By the time you're reading this on Friday, the markets will be closed on a holiday that caps another challenging week. We were hit with several key pieces of economic data that confirmed inflationary pressures are running at record levels, even though it, as yet, hasn't demonstratively impacted consumer spending. Also, the March-quarter earnings season shifted into high gear this week with a plethora of earnings reports from the financial sector. These reports included a thesis-confirming one for our shares of Morgan Stanley (MS) . JPMorgan (JPM) CEO Jamie Dimon hit on what we're likely to see over the next few weeks -- continued market volatility -- as we move through the March-quarter earnings season and determine if March was indeed the peak for the consumer and producer price indexes. As we shared during the week, we need more data to make that call, and we'll be getting some of that next week and the week after.
Despite robust year-over-year March-quarter results at Taiwan Semiconductor that pointed to strong demand amid smartphone and high-performance computing applications, chip stocks felt the weight of rising Treasury yields. Following the week's inflation data, the yield on the 10-year Treasury hit its highest level so far in 2022 as the CME FedWatch Tool is now pricing in a potentially greater rate hike for the Fed's June meeting after baking in a half-percentage point move at the early May meeting. While many see that as headwind for "tech" and growth stocks in general, the underlying data for chip stocks in the portfolio point to continued demand. We will continue to be patient, letting the data talk to us, but also keeping a close eye on the technicals as well.
Outside of inflation, interest rates and earnings, the Russia-Ukraine war persists with no resolution in sight and lockdowns in China continue with companies starting to cite them as reason for cutting forward guidance. And with the holiday weekend that has U.S. equity market closed on Friday, it's no surprise to see stocks fade in late afternoon trading. Odds are traders are taking on a more defensive stance given the unknowns of the what's next on the Russia-Ukraine war front and the duration of China's Omicron lockdowns. We'll use the extra day to prepare for those companies reporting next week as well as flesh out a few new candidates for the Bullpen.
The AAP Portfolio
Looking at the performance of the AAP portfolio during this abbreviated trading week, we would characterize it as mixed bag. While the portfolio had several nice gains, including those from Airbnb (ABNB) , Deere & Co. (DE) , AMN Healthcare (AMN) , Chipotle Mexican Grill (CMG) , Ford (F) , Nucor (NUE) , and United Rentals (URI) among others, those positive developments were mitigated by declines in technology despite solid fundamental data points from Taiwan Semiconductor (TSM) .
While it was a shortened week because of Easter holiday, it was still a busy one for the AAP portfolio. Early in the week, we trimmed back our positions in AbbVie (ABBV) and Walmart (WMT) , while later in the week we did the same with Boeing (BA) shares, which face substantial technical resistance ahead. With that ahead of us, we also downgraded BA shares to a "Three" and set a target exit price of $185. We also downgraded the shares of Walmart (WMT) to a "Two" rating, but following the week's event, including the March retail sales report, we've upped our price target to $175 from $165, but that keeps our current "Two" price target intact.
Also, this week, we called shares of the ProShares Short S&P 500 ETF (SH) back up into the portfolio ahead of the March Consumer Price and Producer Price Indexes and the real start to the March-quarter earnings season that began late this week. With the Russia-Ukraine war and related sanctions continuing, with the same being true for China's Omicron lockdowns, we suspect JPMorgan Chase won't be the only company to issue conservative guidance in the coming weeks. For those that missed it, JPM shares closed down more than 5% this week. As expectations are reset in the coming weeks, we will have ample opportunity to call up recent Bullpen additions as well as round out newer portfolio positions.
Since we added Universal Display (OLED) shares to the Bullpen just over a week ago, they are down roughly 15% or so and closing in on the $145 level we flagged when adding them to the Bullpen. Given the extended lockdowns in China, we're inclined to be a bit more patient with this stock, but will continue to monitor the sales of larger screen smartphone models and announcements for new foldable models with even larger screens as they will drive demand for Universal's materials business.
Key Global Economic Readings
(Note: T is the most recent period, T-1 is the prior period's reading and T-2 is two periods back, the intent being to illustrate any trends)
There were three key March economic reports out this week -- the consumer price index, the producer price index, and retail sales. While the expectation for the March readings for both the CPI and PPI called for month-over-month increases, the ones that were reported well above expectations. Candidly, given what we saw in the commodity markets as a result of the Russia-Ukraine war we expected the consensus forecast might fall short of the actual data. Even stripping out food and gas prices, which both put in double-digit increases year-over-year in March, the core CPI reading was still up meaningfully year-over-year.
With the March CPI reading the highest in decades, many were quick to call it "the peak," but as we explained in the Daily Rundown, we would want to see the March PPI data, as well as other inflation indicators before making that claim. Following that view, the March PPI jumped 11.2% year-over-year for the headline component and 9.2% for the core reading, which suggests to us the coming CPI data will continue to be hot even as gas prices continue to roll over. We'll be looking for more clues regrading inflationary pressures and efforts to pass them through to customers in the upcoming April Flash PMI data due out late next week, but the data so far confirms our bullish stance on Amazon (AMZN) , Costco Wholesale (COST) , and Walmart (WMT) .
While the March Retail Sales figure came in a tad softer than expected on a month-over-month basis, when viewed through the year-over-year lens, which is our preferred way to examine the report, there were a number of positives to be had. Even though Gasoline Station retail sales soared 37% year-over-year in March and 36.7% for the March quarter, food service & drinking place retail sales soared 19.4% year-over-year in March (+26.6% for the March-quarter), grocery store sales rose 9.5% year-over-year (8.9% for the March quarter), and nonstore retail sales climbed 10.3% year-over-year for the March quarter. Those figures bode rather well for the portfolio's positions in Chipotle (CMG) , Costco (COST) , Walmart and Amazon.
Also, this week, the NFIB Small Business Optimism Index for March fell to 93.2 from 95.7 in February, well below the expected reading of 95.3. That marked the third decline in as many months and falling to the lowest level since April 2020. Again, we'll be interested in the follow up commentary in next week's April U.S. Flash PMI report, especially given the move lower in oil prices over the last few weeks.
And with that let's touch on oil prices and the move lower in gas prices over the last month. While considerably lower than the early March high, oil prices have found some footing despite a larger than expected build in U.S. oil stocks that was reported this week and the expanded lockdowns in China that are likely eating away at demand in the region. While the news of the forthcoming release from strategic oil reserves around the world is known, drilling permits for new wells in the Permian Basin surged to record levels in March, according to an analysis published by Rystad Energy, signaling crude oil suppliers in the U.S. finally may be responding to higher prices. The last rig count from Baker Hughes published last week tells us the number of active rigs climbed by 254 to 693, which means we are once again seeing the influence of high oil prices playing out. If history plays out, we will see some moderation in oil prices as all of these efforts to increase production take hold.
In the meantime, average gas prices have continued to tick lower reaching $4.07 per gallon according to AAA vs. $4.325 a month ago. Usually around this time of year, we would start to read about the upcoming switch in gas blends to the summer formulation that helps curb pollution, but this year President Biden said his administration plans to allow gasoline that uses a 15% ethanol blend, that can cost $0.10 per gallon less than average gas prices, to be sold during the summer. That should help consumer wallets but also add to expected ag commodity demand, helping spur farmer income -- a positive for our shares of Deere & Co. (DE) .
Late in the week, the European Central Bank (ECB) rendered its latest monetary policy decision, which was to leave interest rates unchanged. This keeps the ECB in a laggard position vs. other central banks the Federal Reserve in particular. As the Fed continues its tightening of monetary policy, we'll have to be mindful of the impact on currency and how companies contend with currency headwinds when it comes to their quarterly results. In terms of the actual ECB decision, we recognize it is in a difficult position having to battle inflation while juggling a far greater impact from the Russia-Ukraine war than we in the U.S. must.
Chart of the Week: Glaring Weakness in the Semis
No doubt there is some divergence between the fundamentals and technicals in the semiconductors. Since peaking in early January, the daily chart (blue, chaikin) shows a series of lower highs, lower lows. That's consistent with a downtrend pattern, but notice there is some support on the chart around the $240 level and just below around $220.
Given the dearth of news that has been mixed it is no surprise to see some fear showing up in these names. But, the weekly chart tells us something different, just a modest pullback to the McGinley Dynamic 14-week moving average. Though volume trends are mildly bearish, there is a good chance we'll see the VanEck Semiconductor exchange-traded fund (SMH) catch support at the lows around $240 (weekly, trendspider). Moving Average Convergence Divergence (MACD) oscillator
is oversold here as is money flow, but we'll be looking for a nice bounce coming up soon.
The Coming Week
When we return from the long weekend and the Easter holiday, we have a modest amount of economic data coming in early in the week. Given the reports of supply chain shortages, falling lumber prices and a decline in mortgage activity, we'll be reviewing the March housing starts and building permits data, given that sector has a multi-plier impact on the economy. Late in the week, we get our first look at how the start of the current quarter is shaping up with the various Flash PMI data. As we mentioned above and on the Daily Rundown this week, we will be keenly interested in comments contained in the Flash PMI reports regarding inflationary pressures, customer facing price increases and supply chain issues. Those will be clues as to whether the March PPI and CPI data are likely to be the peak.
Here's a closer look at the economic data coming at us next week:
Monday, April 18
- NAHB Housing Market Index - April (10:00 AM)
Tuesday, April 19
- Housing Starts & Building Permits - March (8:30 AM)
Wednesday, April 20
- Weekly MBA Mortgage Applications (7:00 AM)
- Existing Home Sales - March (10:00 AM)
- Weekly EIA Crude Oil Inventories (10:30 AM)
Thursday, April 21
- Weekly Initial & Continuing Jobless Claims (8:30 AM)
- Philadelphia Fed Index - April (8:30 AM)
- Leading Indicators - March (10:00 AM)
- Weekly EIA Natural Gas Inventories (10:30 AM)
Friday, April 22
- S&P Global Manufacturing & Services PMI (Preliminary) - April (9:45 AM)
Wednesday, April 20
- Germany: PPI - March
- Eurozone: Trade Balance - February
Thursday, April 21
- Eurozone: Consumer Price Index - March
- Eurozone: Consumer Confidence (Flash) - April
Friday, April 22
- Japan: CPI - March
- Japan: Markit/JMMA PMI Manufacturing (Preliminary) - April
- UK: Retail Sales - March
- Eurozone: S&P Global Manufacturing & Services PMI (Preliminary) - April
- UK: CIPS Manufacturing & Services PMI (Preliminary) - April
On the earnings front, the pace of quarterly earnings reports picks up and we'll be hearing from the portfolio's own Nucor (NUE), Union Pacific (UNP), and Honeywell (HON) late in the week. Leading up to those reports, we'll be scrutinizing what's report and shared from Steel Dynamics (STLD), Alcoa (AA), CSX (CSX), and JB Hunt Transport.
In terms of the other earnings reports to be had next week, comments from Charles Schwab (SCHW) and Interactive Brokers (IBKR) should confirm our thesis on Cboe Global Markets (CBOE), while ASML (ASML) and Lam Research (LRCX) should do the same for Applied Materials (AMAT). We'll be eyeing quarterly results and guidance from United Airlines (UAL), American Express (AXP), American Airlines (AAL), and Alaska Air (ALK) with an eye toward our shares of Airbnb (ABNB). And with PPG Industries (PPG) also reporting, we'll be curious if it drops any insightful hints about the tone of its business with AAP Bullpen resident Universal Display (OLED).
Here's a closer look at the earnings reports coming at us next week:
Monday, April 18
- Open: Bank of America (BAC), Charles Schwab (SCHW), Harley Davidson (HOG), Synchrony Financial (SYF).
- Close: JB Hunt Transport (JBHT), Steel Dynamics (STLD).
Tuesday, April 19
- Open: Dover (DOV), GATX (GATX), Haliburton (HAL), Hasbro (HAS), Johnson & Johnson (JNJ), Lockheed Martin (LMT).
- Close: IBM (IBM), Interactive Brokers (IBKR), Netflix (NFLX).
Wednesday, April 20
- Open: ASML (ASML), Heartland Express (HTLD), Lithia Motors (LAD), Procter & Gamble (PG).
- Close: Alcoa (AA), CSX (CSX), Lam Research (LRCX), Las Vegas Sands (LVS), Tesla (TSLA), United Airlines (UAL), Whirlpool (WHR).
Thursday, April 21
- Open: Alaska Air (ALK), American Airlines (AAL), AT&T (T), Nucor (NUE), NVR (NVR), Philip Morris International (PM), Trinity Industries (TRN), Union Pacific (UNP).
- Close: Boston Beer (SAM), Mattel (MAT), PPG Industries (PPG), Snap (SNAP).
Friday, April 22
- Open: American Express (AXP), Honeywell (HON), Kimberly Clark (KMB), SAP SE (SAP), Verizon (VZ).
Airbnb, Inc. (ABNB) ; $170.70; 765 shares; 3.73%; Sector: Consumer Service
WEEKLY UPDATE: Following the favorable TSA passenger data and bullish comments from Ryanair Holdings last week (RYAAY), American Airlines (AAL) lifted revenue guidance for the March quarter and when it reported its March quarter results this week Delta Air Lines (DAL) shared it had the highest bookings ever over a five-week period. Alongside that, JPMorgan shared it debit and credit card business was up 21% year over year in the March quarter given the continued pickup in travel and dining. Finally, late in the week BTIG shared that according to tracking data, a post-Omicron rebound in February-March should put Airbnb on track to meet its room night guidance for the quarter. We see all of the above confirming our stance on ABNB shares and we'll look for more confirmation when United Airlines (UAL) and American Express (AXP) report their March quarter results next week.
1-Wk. Price Change: 5%; Yield: 0.00%
INVESTMENT THESIS: Airbnb is a global technology platform that matches travelers or "guests" with hosts that make their home or other dwelling available for use over a period of days. Airbnb makes its money is on services associated with usage of its platform, customer support and payment processing. That revenue stream, which is tied to facilitating a guest's stay, is recognized when the guest check-in occurs. Airbnb updated or introduced 50+ products for guests and hosts that are designed to increase host confidence to list properties with greater insurance coverage, making listings more informative with improved and automated translation in 62 languages, verified accessibility features and verified Wi-Fi speeds. For guests, there is improving discoverability, such as the "I'm Flexible" feature now extends for stays out to 12 months and can be filtered by property type. In our view the more comfortable Airbnb is able to make hosts, there more hosts the company can attract, and the more properties hosts are likely to list. Similarly, the more options and greater flexibility it can provide guests, the greater the likelihood of winning consumer wallet share. We would argue Airbnb has learned one of what we think is Amazon's (AMZN) great value propositions -- the ability to reduce transactional friction.
Target Price: Reiterate $220; Rating: One
RISKS: The COVID-19 pandemic and its impact on travel spend, economic challenges, geopolitical risks, host growth and retention.
ACTIONS, ANALYSIS & MORE: Investor Relations
Advanced Micro Devices (AMD) ; $93.06; 1,160 shares; 2.78%; Sector: Info. Tech.
WEEKLY UPDATE: KeyBanc Capital Markets issued a note this week sharing its findings that cloud demand rose at more than 30% year-over-year in March, which should have a positive pull through for graphics processing chips as well. Late this week, Taiwan Semiconductor (TSM) reported its High Performance Computing segment revenue rose 59% year over year in the March quarter with IoT and Automotive up 21% and 70%, respectively. Year over year, Taiwan Semi sees its June quarter revenue up 32%-37%, which suggest continued year over year strength in HPC, which in turn bodes well for data center and cloud related demand. In the coming weeks, we'll be digging into cloud commentary from Google (GOOGL), Microsoft (MSFT), Amazon (AMZN), Alibaba (BABA) and others as they report their March quarter results. We'd also note our $175 price target equates to a PEG ratio of 1.3 -- not expensive at all given it's well below a PEG ratio of 2.0. When the company reports its March quarter results we expect more insight on the synergies to be had as it integrates Xilinx, which should also help diversify its end market exposure.
1-Wk. Price Change: -7.9% Yield: 0.00%
INVESTMENT THESIS: AMD is a chip maker that specializes in the development of both CPUs (like Intel) and GPUs (like Nvidia). On the CPU side, the company continues to take share from Intel in the data center thanks to its 2nd generation EPYC processor line, which is seeing increased adoption in the super computing and high-performance computing space (especially following execution missteps from Intel that has resulted in delays for the companies 7nm chips), which you can read more about at the link here. On the GPU side, while Nvidia remains the unquestioned leader in terms of overall performance, AMD is the close on its tail and provides a strong balance between price and performance. AMD is also seeing strong momentum in the mobile space, recently announcing that its Ryzen platform has exceeded its moonshot 25x20 goal set in 2014 that aimed to improve the energy efficiency of its mobile processors 25 times by 2020. Simply put, we think AMD has more room to run as it gains market share, especially when you factor in the current strength of data center and the company's positioning as it relates to the next-gen video game console cycle given that both PlayStation and Xbox use AMD graphics cards.
Target Price: Reiterate $175; Rating: One
ACTIONS, ANALYSIS & MORE: FY2Q21 Earnings Analysis (7/27/21), CEO Interview (7/29/20), Readthroughs Are Still Positive for AMD (7/24/20), Initiation (7/7/20), Investor Relations
Amazon (AMZN) ; $3,034.13; 47 shares; 3.68%; Sector: Consumer Discretionary
WEEKLY UPDATE: Inside the March retail sales report we learned non-store retail sales rose 1.8% year- over-year during the month and 10.3% for the March quarter. This sets the bar for Amazon's upcoming quarterly earnings report, especially so for its North American retail facing business. Also this week, Amazon announced it was rebranding its free, ad-supported IMDb TV streaming service to "Freevee" and aims to boost its original content by 70%. This should also help drive continued growth in Amazon's overall advertising revenue stream. Late in the week Amazon announced it will offset incremental costs by passing fees on to sellers in the form of fuel and inflation surcharges. Beginning April 28, the incremental surcharges will be added to the existing ~5% fee currently leveled on U.S. third-party vendors who use the company's fulfillment services. The new costs are expected to add ~$0.24 per unit to the services offered by Fulfillment by Amazon. Amazon will reports its March quarter results on April 29, and as we get ready for that report we'll be sure to read the latest Letter to Shareholders that was released on Thursday, April 14.
1-Wk. Price Change: -1.8%; Yield: 0.00%
INVESTMENT THESIS: We believe upside will result from Amazon's continued Commerce dominance, AWS' continued leadership in the public cloud space, and ongoing growth of the company's advertising revenue stream, which feeds off Amazon's eCommerce business. Additionally, we believe profitability will continue to improve as AWS and advertising account for a larger portion of total sales as both these segments sport higher margins than the eCommerce operation. And while we believe the increasing share of revenue from these higher margin businesses will be key to driving profitability longer-term, we believe margins on ecommerce stand to improve as the company's infrastructure is further built out and economies of scale further kick in. The embedded call option is that management is always looking to enter a new space and generate new revenue streams. We continue to see the company's Prime, logistics service and learnings from its Chime video conferencing platform as a game changer for the healthcare industry.
Target Price: Reiterate $4,000; Rating: One
RISKS: High valuation exposes the stock to volatile swings, eCommerce has exposure to slower consumer spending, competition, management is not afraid to invest heavily, potential headwinds resulting from new eCommerce regulation in India, management is not scared to invest aggressively for growth, which can at times cause volatile reactions as near-term concerns arise relating to the impact on margins.
ACTIONS, ANALYSIS & MORE: FY2Q21 Earnings Analysis (7/29/21), 2020 Letter to Shareholders (4/15/21), Initiation (2/2/18), Investor Relations
AMN Healthcare Services, Inc. (AMN) ; $104; 1,060 shares; 2.84%; Sector: Health Care Services
WEEKLY UPDATE: S&P revised its outlook on AMN shares to positive due to greater demand for nurses and allied health care personnel, resulting in higher-than-expected bill rates. The company announced it will report its quarterly result on May 5. Ahead of that report, we will continue to dig into monthly JOLTS reports and other data regarding health care worker demand as well as the ongoing nursing shortage.
1-Wk. Price Change: 0.7%; Yield: 0.0
INVESTMENT THESIS: AMN Healthcare's business centers on talent solutions for the health care sector in the U.S. The company's revenue stream is tied to talents solutions, it reports in three business segments: Nurse and Allied Solutions, which generated 61% of revenue for the first nine months of 2021 and ~59% of its operating profit; Physician and Leadership Solutions - 24% and 13%, respectively; and Technology and Workforce Solutions - 15% and 28%, respectively. That business mix positions the company to be capitalize on the rising demand for healthcare professionals, particularly for nurses and doctors, which is expected to grow significantly as more of the U.S. population moves past the age of 65 in the coming years.
Target Price: Reiterate $140; Rating: One
RISKS: Economic downturns and the pace of economic recovery; the ability to win new contracts; the ability to recruit and retain quality healthcare professionals.
ACTIONS, ANALYSIS & MORE:, Initiation (1/27/22), Our Aging of the Population Investment Theme Explores Medical Staffing Issues, Investor Relations
Apple (AAPL) ; $165.29; 1,080 shares; 4.60%; Sector: Technology
WEEKLY UPDATE: Amid reports of weak 5G iPhone SE demand and lockdowns in China, Apple appears to be not only matching its product mix with consumer demand, a positive for both iPhone and overall Apple revenue, but also tapping into manufacturing in other parts of the globe. One such market is India, and we suspect we'll hear more about this move when Apple reports its March-quarter results. Setting the table for that report was Taiwan Semiconductor's (TSM) March quarter results, which revealed its smartphone related revenue rose 21% year-over-year during what is typically a seasonally weak quarter. Taiwan Semi's guidance implies more of the same in the June quarter, and with the company being a key supplier for the company its results could signal a upside surprise for Apple's Mac line. And ahead of Apple's April 28 earnings date, we are starting to hear speculation over what the company could announce as far as increasing its stock buyback program and dividend. While we tend not to overly speculate on those, we could see both being increased from current levels.
1-Wk. Price Change: -2.8% Yield: 0.5%
INVESTMENT THESIS: While we acknowledge that near- to- midterm performance remains heavily influenced by iPhone sales, the dynamic is shifting as investors finally being to place greater emphasis on Services growth. We are bullish on the 5G upgrade cycle and believe longer-term upside will continue to come as Services revenue grows its share of overall sales. Services provide for a recurring revenue stream at higher margins, a factor that serves to reduce earnings volatility while allowing for a higher percentage of sales to fall to the bottom line, as a result, we believe that Services growth and the installed base, are much more important than how many devices the company can sell in a given 90-day period. In addition to improved profitability, we also believe the transparent nature of this revenue stream will demand an expanded price-to-earnings multiple as segment sales grow. Furthermore, we believe that Apple's desire to push deeper into the healthcare arena will help make its devices invaluable as more life-changing features are added and the company works to democratize health records. Lastly, also see upside resulting from increased adoption of wearables (think the Apple Watch) and potential new product announcements such as an AR/VR headset or an update on project Titan, the company's secretive autonomous driving program.
Target Price: Reiterate $200; Rating: One
RISKS: Slowdown in consumer spending, competition, lack of new product innovation, elongated replacement cycles, failure to execute on Services growth initiative
ACTIONS, ANALYSIS & MORE: FY3Q21 Earnings Analysis (7/27/21), Apple Product Launch Event Takeaways (4/20/21), Takeaways from WWDC (6/22/20), Initiation (1/4/10), Investor Relations
Applied Materials (AMAT) ; $113.36; 1,160 shares; 3.39%; Sector: Industrial Machinery
WEEKLY UPDATE: Applied Materials won Intel's (INTC) exclusive EPIC Program Outstanding Supplier Award with Supplier Diversity Distinction, Intel's highest supplier recognition, for 2022. Late in the week we nibbled further on AMAT shares, using the continued weakness in the shares to improve our cost basis. We'd remind members that on March 11 Applied added an additional $6 billion to its existing share buyback program, bringing the total at that point to $9.2 billion. We strongly suspect the company is putting that program to work at or near current levels in AMAT shares. Late in the week, tucked inside its March quarter results Taiwan Semiconductor (TSM) increased its capital spending 11% year over year, putting it on the path to meet its significant year over year increase. Next week we'll be parsing through March quarter results from ASML (ASML) and Lam Research (LRXC), which should preview what we eventually hear when Applied reports its quarterly results next.
1-Wk. Price Change: -5.5% Yield: 0.8%
INVESTMENT THESIS: SEMI, the semiconductor capital equipment trade association, now sees global sales of semiconductor manufacturing equipment by original equipment manufacturers passing the $100 billion mark in 2022, after jumping 34% to $95.3 billion in 2021 and registering $71.1 billion in 2020. Other forecasts point to continued growth in the semiconductor capital equipment market due to the maturing of the 5G and IoT markets as well as the maturation of the other drivers for chip demand. We also like the company's policy of returning capital to shareholders and would note its growing track record of annual dividend increases.
Target Price: Reiterate $180; Rating: One
RISKS: Semiconductor capital equipment spending. Geopolitical tensions and international trade disputes.
ACTIONS, ANALYSIS & MORE: Trimming 2 Names; Initiating a New Position, Investor Relations.
ChargePoint Holdings Inc. (CHPT) ; $15.25; 4,500 shares; 1.77%; Sector: Electrical Components & Equipment
1-Wk. Price Change: -9% Yield: 0.00%
WEEKLY UPDATE: None. ChargePoint has yet to share when it will next report its quarterly results. As we move through the March-quarter earnings season, we will continue to track the shifting landscape toward EVs a harbinger of demand for EV charging stations. With the shares below $16, we are looking to build out our position size while improving our long-term cost basis.
INVESTMENT THESIS: ChargePoint Holdings designs, develops and markets networked electric vehicle (EV) charging system infrastructure and cloud-based services which enable consumers the ability to locate, reserve and authenticate Networked Charging Systems, and to transact EV charging sessions on those systems. As part of ChargePoint's Networked Charging Systems, subscriptions, and other offerings, it provides an open platform that integrates with system hardware from ChargePoint and other manufacturers. According to the US Department of Energy, the US reached a milestone this past year with its 100,000th EV charger installed in 2021. Industry analysts at Guidehouse Insights forecast that a total of 120 million chargers will be needed globally by 2030, providing a meaningful opportunity for ChargePoint to expand its charging footprint. To that end, the U.S. Departments of Transportation and Energy announced nearly $5 billion over the next five years that will be made available under the new National Electric Vehicle Infrastructure (NEVI) Formula Program established by President Biden's Bipartisan Infrastructure Law. The aim of NEVI is to build out a national electric vehicle charging network of high voltage chargers along designated Alternative Fuel Corridors, particularly along the Interstate Highway System.
Target Price: Reiterate $27; Rating: One
RISKS: EV adoption of passenger and fleet applications, changing technology, subscription renewals.
ACTIONS, ANALYSIS & MORE: We're Calling Up a Name From the Bullpen, The Needle Could Begin to Move on This Bullpen Name, Investor Relations.
Chipotle Mexican Grill (CMG) ; $1,603.17; 70 shares; 2.89%; Sector: Restaurants
1-Wk. Price Change: 3.8% Yield: 0.00%
WEEKLY UPDATE: After we nibbled further on CMG shares last week, early this week Citi reiterated its "Buy" rating on the shares, calling them a "category leader." The March retail sales report showed consumers continued to embrace eating out during the month as retail sales at food service & drinking establishments rose 19.4% year-over-year. For the March quarter in full, retail sales for the category jumped 26.6% as customers put Omicron into the rear view. We see that data setting up for a positive March quarter earnings report from Chipotle, which should also realize some benefits from the start of pricing action taken late in the December quarter and continued early into the current one. Chipotle will report its March quarter results on April 26.
INVESTMENT THESIS: Our investment thesis on CMG shares centers on its offering consumers better-for-you fare while also expanding its geographic density, embracing digital ordering and bringing to market limited-time menu offerings that should spur traffic and boost average revenue per ticket. With upside to our price target shrinking, we are once again reviewing the incremental upside and revisiting protein input costs.
Target Price: Reiterate $2,000; Rating: One
RISKS: Input costs, particularly for the protein complex, labor costs, consumer spending, food safety, industry dynamics and competition.
ACTIONS, ANALYSIS & MORE: Initiating a New Position in Chipotle, We're Adding Chipotle to the (Bullpen) Menu
Disney (DIS) ; $130.47; 805 shares; 2.71%; Sector: Communication Services
WEEKLY UPDATE: While there was no news this week from the company, according to the Disney world Park Pass Reservation System, all four parks are completely full for almost the entire Spring Break week. Similar reports indicate March 2022 was as busy as February, which was the busiest month for the company's Florida parks in the last two years. We see this pointing to a robust first half of 2022 for Disney's Parks business. Disney will report its quarterly results on May 11.
1-Wk. Price Change: -1.1% Yield: 0.00%
INVESTMENT THESIS: We believe Disney is excelling in its pivot from pay-TV to direct-to-consumer. The launch of Disney+ has been met with incredible fanfare and has surpassed 100 million subscriptions globally. In total, Disney projects its family of offerings could reach 300 to 350 million global subscribers by fiscal 2024, and we believe there is upside to management's profitability projections. Disney is also a strong "re-opening" play through its theme park, cruise line, and theatrical entertainment businesses. We also see margin expansion opportunities at the parks through the implementation of new reservation systems, new technologies, new experiences, and new membership programs.
Target Price: Reiterate $215; Rating: One
RISKS: Covid-19 related closures and movie production delays, macroeconomic slowdown impacting the consumer, churn on subscription products.
ACTIONS, ANALYSIS & MORE: The Selloff in Disney Makes the Stock Look Attractive (5/14/21) FY2Q21 Earnings Analysis (5/13/21), Disney Tells a Great Story at Its Investor Day (12/11/2020), CEO Bob Chapek Discuss Disney's Media & Entertainment Restructuring (10/12/20), Initiation (9/21/21), Investor Relations
Alphabet (GOOGL) ; $2,534.60; 55 shares; 3.59%; Sector: Communication Services
WEEKLY UPDATE: Last week we shared that U.S. digital ad spending expected to hit $239.89 billion this year, up 13.6% vs. 2021 and continue growing in subsequent years, clearly a positive for Alphabet. This week, Zenith's Advertising Expenditure Forecast calls for advertising across all digital channels to exceed 60% of global ad spend for the first time in 2022, reaching 65% of total spending by 2024. Digging into the report, Zenith forecasts 14% growth in digital ad spend in 2022, and 9% in 2023 and 10% in 2024, continuing to take spending share from print, radio, and TV. During the week, Alphabet's Google shared plans to invest about $9.5 billion across its U.S. offices and data centers in 2022, up from $7 billion the prior year. We see that as another reason to remain bullish on data center chip stocks, including Nvidia, Marvell, and AMD. Google will report its quarterly results on April 26.
1-Wk. Price Change: -4.9%; Yield: 0.00%
INVESTMENT THESIS: We believe that while search and digital ad dominance are what will carry shares in the near- to- midterm, longer-term it is the company's artificial intelligence (AI) "moat" that will provide for new avenues of growth. AI is what has made the company's Search, Video (YouTube) and targeted ad capabilities best-in-class and is the driving force behind the company's success in voice (Google Home) and autonomous driving (Waymo). Furthermore, we believe it is this AI expertise that will also make the company more prevalent in other industries, including healthcare via subsidiary Verily, as AI and machine learning continue to disrupt operations across industries. We believe Alphabet's willingness to invest in new areas, knowing most will fail, is a recipe for long-term success as while most "X Moonshot Factory" projects may fail, every once in a while, you end up with a Waymo, perhaps the division's, most successful graduate to date. Lastly, compounding out positive view of the company's future opportunities, we believe that Alphabet's free cash flow generation and solid balance sheet set it apart and are what will allow the company to continue taking chances on far-out ground-breaking and potentially world changing projects. Following the company's announced 20-for-one stock split, a move that could very well help the shares land in the Dow Jones Industrial Average, we will adjust our new price target on July 1.
Target Price: Reiterate $3,500; Rating: One
RISKS: Regulatory risk (data privacy), competition, macroeconomic slowdown impacting consumers and therefore ad buyer activity
ACTIONS, ANALYSIS & MORE: FY2Q21 Earnings Analysis (7/27/21), Why GOOGL Has Shrugged Off Antitrust Headlines in Early Trading Tuesday (10/20/20), Initiation (11/27/13), Investor Relations
Marvell Technology (MRVL) ; $60.97; 1,750 shares; 2.75%; Sector: Info. Tech.
WEEKLY UPDATE: It was another quiet week for Marvell shares, but wireless infrastrucrture company Ericsson (ERIC) shared the pace of 5G buildouts continued during the March quarter, particularly in North America. While Marvell has some exposure to Ericsson, its larger carrier network customers are Nokia and Samsung, and we will be digging into those upcoming reports when they are published. During the week there were several bullish comments issued on data center demand, and those were reinforced by the strong March quarter print for Taiwan Semiconductor's (TSM) High-Performance Computing segment. Segment revenue rose 59% year over year in the March quarter. Year over year, Taiwan Semi sees its June quarter revenue up 32%-37%, which suggest continued year over year strength in HPC, which in turn bodes well for data center and cloud related demand. We continue to like Marvell's position as a digital infrastructure chip play as well as the longer-term upside to be had with its auto-chip business.
1-Wk. Price Change: -3.5% Yield: 0.4%
INVESTMENT THESIS: Marvell Technologies is a semiconductor company that specializes in 5G infrastructure and data center chips. Our bullish centers on our view that the 5G upgrade cycle is still in its early earnings and will provide a multiyear tailwind to earnings. But the data center represents Marvell's largest end market, and it is also one of its fastest growing thanks to strength in the cloud. Meanwhile, Automotive represents the single biggest incremental opportunity for Marvell over the next five to 10 years. Management also has a terrific track record when it comes to M&A. This strategy has diversified Marvell's business away from volatile end markets with short product cycles like Consumer and pushed the company deeper into secular growth markets like Data Center and data infrastructure. Some notable completed deals are the acquisition of Cavium, Aquantia, Avera Semiconductor, and most recently, Inphi. Marvell's $1.1 billion acquisition of Innovium, a leader in networking solutions for cloud and edge data centers, is currently expected to be completed by the end of calendar 2021.
Target Price: Reiterate $105; Rating: One
RISKS: Further intensification on the US/China trade front, a delayed ramp in 5G infrastructure buildouts.
ACTIONS, ANALYSIS & MORE: FY2Q21 Earnings Analysis (8/26/21), FY1Q21 Earnings Analysis (6/7/21), Marvell Technology Gets Approval From China Regulators for Inphi Deal (3/24/21), Marvell Announces Acquisition of Inphi (10/29/20), Initiation (7/3/19), Investor Relations
Microsoft Corp (MSFT) ; $279.83; 425 shares; 3.07%; Sector: Technology
WEEKLY UPDATE: None. Microsoft will report its March-quarter earnings on April 26.
1-Wk. Price Change: -5.8% Yield: 0.8%
INVESTMENT THESIS: We believe the cloud to be a secular growth trend and that upside to shares will result from Microsoft's hybrid cloud leadership as the company grab's market in this expanding industry. While companies may look to build out multi-cloud environments, Microsoft's Azure offering will be a prime choice thanks to the company's decision to provide the same "stack" used in the public cloud, to companies for their on-premise data centers. Additionally, we would note that hybrid environments are currently the preference for most companies because it allows them to maintain critical data in house while taking advantage of the agility and scalability provided by public clouds. Outside of the cloud opportunity, we maintain a positive view on the company's growing gaming business, which we believe is becoming an increasingly prominent factor in the Microsoft growth story as gaming becomes more mainstream, management works to convert its gaming revenue from one-time license purchase to a recurring subscription model and as technologies like augmented/virtual reality evolve. Finally, as it relates to LinkedIn and other subscription-based services such as O365 and various Dynamics products, we continue to value them highly for their recurring revenue streams, which we remind members, provides for greater transparency of future earnings.
Target Price: Reiterate $360; Rating: One.
RISKS: Slowdown in IT spending, competition, cannibalization of on premises business by the cloud
ACTIONS, ANALYSIS & MORE: FY4Q21 Earnings Analysis (7/27/21), Ignite 2021, Microsoft Acquires ZeniMax (9/22/20), CEO Satya Nadella on CNBC (3/25/20), CEO Satya Nadella speaks at the World Economic Forum (1/23/20)
Morgan Stanley (MS) ; $84.76; 1,385 shares; 3.03%; Sector: Financials
WEEKLY UPDATE: Despite the March-quarter decline in investment banking activity across Wall Street, Morgan Stanley delivered top and bottom-line results for its March quarter that, in our view, speaks to the growing emphasis for its business model. CEO James Gorman's targets reach $10 trillion in client assets, more than 50% higher than the current level, which should drive more predictable fee-based revenue streams. We continue think the company's investment banking business rebounding is a "when" question, not an "if" one and we'd point to recent IPO registrations as well as new ones. Meanwhile, private equity shops are flush with capital, and we suspect they are evaluating candidates given the year-to-date performance of several sectors but especially that of tech.
1-Wk. Price Change: 0.8% ; Yield: 2.5%
INVESTMENT THESIS: The company's mission is to create three world-class businesses of scale: Institutional Securities, Wealth Management, and Investment Management. The bank has supercharged Morgan Stanley's push into the latter two businesses was recently enhanced by the acquisitions of E-Trade (for Wealth Management) and Eaton Vance (Investment Management). Both deals have increased the bank's exposure to fee-based and recurring revenue streams, making Morgan Stanley less dependent on volatile business lines and interest rates. Estimates suggest Wealth Management and Investment Management fees as a percentage of Morgan Stanley's overall revenues should increase to around 60% in the fourth quarter of 2022, up from about 46% in the first quarter of 2021. We see this transition as a multiple enhancing event. We also appreciate the bank's ability to return excess capital to shareholders. Following 2021's CCAR, the bank doubled its quarterly dividend payment to $0.70 per share and announced a share repurchase program worth up to $12 billion.
Target Price: Reiterate $120; Rating: One
RISKS: Capital Markets activity, Integration risk on recent acquisitions, increased regulation of banking industry, low interest rates
ACTIONS, ANALYSIS & MORE: 2Q21 Earnings Report (7/15/21), Initiation (7/12/21), Investor Relations
Nvidia (NVDA) ; $212.58; 610 shares; 3.34%; Sector: Info. Tech.
WEEKLY UPDATE: Bank of America shared its view that Nvidia is poised to benefit from continued strength in data center and ramping auto business that should overshadow any short-term graphics chip weakness in China and Europe. New Street Research echoed those comments, adding the decline in cryptocurrency prices is not a reason investors should be avoiding NVDA shares. KeyBanc Capital Markets issued a note this week sharing its findings that cloud demand rose at more than 30% year-over-year in March, which should have a positive pull through for graphics processing chips as well. Late this week, Taiwan Semiconductor (TSM) reported its High Performance Computing segment revenue rose 59% year -over-year in the March quarter with IoT and Automotive up 21% and 70%, respectively. Year-over-year, Taiwan Semi sees its June quarter revenue up 32%-37%, which suggest continued year \-over-year strength in HPC, which in turn bodes well for data center and cloud related demand. In the coming weeks, we'll be digging into cloud commentary from Google (GOOGL), Microsoft (MSFT), Amazon (AMZN), Alibaba (BABA) and others as they report their March quarter results.
1-Wk. Price Change: -8% Yield: 0.2%
INVESTMENT THESIS: We believe upside will result from Nvidia's GPU dominance, the moat created by its CUDA, the company's parallel computing platform, and significant growth in all of the company's end markets including, the cloud (think datacenter), gaming, autonomous vehicles and pro visualization. Furthermore, we believe the cloud (i.e. data center) growth will be even more of a factor in upside following the acquisition of Mellanox, which thanks to its low latency "InfiniBand" technology, provides Nvidia the ability be a more integral player in the buildout of data centers by working to both accelerate server subsystems via GPU-acceleration and accelerate the data center overall by "tying together" the multiple subsystems and allowing them to operate as a single cohesive unit.
Target Price: Reiterate $360; Rating: One
RISKS: Slow uptake of raytracing chips which will depend on gaming publishers' implementation of the new technology in software releases, a slowdown in the IT/data center spending, competition, slower than expected inventory channel normalization.
ACTIONS, ANALYSIS & MORE: FY2Q22 Earnings Analysis (8/18/21), Highlights From the Nvidia Investor Day (4/12/21), Jim Discusses Arm Holdings Acquisition on Mad Money (9/24/20), Initiation (3/18/19), Investor Relations
Skyworks Solutions (SWKS) ; $117.73; 850 shares; 2.58%; Sector: Semiconductors
WEEKLY UPDATE: Wells Fargo reiterated its "Outperform" rating on SWKS shares this week as did KeyBanc. Our bullish conviction on the shares was reinforced by the 21% year over year increase in Taiwan Semiconductor's smartphone related business during the March quarter, and its June quarter guidance that implies 29%-33% year over year gains for that business. Taiwan's Semiconductor also reported significant year over year revenue gains for its IoT and Automotive business, a confirming set of data for Skyworks's 2021 acquisition for that business out of Silicon Labs (SLAB).
1-Wk. Price Change: -3.7% Yield: 1.8%
INVESTMENT THESIS: Our thesis on the shares of this RF semiconductor company is multifold. We see the company's business benefiting from the 5G smartphone upgrade cycle, particularly given its higher dollar content per 5G device than 4G and 3G ones. As that multi-year opportunity matures, 5G will enable the IoT and connected car markets as well as other opportunities for the company's RF semiconductors. We also appreciate the company's growing track record for growing its dividends.
Target Price: $210; Rating: One
RISKS: International and geopolitical business risks, product development and design risks, limited number of customers.
ACTIONS, ANALYSIS & MORE: Initiating Coverage of Two Stocks and Trimming One, Investor Relations.
United Rentals (URI) ; $331.07; 160 shares; 1.37%; Sector: Industrials
WEEKLY UPDATE: While there was no company specific news this week, we will be closely dissecting quarterly results from construction equipment companies Caterpillar (CAT), Terex (TEX), and Gencor Industries (GENC) as well as what they see for the coming quarters. During the week, we took advantage of the recent weakness in URI shares to nibble, increasing our position size. We would look to build out the position size more aggressively if the shares retreat below the $315 level.
1-Wk. Price Change: 4.4% Yield: 0.0%
INVESTMENT THESIS: United Rentals is the largest equipment rental company in the world, operates throughout the United States and Canada, and has a limited presence in Europe, Australia and New Zealand. It serves the industrial and other non-construction; commercial (or private non-residential) construction; and residential construction. Industrial and other non-construction rentals represented approximately 50% of rental revenue, primarily reflecting rentals to manufacturers, energy companies, chemical companies, paper mills, railroads, shipbuilders, utilities, retailers and infrastructure entities; Commercial construction rentals represented approximately 46% of rental revenue, primarily reflecting rentals related to the construction and remodeling of facilities for office space, lodging, healthcare, entertainment and other commercial purposes; and residential rentals ~4% of revenue. We see the company benefitting on three fronts - the seasonal uptick in construction spending; the release of funds and projects associated with the five-year Biden Infrastructure Bill; and the company's nip and tuck acquisition strategy that should further enhance its geographic footprint. In January, the company announced a fresh $1 billion buyback authorization following the completion of $4 billion in share repurchases over the 2012-2021 period.
Target Price: Reiterate $420; Rating: One
RISKS: Industry and economic risk, competition and competitive pressures, acquisition risk.
ACTIONS, ANALYSIS & MORE: Initiating a Position in This Equipment Rental Company, We're Adding This Equipment Rental Company to the Bullpen, Investor Relations.
AbbVie (ABBV) ; $162.31; 175 shares; .73%; Sector: Health Care
WEEKLY UPDATE: Over the last few weeks, ABBV shares continued to move higher despite facing the loss of exclusivity for Humira next year, and early this week we once again rang the register on the shares realizing some hefty gains along the way. Late in the week, ABBV shares slumped on the news that Vice Chairman and President Michael Severino, who is responsible for research and development and the corporate strategy office, is leaving the company to join life sciences venture capital firm Flagship Pioneering as chief executive-partner. This adds to questions over as to how AbbVie will navigate its upcoming Humira loss. While we still have a slice of ABBV shares left, we're inclined to exit the position as we pass the dividend record date of April 15 that will ensure we receive the next $1.41 quarterly dividend payment on May 16.
1-Wk. Price Change: -7.2% Yield: 3.2%
INVESTMENT THESIS: AbbVie is a biopharmaceutical company best known for its blockbuster drug Humira. Despite the incredible selling strength of this product, the company has seen investors shy away from this name due to Humira's lost patent protection in Europe and risk in the United States in 2023. Key to AbbVie's future was the acquisition of Allergan, a deal that has diversified the company's revenue stream and provided exposure to new categories like Medical Aesthetics, neuroscience, and eye care. Additionally, we believe key growth drugs Rinvoq and Skyrizi will help fill the revenue and earnings gap of the Humira exclusivity loss. We also like AbbVie for its industry-leading dividend that we believe is supported by the balance sheet and well covered by free cash flow. AbbVie will pay its next dividend of $1.41 per share on Feb. 15 to shareholders of record as of Jan. 14, 2022.
Target Price: Reiterate $150; Rating: Two
RISKS: Execution of the Allergan integration, drug pricing, pipeline issues, loss of exclusivity on key drugs, competition
ACTIONS, ANALYSIS & MORE: Shares Selloff Following FDA JAK Inhibitor Update (9/1/21), FY2Q21 Earnings Analysis (7/30/21), Highlights From the JPMorgan Healthcare Conference (1/13/21), Initiation (10/1/18), Investor Relations
RISKS: Competition, a slowdown in the IT/data center spending.
Cboe Global Markets Inc. (CBOE) ; $117.52; 450 shares; 1.39%; Sector: Financials
WEEKLY UPDATE: On the heels of JPMorgan Chase's (JPM) March-quarter earnings report that benefitted from a strong end-of-quarter trading environment as well as continued market volatility entering the current quarter, we added to our CBOE position. The coming days with earnings from Charles Schwab (SCHW) and Interactive Brokers (IBKR) should bring further confirmation for our thesis, which includes both the continued adoption of options trading and therefore related volume, but also continued growth in Cboe's fixed fee related businesses. Tucked inside JPMorgan's earnings conference call was a comment from CEO Jamie Dimon that he can't "foresee any scenario at all where you're not going to have a lot of volatility in markets going forward." When we look at the issues presenting headwinds and uncertainty for the market, we agree and that should be a positive for Cboe's core business as more risk tolerant investors look to hedge their portfolios. If options trading volume continues to surge, and the shares retreat under market pressure to below the $110 level, we would look to revisit our "Two" rating.
1-Wk. Price Change: 1.3% Yield: 1.5%
INVESTMENT THESIS: Cboe's business, which centers on market infrastructure, data solutions, and tradable products for equities, derivatives, and foreign exchange across North America, Asia Pacific, and Europe. Those operations include the largest options exchange and the third largest stock exchange operator in the U.S., one of the largest stock exchanges by value traded in Europe, and EuroCCP, a leading pan-European equities and derivatives clearinghouse among others. The two primary drivers of the company's earnings are its options and North American equities business, which combined drive around 75% of its revenue but more importantly roughly 85% of its operating income. Viewed from a different perspective, 28%-30% of Cboe's revenue stream is from recurring non-transaction revenue that includes proprietary market data as well as access and capacity fees. We like the sticky nature and predictability of that business. The core driver of the company's business hinges on continued growth in options trading volume and the company expanding its recurring non-transaction revenue.
Target Price: Reiterate $137; Rating: Two
RISKS: IT spending, competition, supply chain challenges
ACTIONS, ANALYSIS & MORE: Addition to AAP Portfolio; Initial Technical Review, Addition to Bullpen, Investor Overview.
Cisco Systems (CSCO) ; $54.28; 2,440 shares; 3.38%; Sector: Info. Tech.
WEEKLY UPDATE: With the shares pulling back this week, we are once again revisiting our current Two rating. As we wait for the company to report its latest quarterly results, we will be listening to comments from mobile carriers, telcos, cable companies, and data center ones about their March quarter, expectations for the current one and any supply chain disruptions they experienced.
1-Wk. Price Change: -2.5% Yield: 2.7%
INVESTMENT THESIS: We have a favorable outlook on Cisco and its positioning to the recovery in Enterprise IT spending after the company reported 10% YoY order growth in its fiscal third quarter. This result represented the strong demand the company has seen in nearly a decade, and it is being driven by substantial growth opportunities in hybrid work, digital transformation, and the cloud. In addition to positive industry trends, the company's ongoing transition from hardware to more software/subscription sales is a price-to-earnings multiple expanding opportunity. Not only does this transition expand margins, but the recurring nature of the sales also reduces the volatility of earnings. Lastly, we like how management consistently returns a ton of cash to shareholders. Share repurchases are typical quarter after quarter, and the current stock price offers investors an attractive dividend yield. Management has increased its dividend payout for seven consecutive years.
Target Price: Reiterate $68; Rating: Two
RISKS: IT spending, competition, supply chain challenges
ACTIONS, ANALYSIS & MORE: FY4Q21 Earnings Analysis (8/18/2021), Initiation (6/2/21), Investor Relations
Costco Wholesale (COST) ; $590.39; 210 shares; 3.20%; Sector: Consumer Staples
WEEKLY UPDATE: Once again the monthly retail sales report confirmed that Costco continued to take consumer wallet share in March. While overall retail sales ex-gas and ex-auto rose 5.5% year-over-year, Costco's same-store adjusted March sales climbed 12.7%. We continue to see Costco's business and our shares benefitting from consumers pivoting where they spend the disposable dollars they do have in order to maximize them. As Retail Sales and Costco's own sales metrics are reported for April we will once again be looking for upside to our current price target. Late in the week, Costco announced a 13.9% increase for its quarterly dividend to $0.90 per share. The dividend is payable May 13, 2022, to shareholders of record at the close of business on April 29, 2022.
1-Wk. Price Change: -1.6% Yield: 0.5%
INVESTMENT THESIS: We like Costco's long-term prospects, driven by a club-based operating model that focuses on volumes, not margins, and therefore offers its customers a value proposition of everyday low prices. The strength of this model has created an incredible loyal customer base with low churn and continued share gains in both brick and mortar and e-commerce. And this is a global concept, evidenced by the strength of sales both in the U.S. and abroad, which includes an emerging China opportunity. We see the company's membership model as a key differentiator vs. other retailers and its plans to open additional warehouse locations in the coming quarters should drive retail volumes and the higher margin membership fee income as well. We also appreciate management's approach to capital returns and their willingness to return cash when it is in excess on the balance sheet.
Target Price: Reiterate $620. Rating: Two
RISKS: Inability to pass through higher costs, fuel prices, weaker consumer, membership churn.
ACTIONS, ANALYSIS & MORE: FY4Q21 Earnings Analysis (9/23/21), FY2Q21 Earnings Analysis (3/4/21), Upgrading Costco to a One (2/25/21), $10 Per Share Special Dividend (11/16/20), Recent Buy Alert (2/28/20), Initiation (1/27/20), Investor Relations
Deere & Co. (DE) ; $436.75; 285 shares; 3.21; Sector: Farm Machinery & Equipment
WEEKLY UPDATE: The Association of Equipment Manufacturers reported March industry unit retail sales for agricultural equipment in North America, which showed the year-to-date numbers of total tractors sold in 2022 at 5,653 units, up 0.4% year-over-year. Typically February sales are stronger than those in March ahead of the planting season for farmers. Also this week, US corn, wheat and soybean futures all gained ground supported by ongoing concerns about disruptions caused by Russia's war on Ukraine, with an extra sprinkling of optimism over increased demand for biofuels. During the week President Biden said his administration plans to allow gasoline that uses a 15% ethanol blend, that can cost $0.10 per gallon less than average gas prices, to be sold during the summer. We continue to see DE shares benefitting by farmer income prospects while the increase in fertilizer costs is poised to stimulate an upgrade cycle to precision ag equipment. Should DE shares retreat to the $390 level, we would reconsider our current Two rating.
.1-Wk. Price Change: 4.4% Yield: 0.9%
INVESTMENT THESIS: The global agriculture equipment market size is expected to reach $166.5 billion in 2027, growing at 6% CAGR over the 2020-2027 period. The favorable outlook for equipment purchases in the coming quarters reflects rising farmer income that historically drives new equipment purchases. At the same time, Deere continues to lean into the sustainability movement with its precision ag offering. That technology is helping farmers drive crop yields higher while also realizing cost savings, which makes the new technology a productivity upgrade compared to older equipment.
Target Price: Reiterate $450; Rating: One
RISKS: Geopolitical uncertainty, economic conditions, raw material and other input prices, prices for key agricultural commodities.
ACTIONS, ANALYSIS & MORE: Initiation (10/25/21), Investor Relations
Ford Motor (F) ; $15.48; 8,670 shares; 3.46%; Sector: Industrials
WEEKLY UPDATE: It was a relatively quiet one for Ford during this shortened trading week, but toward the end the company shared its China sales in the March quarter fell 18% year-over-year to 125,000 units due to a combination of supply chain issues and Omicron related lockdowns in China. Given the headlines surrounding both factors, we aren't overly surprised by the year over year decline, but we will be matching it up against what other auto OEMs report to determine if Ford gained share during the quarter. Taking some of the sting out of that, Ford also announced the all new, all electric F-150 Lightning Pickup will be available on April 26. Ford's next $0.10 quarterly dividend will be paid on June 1 to shareholders of record on April 26. Ford's 2022 virtual shareholder meeting will be held on May 12.
1-Wk. Price Change: 2.9% Yield: 0.6%
INVESTMENT THESIS: Our bullish thesis on Ford is mainly predicated on the turnaround led by CEO Jim Farley and his new leadership team. Whether it be through restructuring underperforming parts of the business and getting out of low profitable vehicles or addressing a roughly $2 billion headwind related to warranty costs, we believe Farley and his management are executing in building a new Ford that grows profitably and generates sustainable free cash flow. We also think Ford's electric vehicle business is underappreciated. Not only do they have the Mustang Mach-E, but Ford is also developing all-new electric versions of the popular F-150 and the E-Transit cargo van. Plus, Ford has a strategic partnership and minority investment with Rivian who is best known for its customer delivery vehicles for Amazon.
Target Price: Reiterate $25; Rating: Two
RISKS: Turnaround execution, the transition from ICE (internal combustion engines) to EV vehicles, competition, economic cycle,
ACTIONS, ANALYSIS & MORE: FY2Q21 Earnings Analysis (7/28/21), Ford Continues to Shine After Capital Markets Day (5/27/21), Our Take on Ford as It Continues Its Climb Higher (1/21/21), Looking for Opportunities After a Ford Downgrade (11/25/20), Initiation (11/24/2020), Investor Relations
Mastercard (MA) ; $357.82; 275 shares; 2.54%; Sector: Info. Tech
WEEKLY UPDATE: Last week, we discussed the finding's of Mastercard's March SpendingPulse report which paired with the findings of its January and February reports points to a meaningful year-over-year increase in consumer shopping, a positive for Mastercard's payment processing business. Those comments were echoed this week by both the March retail sales report that showed March-quarter retail sales rose 13.8% excluding autos and related parts. In its March quarter earnings, JPMorgan Chase (JPM) shared its credit and debit card business was up 21% year-over-year. We see both setting the stage for a solid March quarter earnings report from Mastercard on April 28.
1-Wk. Price Change: 1.6% Yield: 0.6%
INVESTMENT THESIS: Mastercard is a card network company that benefits from the secular shift away from cash transactions and towards card based and electronic payments. On COVID-19 dynamics, we view MA as a "reopening" play and an economic recovery play within technology because its cross-border volumes fell sharply during the pandemic but will rebound as mobility increases and travel restrictions ease. Mastercard has more international exposure relative to Visa, making its growth outlook more susceptible to new travel restrictions. However, we view MA as the better long-term play as we are betting on that inevitable recovery. The company's next $0.49 per share quarterly dividend will be paid on May 9 to shareholders of record on April 8.
Target Price: Reiterate $425 Rating: Two
RISKS: The recovery in cross-border transactions, regulation in payments market, competition from other fintechs, pricing pressures.
Nucor (NUE) ; $165.32; 390 shares; 1.66%; Sector: Materials
WEEKLY UPDATE: During the week, NUE share hit a record high $157.73 after the company shared it will report its March-quarter results on April 21. Ahead of that report, we'll be analyzing quarterly results from Steel Dynamics (STLD) and what it has to say about steel prices in particular.
1-Wk. Price Change: 9.7% Yield: 1%
INVESTMENT THESIS: Nucor is the largest steel producer in the United States, primarily serving commercial, municipal construction, and industrial markets. The company operates in three major segments: steel mills, steel products, and raw materials. Nucor is also the largest metals recycler in North America. We believe the steel industry is going through a multi-year cycle of higher prices, leading to higher margins and bigger profits for Nucor. The sharp, V-shaped recovery in industry activity has been one driver of profit growth for Nucor, as the surge in demand for steel coming out of the pandemic was met with tight capacity. We also believe Nucor will be a major beneficiary of a comprehensive infrastructure package. Lastly, Nucor has a history of rewarding its shareholders with robust capital returns during its upcycles. The company recently announced a 23% increase in its quarterly dividend to $0.50 per share, up from the prior $0.405, and the approval of a $4 billion share repurchase program, which replaces Nucor's prior $3 billion program under which the company bought back $2.33 billion between May-December of this year.
Target Price: Reiterate $142; Rating: Two
RISKS: Steel prices, decline in industrial activity, no comprehensive infrastructure package.
ACTIONS, ANALYSIS & MORE: Nucor Preannounces Stronger-Than-Expected Third-Quarter Earnings
(9/16/21), FY2Q21 Earnings Analysis (7/22/21), Initiation (6/7/21), Investor Relations
Union Pacific Corp (UNP) ; $246.21; 370 shares; 2.35%; Sector: Industrials
WEEKLY UPDATE: The Cass Freight Index showed U.S. freight slowed further in March compared to February and January. This confirms the aggregated March railcar data published by the Association of American Railroads, which has continued to post year-over-year declines in April. We suspect some of that is due to domestic supply chain issues as well as renewed lockdowns in China and the Shanghai port in particular. As those lockdowns continue we could see more pronounced supply chain issues emerge in the coming weeks. And looking out a few months, the contract for the International Longshore and Warehouse Union expires at the end of June. That group contains 22,000 union workers employed at 29 ports along the West Coast of the United States with nearly three-fourths of them at the twin ports of Long Beach and Los Angeles, the primary gateway for goods shipped to the United States from Asia. We expect Union Pacific will offer some comment on that when it reports its March quarter results on before the market open on April 21. Ahead of that report, we'll be parsing quarterly results from CSX (CSX), which should give us a strong sense as to what we'll see from UNP.
1-Wk. Price Change: 1.7%; Yield: 1.7%
INVESTMENT THESIS: We believe Union Pacific to be an ideal investment to both gain exposure to the economic reopening underway and to hedge against potential inflation. The supply crunch we are seeing across many industries (due to a surge in demand coupled with companies that have focused on running lean inventories throughout 2020) means a need to transport goods to rebuild supplies. This dynamic speaks to management's guidance for mid-single digit volume growth in 2021 versus the prior year. As for inflation, because of its importance in the global supply chain, Union Pacific has significant pricing power, which is the key to any inflationary hedge as it means the company can pass costs through to customers. Because of this pricing power, management also expects "continued margin improvement driven by pricing opportunities in excess of inflation and ongoing productivity initiatives." The company recently announced a new share repurchase authorization effective April 1 allowing it to buy up to 100 million shares by March 31, 2025.
Target Price: Reiterate $265 Rating: Two
RISKS: Service interruptions due to weather, West Coast port congestion, or other external factors, competition, a failure to innovate and increase efficiencies.
ACTIONS, ANALYSIS & MORE: FY2Q21 Earnings Analysis (7/22/21), Accelerated Share Repurchase (5/26/21), Initiation (3/9/21), Investor Relations
United Parcel Service (UPS) ; $188.02; 370 shares; 2.52%; Sector: Industrials
WEEKLY UPDATE: Late in the week, Loop Capital Markets pointed to the current 3.2% dividend yield as an attractive entry point for UPS shares despite near-term global macro pressures and upside to its $243 price target. We too are re-examining the risk to reward trade off to be had near the current share prices vs. our current Two rating. UPS will report its March quarter results on April 26, before the market open.
1-Wk. Price Change: -1.5% Yield: 2.2%
INVESTMENT THESIS: We are fans of CEO Carol Tomé. Throughout her time at Home Depot, Tomé built an impressive reputation as a turnaround artist, and we think her fresh perspective and intense focus on efficiencies will create a better UPS. However, near-term global supply chain issues paired with rising transportation costs could be a thorn in the company's side. We appreciate UPS's nearly 50 years of stability and growth in dividends, which management calls the "hallmark" of the company's financial strength. In February 2022, the company announced a 49% hike to its quarterly dividend putting it at $1.52 per share.
Target Price: Reiterate $255; Rating: Two
RISKS: Weakness in the broader economy, rising fuel prices, execution, cost management, pricing power.
ACTIONS, ANALYSIS & MORE: FY2Q21 Earnings Analysis (7/27/21), Investor/Analyst Day Analysis (6/9/21), Initiation Post (9/25/20), Investor Relations
Walmart (WMT) ; $157.08; 860 shares; 3.48%; Sector: Consumer Staples
Weekly Update: Early this week we trimmed back our position in Walmart shares and downgraded them to a Two rating. Later in the week, the company named John Rainey as its next Executive Vice President and Chief Financial Officer effective June 6. Rainey joins the company from PayPal (PYPL) where he serves as CFO and Executive Vice President, Global Customer Operations, and we see that as a great hire especially as Walmart looks to push further into digital and payments. Late in the week, the March Retail Sales was reports and following the data contained in that report as well as both hotter than expected March CPI and PPI reports, we're boosting our price target on WMT shares to $175 from $165. If the shares retreated below the $150 level, we'd be inclined to reconsider the current Two rating.
1-Wk. Price Change: -0.2%; Yield: 1.4%
INVESTMENT THESIS: We believe Walmart to be a defensive name that can withstand the pressures of the coronavirus pandemic that is at the same time transforming itself for the digital, post-pandemic world. While its scale is well understood and to a large part what allows the name to be so resilient despite a difficult macroeconomic environment, we believe investments into ecommerce are what will provide longer-term upside. On this offensive front, we believe multi-year investments in eCommerce (previously rolling Jet.com into the core online operation) and initiatives such as Walmart+ stand to increase engagement and customer loyalty. We also believe the recent partnership with Shopify will help expand the online marketplace and view a potential deal with TikTok Global as an "embedded call option" that can greatly aid the online segment's growth as it provides the company an Instagram like play with the ability to leverage online influencers. Moreover, we believe Walmart to have a strong foothold in the rapidly growing emerging Indian market via its majority ownership of Flipkart. Finally, we believe there to be a budding advertisement business that can leverage the company's omni-channel investments (and resulting data) that has yet to be appreciated by the market.
Target Price: Increase to $175 from $165; Rating: Two.
RISKS: Consumer spending levels, FX, Competition, Margin headwinds related to e-commerce,
ACTIONS, ANALYSIS & MORE: FY2Q21 Earnings Analysis (8/17/21), Why We Are Upgrading Walmart to a One (6/24/21), Walmart Moves Higher After Bloomberg Reports 7Flipkart Could IPO in Q4 (4/6/21), Adding to Walmart (2/19/21). Initiation (11/6/20), Investor Relations
Boeing Co. (BA) ; $181.94; 340 shares; 1.59%; Sector: Industrial
WEEKLY UPDATE: While BA shares got some lift following the company's March-quarter delivery update, which revealed a 14% increase in overall deliveries year-over-year. That improvement was almost entirely predicated on the 737 MAX as issues with its 787 aircraft continue. Following that report, BA shares received yet another price target cut, the second in as many weeks. As we noted during the week, BA shares face considerable technical resistance between the $185-$190 level, which led us to not only trim back our position but downgrade the shares to a Three rating. We will look to unwind the balance of the portfolio's position in BA shares above $185.
1-Wk. Price Change: 3.8% Yield: 0.00%
INVESTMENT THESIS: Our thesis is predicated on a few beliefs. First off, we see a near-term catalyst related to the conclusion of the 737 Max saga, and we expect a happy ending and a globally coordinated recertification before the end of 2020. Additionally, we believe 2022 will be the inflection year to Boeing's free cash flow, and Boeing' history points to the inflection point being a good entry point to get into the stock. That being said, management acknowledged on its third quarter earnings call that 2022 is the more likely inflection point. Looking further out, we've seen estimates that suggest Boeing's free cash flow will be greater than $20 per share in a normalized year 2023. When visibility behind Boeing estimates begins to improve (driven by 737 ungrounding and vaccine/therapeutic driven improvements to air travel/global tourism), we think positive momentum will finally build in the stock.
Target Price: $185-$190; Rating: Three
RISKS: Recovery in aerospace market, economic health of airlines, production issues, 737 MAX recertification, defense budgets.
ACTIONS, ANALYSIS & MORE: FY2Q21 Earnings Analysis (7/28/21), March Orders and Deliveries Are Signs of a Business That Has Turned (4/13/21), Two Pieces of Good News (3/1/21), Initiation Post (10/5/20), Investor Relations
Honeywell (HON) ; $195.19; 200 shares; 1.01%; Sector: Industrial
WEEKLY UPDATE: We recently trimmed HON shares and downgraded the shares to a "Three" rating. In addition to concerns related to renewed supply chain pressures which appear to be expanding in China as well as inflationary ones for input costs and corresponding margin pressure, the technicals point to meaningful technical resistance at the $200 level. Our plan will be to use near-term strength in HON shares to further unwind this position.
1-Wk. Price Change: 2.6% Yield: 1.9%
INVESTMENT THESIS: High-quality, diversified industrial with strong franchises in Aerospace, Safety & Productivity Solutions (SPS), Building Technologies (HBT), and Performance Materials & Technologies (PMT). In the current Covid environment, we believe Aero's exposure to the still-growing Defense & Space industry is being underappreciated by the market, while SPS is poised for growth in the back half of 2020 into 2021 due to exposure to PPE and warehouse automation. Honeywell also has one of the strongest balance sheets in the sector with a leverage ratio below 1-times. This creates ample capacity for future dividend increases, share repurchases to support EPS growth, or strategic M&A which we believe is even more of a possibility in the current environment.
Target Price: $200 Rating: Three
RISKS: The economic cycle, longer than expected rebound in the aerospace industry.
ACTIONS, ANALYSIS & MORE: FY2Q21 Earnings Analysis (7/23/21), A Tale of 2 Aerospace Companies on Friday (4/9/21), Sparta Acquisition (12/22/20), FY3Q20 Earnings Analysis (10/30/20), CEO Darius Adamcyzk on CNBC (9/10/20), Initiation (8/5/2020), Investor Relations
NortonLifeLock (NLOK) ; $26.64; 2,300 shares; 1.58%; Sector: Info. Tech.
WEEKLY UPDATE: When we downgraded the shares to a "Three" rating, we established our exit price target at $28 given the our view NLOK shares are poised to be "dead money" until the Avast transaction is either approved of scuttled. After several slips, that timing now looks to be sometime in the second half of 2022.
1-Wk. Price Change: -0.6% Yield: 1.9%
INVESTMENT THESIS: NortonLifeLock is an industry-leading and worldwide recognized user-centric Consumer Cyber Safety business that provides device security, identity threat protection, and privacy software that protects customers from threats posed by cyber criminals. We believe NortonLifeLock's role in protecting consumers from cyber threats will continue to increase in importance as more devices are connected to the internet. Longer-term, management is committed to growing at a low to mid-single-digit percent rate, running the business at a 50% operating margin, and generating a solid amount of free cash flow. Thanks to the company's clean balance sheet, we think management could accelerate top-line growth even further by pursuing more industry consolidating transactions like the Avira acquisition. We await granular details on savings and other synergies to be had with its pending acquisition of Avast. NortonLifeLock's Board of Directors declared a quarterly cash dividend of $0.125 per common share to be paid on March 16, 2022, to all shareholders of record as of the close of business on February 22, 2022.
Target Price: Reiterate $28; Rating: Three
RISKS: Customer churn, management execution, competitive dynamics.
ACTIONS, ANALYSIS & MORE: NortonLifeLock to Merge with Avast (8/11/21), FY1Q22 Earnings Analysis (7/27/21) Initiation (7/22/20), Investor Relations