and Nondefense Aircraft & Parts (+31.2%), with more modest gains for Machinery, Motor Vehicles & Parts, and Electrical Equipment, Appliances and Components. Order declines were seen from Primary Metals, Fabricated Metal Products and Computers & Related Products.

Donning my investing hat, we see the surge in Communications Equipment adding confidence to the expected increase in 5G activity that should bolster its business in the coming quarters. Last week, Nokia delivered the telegraphed weak March quarter it signaled in January. If we were in the later stages of 5G network deployments, we would be far more concerned with these misses relative to Wall Street expectations. However, as both Verizon Communications Inc. (VZ) and AT&T Inc. (T) both shared this week, we are still in the very early earnings for 5G both here in the U.S. and abroad. Verizon even shared that it plans to announce more 5G-capable devices in the coming months. And this speaks to one of the key differentiators for Nokia — namely, Nokia Technologies, its IP licensing arm that delivers operating margins near 82%. That’s more than head and shoulders above historical margins for the Networks business during peak periods of demand. For the March quarter, nearly all of Nokia’s operating profit was generated by Nokia Technologies, which is on a run rate to deliver €1.4 billion (roughly $900 million).

The growing momentum in the 5G market is what allowed Nokia to keep its 2019 earnings forecast intact as the combination of revenue growth and improving margin profile falls to the bottom line. As Nokia noted in its earnings release, “5G revenues are expected to grow sharply, particularly in the second half of the year, driven by our 36 commercial wins to date.” As more device companies look to tap the 5G market opportunity, Nokia Technologies is positioned for further upside in the coming quarters. Should that come to pass, which in our view is more likely than not, it translates into either greater comfort with Nokia’s 2019 earnings-per-share targets or potential upside in the second half of 2019 and beyond.

Our position has been that 5G is a market opportunity that will gain momentum in the coming quarters and likely hit the U.S. commercial tipping point in 2020 with China/Japan to follow and then Europe. With hindsight being 20/20, we were likely early on adding Nokia to the Thematic Leaderboard, however, as the 5G inflection point approaches the shares will remain on the board. Subscribers who are underweight NOK shares should consider using post-March quarter earnings weakness in the shares to add to their holdings. Our long-term price target for NOK shares remains $8.50.

Tematica Options+

As we are in the maelstrom for earnings season, with a choppy market that led our last few long as well as short call option positions to be stopped out, we are going to sit out this week in terms of any new recommendations. We’ll look to wade back into the mix next week should a calmer market emerge. No need in my opinion to make a trade, just to make one. I’d rather wait for the right combination of thematics, opportunity and upside rather than throw caution to the wind just to “do something.” I’m sure you agree. 

This Week’s Issue: New Position in Home Improvement Player

This Week’s Issue: New Position in Home Improvement Player

Key points inside this issue:

Hear those engines? It’s earnings season!

Coming into this week 15% of the S&P 500 companies have reported and exiting it that percentage will jump to 45%. What the market and investors will be focusing on this week is what led to upside or downside surprises for the reported quarter and how is the current quarter shaping up relative to expectations. Remember, that during the March quarter we saw downward revisions in S&P 500 EPS expectations for the quarter such that the consensus called for EPS declines year over year. Currently, expectations for the current June quarter are up 10% sequentially but are flat year over year. 

If we get the data to show these March reports and prospects for the current quarter are better than expected or feared, we could see the 2019 view for S&P 500 earnings move higher vs. the meager 3.7% growth forecast to $167.95. If that happens, it will mark a change in view for 2019 expectations, which have been eroding over the last several months, and could drive the market higher. However, if we see a pickup in downward EPS cuts, we could see those 2019 S&P 500 consensus expectations come under pressure, which would make the stock market even more expensive following its year to date run of 16%. 

Now to sift through the onslaught of more than 680 companies reporting this week, which based on what we’re seeing this morning from Coca-Cola (KO), Lockheed Martin (LMT), Twitter (TWTR) and Pulte Group (PHM) suggest potential upside to be had. Tucked inside those results were positive data points for several of our investing themes:

Coca-Cola is feeling the tailwind of our Cleaner Livinginvesting theme as sales of its flavored waters and sports drinks rose 6% year over year, significantly faster than the 1% growth posted by its carbonated drinks business. During the earnings conference call, CEO James Quincy shared that the management team is looking to make Coca-Cola a “total beverage company” by adding coffees, teas, smoothies and flavored waters to a portfolio that has traditionally offered aerated drinks.

Lockheed Martin Corp reported better-than-expected quarterly profit yesterday, benefitting from the Safety & Securitytailwind associated with President Donald Trump’s looser policies on foreign arms sales boosted demand for missiles and fighter jets.

Efforts to improve its advertising business model helped Twitter capture some of our Digital Lifestyletailwind as year over year monetizable daily user growth returned to double digits for the first time in several quarters. 

Verizon (VZ) beat quarterly expectations and on its earnings conference call 5G and its deployment in the coming quarters was a key topic during the question and answer session. Verizon will continue to build out its network and bring more 5G capable smartphones to market, which in my view continues to bode well for our Digital Infrastructureand Disruptive Innovators Thematic Leaders, Dycom (DY) and Nokia (NOK). Nokia will report its quarterly results later this week, and following Ericsson’s better than expected results that tied to strength in North America and 5G, Nokia could surprise on the upside as well.

Splitting the Housing and Retail Sales hairs

Late last week we received some conflicting economic data in the form of the March Retail Sales report and the March Housing Starts data. While retail sales for the month came in stronger than expected — a welcome sign following the last few months in which that data disappointed relative to expectations — March housing starts fell to their weakest point since 2017 despite a tick down in mortgage rates. Now let’s take a deeper dive into those two reports:

In looking at the March Retail Sales report, total retail rose 1.7% month over month (3.5% year over year) with broad-based sales strength and nice gains seen across discretionary spending categories. While we are quite pleased with the month’s data, subscribers know we tend to favor a longer-term perspective when it comes to identifying data trends. Consequently, as we are bracing for the March quarter earnings onslaught it makes sense to examine how retail sales in this year’s March quarter compared to the year-ago quarter. Here we go:

Leaders for the March 2019 quarter vs. March 2018 quarter:

  • Nonstore retailers up more than 11%, which bodes very well for Thematic King Amazon  (AMZN) and to a lesser extent our Alphabet (GOOGL). Let’s remember that those packages need to get to their intended destinations, which likely means positive things for United Parcel Service (UPS), and I’ll be checking that report, which is out later this week. 
  • Food services & drinking places rose 4.4%, which points to favorable data for Guilty Pleasure Thematic Leader Del Frisco’s Restaurant Group (DFRG). And yes, I continue top wait on more abou its strategic review process. 
  • Health & personal care stores were up 4.6%.
  • Building material & garden suppliers and dealers increased 4.7%.

Laggards for the March 2019 quarter vs. March 2018 quarter:

  • Sporting goods, hobby, musical instrument, & book stores were down 7.9 
  • Department Stores fell 3.8%, which comes as no surprise to me given the accelerating shift to digital shopping that is part of our Digital Lifestyle investing theme. 
  • Miscellaneous store retailers were down 3.8%

Turning to the March Housing Starts report, the aggregate starts data fell to the weakest level since 2017, but that decline includes both single-family and multifamily housing starts. Breaking down those two components, single-family starts were down 0.4% to 781,000, the slowest pace since September 2016, while permits decreased 1.1% to 808,000, the lowest since August 2017. Multifamily starts, which include apartments and condominiums, were unchanged month over month at 354,000, while those permits fell 2.7%. 

The March results may have been influenced to some degree by harsh weather in the Northeast, which contended with heavy snowfalls, and in the South as it dealt with record flooding along the Mississippi and Missouri rivers. Even so, the housing data were off despite a decline in the 30-year mortgage rate to roughly 4.15% this month from 4.86% last October, according to data from Marcrotrends. This decline likely signals that consumers are being priced out of the market as developers and home builders continue to struggle with building affordable properties amid rising labor and materials costs. We also must consider the state of the consumer, who is dealing with the impact of higher debt levels across credit cards, auto loans and student loans — a combination that is sapping disposable income and the ability to service mortgages on homes they may not be able to afford.

Generally speaking, most existing homeowners in the U.S. use the capital from selling their current homes to help fund the purchase of their next dwellings. This means we as investors should watch Existing Home Sales data as a precursor to new home sales and housing starts. Despite February’s better-than-expected sequential print, Existing Home Sales have been falling on a year-over-year basis since February 2018.

Per March Existing Home Sales report, which showed a 5.4% sequential drop vs. February and a similar decline vs. a year ago. For the March quarter, existing home sales fell 5.3%, which in our opinion does not augur well for a near-term pick up in the overall housing market, especially as the recent decline in mortgage rates has not jump started new mortgage applications.

Generally speaking, the housing market has two seasonally strong periods during the year, the spring and fall selling seasons, of which spring tends to be the stronger one. This year, it could be argued that harsh weather in various parts of the U.S. has resulted in the spring selling season getting off to a slow start. Leading up to it, we have seen a climb in the inventory of new homes listed for sale, according to That’s the supply side of the equation, but the side we remain concerned about is demand.

As we get more data in the coming weeks, we’ll be better able to suss out if we are dealing with a weather related situation, a consumer affordability one or some combination of the two. If the data points to a consumer affordability one, we may consider Home Depot (HD), which is a company that cuts across our Middle Class Squeeze and Affordable Luxury investing themes. Through last night, however, HD shares are up some 28% year to date, and are sitting in over bought territory. Should we see a sizable pullback over the coming weeks as more earnings reports are had and digested, this could be one to revisit. 

Tematica Options+

As we turn from investing in stocks to trading options, the above conversation is leading me to add an out of the money call option position in Home Depot shares. In assessing the time frame for said position, we want to capture as much of the spring season as possible for a potential pick up in housing construction, repair & remodel jobs as well as seasonal demands as we put the winter in the rear view mirror. We also want this spring activity captured in Home Depot’s quarterly results. Over the last few years, Home Depot has reported in early June, which means going with out of the money Home Depot call option that expires on June 21. 

Putting those pieces together, I’m adding the Home Depot (HD) June 2019 210 calls (HD190621C00210000)that closed last night at 4.20 to the select list. As we do this, given the 28% move higher in HD shares, I’m going with a tighter than usual stop loss at 3.00 to protect us to the downside should the March quarter earning season torpedo the market and Home Depot shares. 

Weekly Issue: The Mismatch Between The Market’s Move Higher and Declining Earnings

Weekly Issue: The Mismatch Between The Market’s Move Higher and Declining Earnings

Key points inside this issue

  • What the March NFIB Small Business Optimism Index had to say
  • Making sense of the IMF’s latest economic forecast cut
  • Ahead of Disney’s (DIS) Investor Day today, we continue to have a Buy on Disney (DIS) shares, and our $125 price target is under review
  • Based on its recent string of monthly same-store-sales reports and year over year progress in warehouse openings, with more to come, I am bumping our price target on Middle-Class Squeeze Leader Costco Wholesale (COST) to $260 from $250.  
  • Our price target on Thematic King Amazon (AMZN) shares remains $2,250.
  • Our price target on Alphabet/Google (GOOGL) shares remains $1,300.
  • Slowing demand and rising inventory levels for LEDs, do not bode well for new capital equipment demand at Veeco Instruments. While VECO shares have moved against us in the interim due to the stock market’s move higher, we will maintain our short position and our $13.60 stop price. 
  • We will continue to hold Short QQQ (PSQ) May 2019 31.00 calls (190517C00031000)that closed last night at 0.45 and keep our stop loss set at 0.20.
  • A note about next week. Ahead of the Easter holiday that will have the US stockmarket closed on Good Friday, we are taking the week off to recharge and get ready for the coming earnings onslaught. We wish everyone a wonderful holiday weekend. 

What the March NFIB Small Business Optimism Index had to say

This past Tuesday, we received the March Small Business Optimism Index reading from the National Federation of Independent Business (NFIB). The index edged higher, month over month, to 101.8. For the March quarter, the Optimism Index reading averaged 101.56, with March’s reading the highest, which was well below the March 2018 quarter’s 106.4 reading and the 105.5 level for the December 2018 quarter. Clearly, the year-ago level benefited from tax-reform euphoria and while the index has fallen in recent months, the uptrend during first quarter is another sign the domestic economy continues to grow, rather than contract like we are seeing in the Big 3 economies of Europe: Germany, France and Italy.

Digging into the report, one of the bigger soft spots was inventories, as levels were viewed as too large and plans to invest pointed to more firms reducing rather than adding to their inventories. That’s another sign to us of potentially softer guidance relative to expectations in the upcoming earnings season.

Adding to that we also found the Outlook for General Business Conditions component, which looks at the coming six months, has softened considerably, hitting 11 in March, continuing the downtrend in the data since peaking at 35 last July. To us, this reflects that the ongoing trade war, domestic economic data and growing worries over the consumer have taken their toll.

What’s most worrisome to us, however, is the accelerating decline in small business earnings over the last two months. Survey respondents chalk this up to falling sales volume and rising costs that include labor, materials, finance, taxes and regulatory costs.

With lower tax rates and the cut in federal regulation by the Trump administration, the other three factors are the likely culprits behind the month-over-month declines in earnings the last few months. On top of that, the sales expectation for the coming three months has also softened compared to the second half of 2018.

With small business being one of the key job creation engines, these softening sales and earnings expectations could pressure hiring plans and corporate spending, adding to the headwind(s) for the domestic economy.

What’s also interesting ahead of bank earnings that kick off later this week, is the survey revelation that loan availability became harder to obtain during February and March. There was also a drop in expectations for credit in March.

Rather than relying on just one set of numbers, we here at Tematica prefer to leverage several pieces of data to get a fuller, more robust picture. In this case, however, it does mean that we’ll be on guard with bank earnings, especially from those that are outside of the bulge bracket banks — JPMorgan Chase (JPM), Citigroup (C), Bank of America (BAC) and the like. Those names tend to be far more diversified in their revenue streams and can weather the potential storm far better than smaller, regional banks, such as First Community Bankshares (FCBC), that make their profits primarily on deposit and loan volumes.

Making sense of the IMF’s latest economic forecast cut

Also, on Tuesday, the IMF lowered its 2019 World Growth Outlook to 3.3% from 3.5% in January to reflect cuts in both US and European forecasts and a modest upward revision in China. The downward revisions come as the IMF appears to be factoring the recent global economic data that we’ve been getting in recent weeks and in its view “this weakness” is expected to continue in the first half of 2019. Following on that, yesterday morning the European Central Bank (ECB), held interest rates steady and warned that recent data pointed to a “slower growth momentum” in the eurozone.  

In many respects these comments were not surprising given the domestic economic and global IHS Markit data we’ve been reviewing here over the last few months. If anything, we see the IMF’s downgrade as overdue. But similar to how the Fed is a cheerleader for the domestic economy, the IMF is forecasting a global economic rebound in 2020, but then proceeds to list a series of downside risks and uncertainties, including “a rebound in Argentina and Turkey and some improvement in a set of other stressed emerging market and developing economies” and a “realization of these downside risks could dramatically worsen the outlook.” 

Rather than get wrapped up in the economic forecasts of the IMF, the Fed or other entity, we’ll continue to parse the data and triangulate the data points to get as real-time a view on the domestic and global economy as possible. This includes not only the government issued economic indicators, but also those from trade associations and other third parties. Yesterday we talked on the March Small Business Optimism Index from the NFIB and what it had to say. Other indicators we’ll be watching include monthly truck tonnage data, which fell year over year in February per the American Trucking Association, and weekly rail carloads fell 8.9% year over year in March per data from the Association of American Railroads. 

Late yesterday, we received the Fed’s minutes from its March FOMC monetary policy meeting. Recall that exiting the March meeting, the Fed’s post-meeting statement said it would be patient when it comes to future monetary policy actions as it downgraded its GDP forecast in 2019 and 2020. Moreover, it’s updated Economic Projections forecasted only one rate hike between March 2019 and the end of 2020. The meeting minutes confirmed this patient view was widespread across the committee. No surprise there in my view. With inflation data, as well as the vector and velocity of other recent domestic data, tipping lower, I expect the Fed is likely to remain optimistic but dovish in its forthcoming commentary and speeches, especially as the US-China trade negotiations drag on. 

And here we go…. March quarter earnings season 

The March quarter earnings season “fun” will start off with a trickle of earnings this week, 28 in all including several high-profile bank earnings later this week. The pace will pick up next week when roughly 170 companies will be issuing their results. The following week, which begins on April 22nd, it jumps considerably with more than 700 companies issuing their quarterly results and guidance. It is going to be fast; it is going to be furious. 

As you know, over the last few weeks I’ve been increasingly vocal about the potential for a rocky stock market during this earnings season as expectations are likely to get reset for a variety of reasons including the slowing speed of the global economy, dollar headwinds, rising costs, and trade uncertainties to name a few. And let’s remember the March 2018 earnings season saw companies wrap their heads around the impact of tax reform on their collective bottom lines. That bottom-line life preserver, from a guidance perspective, has come and gone.  Be sure to hold some downside protection over the next few weeks, like the ProShares Short S&P 500 ETF (SH) shares.

Tematica Investing

First Apple and today Disney

A few weeks ago, Apple (AAPL) held its special event that focused on its Services businesses, specifically the forthcoming streaming video, gaming and news services, all of which look to drive recurring subscription revenue. Today, The Walt Disney Company (DIS) will hold its annual investor meeting at which it will debut Disney+, its own streaming service. The new service from Disney will not only utilize the entire Disney and Fox entertainment library but also build on the company’s direct to consumer efforts with original programming across its Marvel, Star Wars, Pixar and other tentpole franchises. 

While DIS shares have not graduated to the Thematic Leaders, they have been on the Select List since mid-2016 as part of our former Content is King investment theme, which has since been folded into the Digital Lifestyle theme. When we first learned of the Disney+ service, my view was that if success is measured by consumer adoption, it had the possibility of transforming how investors should value the company. As more details have emerged on the service, it seems that more across Wall Street have adopted that same view. Earlier this week DIS shares received an upgrade from Cowen & Company to Buy, while BMO Capital Markets raised its rating to Outperform. These moves follow a boost from Goldman Sachs and Rosenblatt Securities last week. 

As we move from leaks and rumors on Disney+ to firm details with today’s event — and event that should also touch on other developments as well such as the roll out of Star Wars across Disney’s theme parks — I will revisit my longstanding $125 price target on the shares. 

  • Ahead of Disney’s (DIS) Investor Day today, we continue to have a Buy on Disney (DIS) shares, and our $125 price target is under review

Costco Wholesale does it again in March

Last night Middle Class Squeeze Thematic Leader Costco Wholesale (COST) reported March same-store comps of +5.7% (5.9% excluding gas and foreign exchange.) Compared to the data in recent Retail Sales reports, Costco continues to take consumer wallet share, but to me what was far more striking was the step up in its same-store comps month over month from +3.5% (+4.6% excluding gas and foreign exchange). It would seem it’s not just me looking to fight the tide of rising food prices by buying in bulk at Costco. 

The other item that I track rather closely when Costco issues these monthly reports is the number of open warehouses. Exiting March, it had 770 open warehouses, which compares to 749 exiting March 2018. That year over year increase bodes extremely well for Costco as more warehouses delivers increased high-margin membership fee revenue, which generates roughly 70% of the company’s operating income. 

  • Based on its recent string of monthly same-store-sales reports and year over year progress in warehouse openings, with more to come, I am bumping our price target on Middle-Class Squeeze Leader Costco Wholesale (COST) to $260 from $250.  

eMarketer sees continued Digital Advertising growth ahead

Ad spending will continue to rise across the globe, with digital driving most of the growth. According to data published by eMarketer, this year worldwide digital ad spending will rise by 17.6% to $333.25 billion, which means that, for the first time, digital will account for roughly half of the global ad market. In my view, this reflects the changing nature of where, how and when we consume content be it video, music, news or some other format that is a key part of our Digital Lifestyleinvesting theme. Advertisers want to go where the eyeballs are, and while this is a tailwind for a number of companies, the change in ad spend location is a growing headwind for “legacy” media companies. No wonder CBS (CBS), Comcast’s (CMCSA) NBC and others are looking to join the streaming video fray. 

eMarketer’s forecast depicts one of the core thesis items behind our holding shares of Alphabet Inc. (GOOGL) — namely, that digital advertising will continue to take share of total media spending. Per eMarketer’s forecast, digital advertising will grow to more than 60% of media spending by 2023, up from roughly 46% of advertising last year. While those outer years in the forecast range may be off by a point or two, it’s the direction and year-over-year share gains by digital advertising that matter for our Google shares as well as our (AMZN) shares.

Digging into eMarketer’s forecast, it sees Google remaining the top digital ad seller dog in 2019 with 31% market share. Behind it will be Facebook (FB) and its various properties and then Alibaba (BABA). In fourth place is Amazon, which eMarketer sees as generating $14 billion in ad revenue this year. To most companies, $14 billion would be the business, but at Amazon it should account for roughly 5% of its 2019 revenue. And while it is on the smaller side for the company, it’s bound to be rather profitable.

We are seeing some shifting of ad spend among Google, Facebook and Amazon, with Amazon being the up and comer. That said, the digital ad spend tide is still rising, and with concerns over privacy for Facebook and others the odds are better than good that both Google and Amazon will continue to ride that tide over the next few years. Longer term, as the shift to digital advertising continues, we will see slower growth rates much like any maturing industry, but we’re far from that point today.

  • Our price target on Thematic King Amazon (AMZN) shares remains $2,250.
  • Our price target on Alphabet/Google (GOOGL) shares remains $1,300.

Tematica Options+

Staying short Veeco Instruments

As we get ready to enter the March quarter earnings season, we have three open positions here at Options+. The first is a short position in Veeco Instruments (VECO), which centers on the glut of light emitting diodes (LEDs) across the industry due to falling auto demand as well as the slowing global economy.

March quarter sales at the Ford Motor Company (F) fell 1.6% year over year, which was far better than the 7% declines posted at General Motors (GM) for the quarter. March sales at Nissan (NSANY) fell 7.2% year over year, a tad worse than the 7% drop reported for the month by Fiat Chrysler (FCAU). Lighting company Acuity Brands (AYI) missed revenue expectations when it reported its quarterly results last week, with most of the year over year gains driven by price not volume. 

  • Slowing demand and rising inventory levels for LEDs, do not bode well for new capital equipment demand at Veeco Instruments. While VECO shares have moved against us in the interim due to the stock market’s move higher, we will maintain our short position and our $13.60 stop price. 

Maintaining our PSQ calls as we head into earnings season

In late March we added the Short QQQ (PSQ) May 2019 31.00 calls (190517C00031000) to our holdings and thus far they have moved against us slightly as the market has moved higher. This week, however, the talking heads have started to talk about the mismatch between the continued move higher in the stock market and the declines in earnings for the first half of 2019. That puts intense pressure on earnings expectations in the back half of the year for the S&P 500 to hit 2019 EPS growth targets. 

Emily Roland, head of capital markets research at John Hancock Investments in Boston, summed it up well this week in my opinion when she said:

“Almost all the earnings growth is backloaded into the end of the year… We’re going to need a positive surprise in earnings to keep the engine running for strong market returns.”

Given the economic data and global trade outlook, it is not easy to find where such a surprise would come from. While I remain hopeful for a US-China trade deal, should China’s economy continue to slow even after a trade deal is reached and the eurozone continues on its current path, we could very well see another round of negative revisions for global growth and corporate earnings. 

Weekly Issue: Putting on Our Apron After a Barn-Burner of a March

Weekly Issue: Putting on Our Apron After a Barn-Burner of a March

Key points inside this issue

  • Despite a slowing global economy, the March quarter was a barn burner for stocks, but risks remain heading into the March quarter earnings season.
  • Our price target on Apple (AAPL) remains $225. 
  • Our price target on shares of Living the Life Thematic Leader Del Frisco’s Restaurant Group (DFRG) remains $14.
  • Our price target on Universal Display (OLED) shares of $150 is under review. 
  • We are issuing a Buy on and adding shares of Blue Apron (APRN) to the Tematica Options+ Select List, and setting a stop loss at 0.80.
  • We continue to have a Sell rating on the shares of Veeco Instruments (VECO) and a short position on the Tematica Options+ Select List. Our stop price remains 13.60

Last week brought the March quarter to a close, and even though Friday’s personal income and spending data confirmed a slowing economy, it was the best quarter in nearly a decade for stocks. 

The bulk of the double-digit gains across all of the major domestic stock market indices — the Dow Jones Industrial Average, S&P 500, Nasdaq Composite Index, and the Russell 2000 — came early in the quarter due to positive expectations for U.S.-China trade talks, even as the market shrugged off the federal government shutdown. As the quarter wore on, data pointed to a slowing global economy, with more pronounced weakness in China, Japan and Europe, leaving the U.S. the best house on the slowing economic block. Even so, the domestic data point to a markedly slower U.S. economy compared to the second half of 2018, which in part reflects the anniversary of tax reform, but also consumers that increasingly appear to be hitting a spending wall.

Companies are also contending with higher wage costs, due in part to minimum wage hikes, as well as certain higher input costs. And of course, there is the current trade war with China that is also presenting a headwind, as is the slowing economies in Europe and Japan, especially given the year-over-year strength in the dollar, as you can see in the chart below.

In sum, we’ve seen a number of these headwinds result in reduced earnings expectations for the current quarter, and we’re now beginning to see companies once again trim back expectations. Last Thursday night DowDuPont Inc. (DWDP) slashed its sales and profits forecasts, joining the ranks of Infineon Technologies AG (IFX), Samsung Electronics Co., Ltd., Osram and others. This week, it was Walgreens Boots Alliance (WBA) that shared it had “the most difficult quarter we have had since the formation of Walgreens Boots Alliance.

On Monday we received a slew of economic data that included the March Manufacturing PMI data for China, Japan, the eurozone and the U.S. as well as the March ISM Manufacturing Index and February Retail Sales figures. There were bright spots inside this sea of data, most notably the March ISM Manufacturing Index that surprised modestly to the upside and showed a pickup in orders and employment.

That positive report was tempered by the IHS Markit Manufacturing PMI for the U.S., which showed a month-over-month decline in March and hit its lowest level since mid- 2017. As that report noted, “New order growth has fallen close to the lows seen in the 2016 slowdown, often linked to disappointing exports, tariffs and signs of increasing caution among customers.” This trend points to continued slow growth ahead for the domestic economy, though the latest data as a whole still leave the U.S. as the fastest-growing economy compared to China, Japan and the eurozone.

As for the February Retail Sales Report, it once again missed expectations, declining 0.2% month over month. This marks the third flat to down sequential comparison for this data set in the last four months. Viewing the data on a year-over-year basis, retail sales for the month rose 2.1%, which confirms a slower but still growing U.S. economy. While we don’t want to put too sunny of a view on it, the February year- over-year comparison was ahead of the 2.0% growth pace of the trailing three months. Still, there was no question the year-over-year rate of spending in February slowed compared to January.

While we don’t want to put too sunny of a view on it, the February year- over-year comparison was ahead of the 2.0% growth pace of the trailing three months. Still, there was no question the year-over-year rate of spending in February slowed compared to January.

In my view, this looks to be setting up a volatile earnings season, with earnings guidance that is likely to disappoint and lead to downward revisions for the June quarter as companies reset expectations. We will continue to be prudent, longer-term focused investors that take our cues from our 10 investing themes and the confirming signals to be had.

Tematica Investing

As we put the March quarter in the rear-view mirror, the market will continue to look for hope in a U.S.-China trade deal but given the factors outlined above, I see greater risk to the downside, generally speaking, than upside, as we begin the March-quarter earnings season. The stalwart among them was Clean Living Leader Chipotle Mexican Grill (CMG), as its shares rose more than 60% during the first three months of the year. Digital Lifestyle Leader Netflix (NFLX) as well as New Global Middle Class Leader, Alibaba (BABA), soared more than 30% during the quarter, and Thematic King Amazon (AMZN) climbed 20%. 

The quarter wasn’t without its challenges given declines experienced at Aging of the Population Leader AMN Healthcare (AMN), but as I am seeing with my 87 year old father, the need for elder care is pronounced and bodes well for nursing demand in the coming years. We will continue to hold AMN shares. Another laggard is Dycom Industries (DY), better known as the Digital Infrastructure Leader, which is positioned to benefit from the 5G and gigabit network buildout. We’re entering the seasonally strong time of the year for Dycom, which also brings us closer to initial 5G launches from AT&T (T), Verizon (VZ), T-Mobile USA (TMUS) and others. As with AMN shares, we will continue to hold DY shares as well. 

Now let’s dig into several Thematic Leaders and Select List positions that made news over the last week. 

Apple’s video and gaming efforts are interesting but not in the short-term

During the March quarter, Apple’s (AAPL) shares rebounded hard, rising just over 20%. Some of that climb was due to the excitement ahead of Apple’s services focused event last week, which candidly was largely as expected given prior news leaks. Leading up to the event we saw iPad, Mac and AirPod refreshes, but the event itself focused on Apple Card, Apple News+ and AppleTV+. The one surprise was the announcement of a streaming gaming service, which like AppleTV+ will debut later this year. 

As such while they are positives for the Services business, they will have little impact on the company’s bottom line near-term. That said, Canaccord Genuity upped its price target to $230 from $185 this week. The reality of the situation is that as much as we like content and Apple is looking to use it to make its devices and ecosystem even stickier with customers inside the Digital Lifestyle, in the near-term the primary driver of the company’s profits will continue to be the iPhone. 

  • Our price target on Apple (AAPL) remains $225. A key point to that target is the eventual upgrade cycle tied to 5G and the iPhone, which given our Dycom comments above, increasingly looks like it will happen in the second half of 2020.

Frustrated with Del Frisco’s Restaurant Group, but holding steady

If you’re growing frustrated with this Thematic Leader, you are not alone. During the March quarter, DFRG shares fell roughly 10%, but the inter quarter swing was far greater than that. What’s weighing on the shares is lack of news on the company’s strategic review process. Per some reports, the company could be cleaved into two parts to different buyers, which if true would explain the pronounced timetable.

From a fundamental perspective, while overall restaurant traffic and other metrics fell in February according to data published by TDN2K, the bulk of that decline was at fast casual restaurants, to which we have no exposure. Digging into the data, we find  fine dining was the best-performing industry segment during February for same-store sales growth. While I like such confirming data, as I noted above the DFRG share price will continue to be driven by any and all strategic review developments. This will continue to be our point of focus for now.

 Our plan is to hold DFRG as the takeout story evolves further, but as we have said previously, odds are we will use a deal- related pop in the stock to exit the position. 

  • Our price target on shares of Living the Life Thematic Leader Del Frisco’s Restaurant Group (DFRG) remains $14.

Universal Display should continue to shine

Universal Display (OLED) shares shined bright during the first quarter rising easily more than 50%. Yesterday, there were thesis confirming reports for the adoption of organic light emitting diode display that will drive demand for Universal’s chemical and IP licensing businesses. Those reports centered on Apple (AAPL) shifting its entire production of iPhones to organic light-emitting diode displays in 2020.

These same reports also suggest Apple will have three different- size iPhones, measuring 5.42 inches, 6.06 inches and 6.67 inches. While the varied iPhone sizing is new, we heard similar hints about the switch in display technology several months ago. We see this as follow up to that, which in our view increases the likelihood of this happening.

We’d also note the timing of these models and the display transition seem to coincide with the potential debut of a 5G iPhone. In light of the incremental RF chips the 5G model will contain, it makes sense that Apple would look to adopt this display technology for both space as well as power savings.

While we like seeing our investment thesis confirmed here, I’d note that not only have OLED shares climbed substantially over the last three months, but the transition to all organic light-emitting diode displays at Apple, and most likely others, is several quarters out. We will continue to be long- term investors in OLED shares. However, given market conditions and the upcoming earning season we could see OLED shares give some of its gains back in the near-term. We’ll continue to focus on the long-term opportunity not only in the smartphone market but in automotive and eventually the general illumination market. 

  • Our price target on Universal Display (OLED) shares of $150 is under review. 

Tematica Options+

Jumping on Blue Apron shares for the Oprah trade

Normally at Tematica Options+ we’re using call options and other strategies, such as shorting shares, to drive superior returns. As we know, the more aggressive the play, the greater the risk. From time to time, there are opportunities to be had in the “basic” equity shares of a company, particulary when the share price is so low it’s akin to buying a call option. 

That brings us to the shares of meal kit company Blue Apron (APRN), which I’ve been critical of in the past for a number of reasons. But from time to time, a trade can be had and such an opportunity looks to be rearing its head with APRN shares. 

In December, Blue Apron inked a partnership with Weight Watchers International Inc. (WTWW), the company that these days goes by WW and the one in which Oprah Winfrey holds an 8% ownership stake. That partnership between the two companies centered on Blue Apron is offering a selection of WW approved meals for home delivery. To some it may have seemed like a lifeline for Blue Apron, but from a matter of convenience with a dash of our Digital Lifestyle it makes a lot of sense. 

So why now?

Following a soft start to 2019 that led Weight Watchers shares to plunge more than 35% during the March quarter, WW is set to unveil a new “It Works” campaign featuring Oprah chatting with other WW members to congratulate them on their weight loss. In addition to featuring Winfrey, the campaign will reposition WW as a health and wellness company rather than one focused on dieting. To us, that means WW is looking to tap into our Clean Living investment theme.

In my view, this could cast Blue Apron in a new light and boost demand for its kits in light of the partnership with WW. Current expectations for Blue Apron are low, which means any modest surprise to the upside has the potential to goose the shares back to January levels. 

As we add APRN shares to our trading book, we’ll set a stop loss at 0.80, and look to move it higher as the shares do the same.

  • We are issuing a Buy on and adding shares of Blue Apron (APRN) to the Tematica Options+ Select List, and setting a stop loss at 0.80.

Infineon’s guidance cut affirms our short view on Veeco shares

Amid the recent, German lighting company Osram broke the news that its March quarter would miss expectations and cut its 2019 guidance. The reasons were market weakness in the automotive industry, general lighting and mobile devices that led to an inventory build, especially in China.

Here’s the thing, Osram’s prior guidance banked on new orders for the second half of the year picking up significantly. Now it seems that’s no longer being anticipated.

Given the inventory glut, there is a far greater probability that demand for the machines that manufacture light emitting diodes serving those market will remain weak. This likely means that when it reports its quarterly results, semiconductor capital equipment company Veeco Instruments (VECO) will serve up weaker than expected guidance. We will remain short VECO shares for now. 

  • We continue to have a Sell rating on the shares of Veeco Instruments (VECO) and a short position on the Tematic Options+ Select List. Our stop price remains 13.60
Weekly Issue: Adding Another Inverse ​ETF Call

Weekly Issue: Adding Another Inverse ​ETF Call

Key points in this issue:

  • The Fed, recent economic data and downside guidance are setting up a rocky March quarter earnings season. 
  • We will continue to hold shares of Guilt Pleasure thematic leader Del Frisco’s Restaurant Group (DFRG) as we patiently wait for the next step of its strategic review process. Our price target of $14 remains in place. 
  • Be sure to check back on later this week when I follow up on the announcements that Select List resident Apple (AAPL) made yesterday. There we are a number of things to cover, several of which position Apple’s business inside the Digital Lifestyle tailwind. 
  • We will continue to hold the ProShares Short S&P 500 ETF (SH) May 17, 2019, 29.00 calls (SH 190517C00029000)and for now our stop loss remains at 0.15.
  • We are issuing a Buy on and adding the Short QQQ (PSQ) May 2019 31.00 calls (190517C00031000)that closed last night at 0.47 to the Select List with a stop loss set at 0.20.

Data points to a slower economy ahead

Stocks finished last week on different footing compared to the start of the week but as I type this, they are attempting to rebound. While the major market indices trended higher ahead of Federal Reserve Chair Jerome Powell’s post-monetary policy press conference last Wednesday, the revelation the Fed would adopt a far more dovish stance, with no expected rate hikes in 2019, took the market by surprise. I talked about this on last week’s Cocktail Investing podcast, which if you missed it you can find it here.

As you can see in the chart below, the market initially liked what it read in the FOMC statement – dovish as expected – but as it digested the Fed’s latest economic projections and Powell’s comments it traded off its 2 PM surge. There’s dovish and then there is, “Uh oh, they are worried!” To better understand what put a bitter aftertaste in the market’s mouth let’s have a blow by blow account of what it heard.

First let’s turn to the Fed’s monetary policy press release. Right off the bat it agreed with the data we’ve been getting of late that “growth of economic activity has slowed from its solid rate in the fourth quarter” due to in part to slower household spending and business fixed investment. We touched on this in our note yesterday, which means those comments were of little surprise as was the lack of rate hike as the Fed maintained its target range for the federal funds rate.

Now here comes the dovish statement that popped the market – “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.” In other words, the Fed’s patience means a more dovish stance in the near term and basically took any more hikes in 2019 off the table with just one possible in 2020.

Now let’s turn to the Fed’s latest iteration of economic projections, which show the Fed has reduced its 2019 GDP forecast to 2.1% from 2.3% in December and 2.5% in September. Interesting, given the CNBC March Fed Survey findings we shared yesterday that put 2019 GDP at 2.3%. We say interesting because the Fed tends to be the cheerleader for the economy, yet its forecast is below the CNBC consensus, but in line with the Economic Forecast Survey published by The Wall Street Journal. The Fed also trimmed its forecast for GDP in 2020 to 1.9% from 2.0% and left its 2020 view unchanged at 1.8%. No matter how you slice it, it’s slower growth ahead compared to what we saw in the second half of 2018. 

Inside this forecast, the Fed also took a knife to its federal funds forecast for 2019 through 2021. For this year it now sees the federal funds rate at 2.4%, pretty much in between the 2.25% to 2.50% range it said it would maintain. For 2020-2021, the Fed now forecasts the federal funds rate will remain at 2.6%, down from its prior forecast of 3.1%. In other words, the prior view to boost rates to cool the economy and keep inflation tame is no longer. This goes hand in hand with the revised GDP forecast and comments issued in the formal press release. 

What’s different this time around is the why as the Fed is reacting to the slowing economy and is aware that a more aggressive interest rate policy could erode the expected speed of GDP in the coming quarters. What we have here is a Fed that is looking to avoid, as best it can, one of the classic mistakes of the past, which is boosting interest rates into a slowing economy or recession. 

Now let’s turn to the press conference to determine what was said that put that after taste in the market’s mouth. During Powell’s prepared remarks, his message was summed up in the following words – “We continue to expect that the American economy will grow at a solid pace in 2019, although likely slower than the very strong pace of 2018. We believe that our current policy stance is appropriate.” A pretty succinct was of summarizing the press release and economic projections. 

Powell also addressed the Fed’s Balance Sheet Normalization Principles and Plans, noting the news the Fed intends “to slow the runoff of our assets starting in May, and to cease runoff entirely in September of this year.” In other words, a more dovish stance at the Fed and significantly so compared to that coming out of its last few FOMC meetings. 

To recap and put this all of this into context, the “normal” federal funds rate for this business cycle sits between 2.25% and 2.5% versus 2.75% at the end of the Fed’s last tightening cycle in 2006 and 4% at the end of 2000 cycle – that’s not a whole lot of monetary ammunition for the next downturn.

By September the Fed will still hold over $3.5 trillion in bonds which equates to about 17% of GDP versus just 6% back in 2006. 

Materially lower “normal” rates and a balance sheet that is nearly 3x heavier after over 10 years since the last recession, unprecedented monetary stimulus, solid tax cuts and a level of government spending the likes of which have not been seen outside of a recession or a war. Yeah, the markets got spooked.

This brings us to the likely question that spooked the markets – what is the Fed seeing that it has taken on a more pronounced dovish tone? 

More than likely it viewed the slowing global economy, the pushouts in the US-China trade conversation and the potential for a Brexit delay as fanning the flames of uncertainty. Generally speaking, during periods of uncertainty both consumers and businesses tend to tighten their belts, could be another reason why March quarter guidance could be weaker than expected. 

Those slower growing economy concerns were back in action Friday morning following the publication of March Flash PMI data for Japan, the EU and the U.S.

For Japan, the Flash Manufacturing PMI remained in contraction territory, with new order activity falling at a faster rate pointing to a “sustained downturn.” 

Later this week we will close the books on the March quarter and prepare for the upcoming earning season that is only a few weeks away. We’ll continue to listen to the Thematic Signalsand other thematic signposts as we navigate what is likely to be another challenging period for the overall stock market. 

Tematica Investing

Holding steady with Del Frisco’s shares

In aggregate our Thematic Leaders continue to perform well so far this year despite the recent fall off in Guilty Pleasure leader Del Frisco’s Restaurant Group (DFRG). Following its recent earnings report that shed no light on where the company is in its strategic review process, the shares continued to move lower over the last several days bringing the decline over the last month to more than 25%. Candidly, I am growing frustrated with this leader, but I know it’s simply the lack of news that is weighing on the shares. There have been a few reports suggesting the company could be cleaved into two parts to different buyers, which if true would explain the pronounced timetable. 

Despite this frustration, and especially because the shares are deep into in oversold territory, our plan is to hold DFRG as the takeout story evolves further. 

  • We will continue to hold shares of Guilty Pleasure thematic leader Del Frisco’s Restaurant Group (DFRG) as we patiently wait for the next step of its strategic review process. Our price target of $14 remains in place. 

Be sure to check back on later this week when I follow up on the announcements that Select List resident Apple (AAPL) made yesterday. There we are a number of things to cover, several of which position Apple’s business inside the Digital Lifestyle tailwind.


Tematica Options+

Sticking with SH calls and adding a PSQ call option position

Last week I shared some of the concerns I revisited above and prompted us to added the ProShares Short S&P 500 ETF (SH) May 17, 2019, 29.00 calls (SH 190517C00029000)in last week’s Tematica Investing Options+. We did so at a price of 0.25 with a 0.15 stop loss. Given the market’s drop on Friday following the economic data I laid out above, those calls popped nicely, and as of last night, they closed trading at 0.45. A very nice 80% from our buy in. As the market looks to recover today, we’ll continue to hold these calls and for now maintain our 0.15 stop loss – no need to boost it only to get stopped out ahead of the March quarter earnings season. 

Also, above, I shared the news that Samsung once again pre-announced its upcoming quarterly results to the downside. Given the factors discussed that led to this weaker than expected performance, odds are we will see other technology companies saying something similar in the upcoming weeks. As you can see in the chart below, the Nasdaq Composite Index has climbed sharply year to date and runs the risk of giving back some of those gains as technology and other companies reset their guidance.

As traders, we want to protect as well as profit from this, and that is leading me to add the Short QQQ (PSQ) May 2019 31.00 calls (190517C00031000)that closed last night at 0.47. Like the SH calls and the S&P 500 above, the PSQ calls are an inverse ETF for the Nasdaq 100 group of companies. As we add these calls to the fold, we will do so with a stop loss set at 0.20. It’s a wide stop loss, but one that we’ll look to boost as the March quarter earnings season gets underway. And for those wondering, the May expiration will allow us to capture the bulk of that season while one in April wouldn’t