Were you expecting a quiet week after the Independence Day holiday, before the June quarter-earnings season kicks off? We can't blame you. But, obviously, the market had its own plans.
In some respects the busy week was a positive, given the upward move in the markets and the decline in volatility. That lifted a number of positions in the portfolio, but at the same time as we did see a few warning signs, as well.
The June Challenger Job Cuts report showed a 57% month-over-month increase (59% on a year-over-year basis) in job cuts, which didn't include late-in-the week layoff news from Twitter and others. Tesla reported its highest monthly sales in China-made vehicles in June, which suggests supply chains continued to normalize late in the quarter. But the latest Covid spike in China has led to the return of certain restrictions. Reports indicate China has instilled a vaccine mandate in Beijing and people will still need to get tested at least every three days to enter all public venues. The concern for investors and companies alike that count on China's manufacturing is a return to lockdowns that could lead to a return supply chains issues. Also, potentially reigniting supply chain issues, some 70,000-truck owner-operators who form the bedrock of California's transport industry are in limbo as state-level labor rules start applying to them, creating another choke point in stressed U.S. supply chains.
And we have another log on geopolitical uncertainty this week. After surviving a non-confidence vote last month, U.K. Prime Minister Boris Johnson will be stepping down from his position after over 40 ministers resigned in protest in recent weeks. China demanded the U.S. cease military collusion with Taiwan and Russian President Vladimir Putin warned that Russia has yet to get serious in Ukraine raising fresh questions over how much longer that conflict will continue. As that timeline extends, it carries with it the pressures that have plagued energy and other commodity markets as well as those from efforts to squeeze Russia.
While there were some positive earnings pre-announcements like the one from Samsung that helped lift our shares of AMD, Nvidia, and Applied Materials this week, there were also a growing number of negatives ones, including those from Kornit Digital, Rada Electronics, Nu Skin, and AI-lending marketplace Upstart. We will continue watch for announcements next week and adjust our expectations accordingly.
Putting all of that and other items we discussed during the week with members together, we continue to think the June-quarter earnings season will see expectations for the back half of 2022 be revised lower. As that happens, questions over what valuation metrics levels should be assigned will be asked. In some cases, like the one we saw with our shares of McCormick & Co. after it reported its May-quarter results, those answers will be counter balanced by the year-to-date drop in stock prices.
As we enter next week, our plan will be to digest the data and assess what it means for not only the dueling market narratives, but what companies are poised to report in the coming weeks. We'll continue to look for opportunities to buy quality companies, but we suspect that in many cases we'll be able to buy them at better prices than current levels.
The AAP Portfolio
The post-Independence Day, shortened trading week was largely positive for the portfolio with more than half of its positions moving higher, more than a dozen of which outperformed our benchmark, the S&P 500. Following the drubbing taken by the stock market during the June quarter that hit several portfolio positions hard, the positive fresh start to the current quarter is rather welcomed even though it meant our market- hedging inverse exchange-traded fund positions ending the week lower.
We added no new positions to the portfolio this week, nor did we add or trim any existing ones. More than likely we will remain on this cautious path next week as the June-quarter earnings season picks up speed and we contend with several pieces of inflation data that should keep the fires burning on the recession vs. inflation duel that has gripped the market.
And for those that missed the July Members-Only Call, in which we did a blow by blow review of every portfolio holding, you can watch the replay here or catch our post-call summary of what we discussed here.
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)
Coming into this holiday week, the Atlanta Fed's GDPNow model called for a 2.1% decline in GDP growth for the June quarter, while the CME FedWatch Tool pegged the likelihood of the Fed boosting interest rates by 75 basis points at its upcoming July monetary policy meeting at 86%. Following the week's data, which included better than expected reports for May factory orders, the June ISM Services Index and job creation contained in the June employment report, the updated Atlanta Fed's GDPNow model now sees 2Q 2022 GDP at -1.2%, while the CME FedWatch Tool now sees a 93% chance of a 75-basis point hike and a 7% chance of a 1 percentage point hike at the Fed's July meeting. The week's data also led the CME FedWatch Tool to now call for almost a 31% probability of a 75-basis point rate hike at the September meeting up from less than 14% a week ago.
Let's review the data and see what led to all of these revisions:
While the May Factory Order data rose vs. that in May as did Factory Shipments, more recent data in the form of S&P Global's June Manufacturing PMI as well as the June ISM Manufacturing Index showed new orders contract for the first time in roughly two years. So, while the May Factory Order data is positive, we and the stock market are less focused on that data vs. the more recent data. With that in mind, next week's Fed Beige Book should add another layer of perspective to order books.
While the ISM Non-Manufacturing Index fell to 55.3% in June vs. 55.9 % in May, it topped the 54.2% consensus forecast. But the June figure was still the lowest reading since May 2020 and continued the month-over-month decline that began in April. New order activity held up far better than that for manufacturing, and while the prices paid component ticked lower, its reading of 80.1 remained at elevated levels.
Turning to the June employment, the number of jobs created during the month came in at 372,000 far stronger 250,000 expectation. The unemployment rate for June held steady at 3.6% but the month-over- month declines in both the labor force participation rate and the employment to population ratio will tell the Fed the labor market remains tight. That tightness more than likely means we won't see any meaningful retreat in year-over-year-wage gains in the near-term. As we can see in the chart below, the average hourly earnings in June were up 5.1% vs. June 2021, a few ticks lower than in May but significantly higher than this time last year.
On a positive note, the national average gas prices in the U.S. have continued to retreat and as we write Friday's Roundup, AAA has that figure at $4.721 per gallon vs. $4.842 a week ago and the mid-June peak of $5.016. While still up significantly year over year, the directional move is likely to help sway upcoming consumer confidence metrics.
The key takeaway from the week's economic data is that so far, the economy continues to hold up despite the growing fears of a potential recession. Inflation pressures remain, and as we learned in the June Fed meeting minutes that were released this week, that is going to keep the Fed's foot on the interest rate hike pedal. Given the sharp revisions that were had in both the Atlanta Fed GDPNow Model as well as the CME FedWatch Tool over the last few weeks, next week's June Consumer and Producer Price Indexes have the potential to drive yet another round of revisions in those models. As those are made, depending on what they are, we will likely see them reverberate across the stock market and investor expectations for whether the Fed can stick a soft landing.
Chart of the Week: XLE Needs an Energy Booster
The Coming Week
Entering next week, the Atlanta Fed's GDP Model now calls for second-quarter 2022 GDP of -1.2% compared to -2.1% exiting last week. Similar to how we entered this past week, next week will see the duel between recession and inflation and the Fed's efforts to contain it continue. The back-to-back June Consumer Price Index and producer price index reports on Wednesday and Thursday will either confirm the thought that inflation has peaked, and if not, it will solidify the expected pace of Fed rate hikes. We'll also be reading through the latest Fed Beige Book to see what its anecdotal data has to say about the pace of the economy as well as inflation pressures. Closing out the week, we have the June retail sales report, which will also bring with it the tally for the June quarter as well. That will give us a benchmark against which to measure forthcoming earnings reports, including those from Amazon, Chipotle, and Mastercard.
Here's a closer look at the economic data coming at us next week:
Monday, July 11
- CB Employment Trends Index - June (10:00 AM ET)
Tuesday, July 12
- NFIB Small Business Optimism Index - June (6:00 AM ET)
- OPEC Monthly Report (7:00 AM ET)
Wednesday, July 13
- Weekly MBA Mortgage Applications (7:00 AM)
- Consumer Price Index - June (8:30 AM ET)
- Weekly EIA Crude Oil Inventories (10:30 AM)
Thursday, July 14
- Weekly Initial & Continuing Jobless Claims (8:30 AM)
- Producer Price Index - June (8:30 AM ET)
- Weekly EIA Natural Gas Inventories (10:30 AM)
- Fed Beige Book (2 PM ET)
Friday, July 15
- Retail Sales - June (8:30 AM ET)
- Empire Manufacturing Index - July (8:30 AM ET)
- Industrial Production & Capacity Utilization - June (9:15 AM ET)
- Business Inventories - May (10:00 AM ET)
- Michigan Consumer Sentiment Index - July (10:00 AM ET)
Monday, July 11
- Italy: Retail Sales - May
Tuesday, July 12
- Japan: Producer Price Index - June
- Germany: ZEW Current Conditions, Economic Sentiment - July
- Eurozone: ZEW Economic Sentiment - July
Wednesday, July 13
- China: Import/Exports - June
- UK: Construction Output, Industrial Production, Manufacturing Production - May
- Germany: Consumer Price Index - June
- Eurozone: Industrial Production - May
Thursday, July 14
- Japan: Industrial Production & Capacity Utilization - May
Friday, July 15
- China: Housing Prices, Industrial Production, Retail Sales - June
- China: China Thomson Reuters IPSOS PCSI - July
- China: 2Q 2022 GDP
- UK: Car Registrations - June
- Germany: Car Registrations - June
- Italy: Consumer Price Index - June
As the June quarter earnings season kicks into gear next week, from a portfolio perspective we'll get quarterly results from PepsiCo (PEP) as well as Morgan Stanley (MS). Given our positions in Apple (AAPL), AMD (AMD) and Nvidia (NVDA) we'll also be paying close attention to Taiwan Semiconductor's (TSM) June quarter results and guidance. As we dig into TSM' report, we'll be looking for any adjustments to its 2022 capital spending plans, which could impact our shares of Applied Materials.
Outside of those reports, the cadence of forthcoming reports is skewed toward the back half of the week, and as usual there is a cluster of bank and financial companies reporting. Once again, we'll focus on loan growth and credit card metrics but in addition, we'll be looking to see the impact of rising interest rates and mortgage rates on their other businesses. We'll also be listening for comments on what those companies see unfolding for the investment banking industry in the second half of 2022. When ConAgra (CAG) reports it should give a good read through to consumer activity at grocery stores, and with Ericsson's report we'll be looking for an update not only on 5G but also what it has to say about supply chains in 2Q 2022 and the current one.
Here's a closer look at the earnings reports coming at us next week:
Monday, July 11
- Open: Azz Inc. (AZZ), Greenbrier Companies (GBX).
- Close: PepsiCo (PEP), PriceSmart (PSMT).
Tuesday, July 12
- Open: AngioDynamics (ANGO)
Wednesday, July 13
- Open: Delta Air Lines (DAL), Fastenal (FAST)
- Close: Washington Federal (WAFD).
Thursday, July 14
- Open: Cintas (CTAS), ConAgra (CAG), Ericsson (ERIC), JPMorgan Chase (JPM), Morgan Stanley (MS), Taiwan Semiconductor (TSM).
- Close: American Outdoor Brands (AOUT).
Friday, July 15
- Open: BlackRock (BLK), BNY Mellon (BK), Citigroup (C), PNC (PNC), State Street (STT), U.S. Bancorp (USB), United Health (UNH), Wells Fargo (WFC).
Advanced Micro Devices (AMD) ; $79.35; 1,160 shares; 2.7%; Sector: Info. Tech.
WEEKLY UPDATE: The week was a positive one for AMD as comments from Samsung built on the recent ones from Micron pointing to continued strength in the data center/server market. Late in the week, Taiwan Semiconductor also upped its revenue outlook for the June quarter, but we won't be able to confirm that was due to data center/high performance computing strength compensating for the weakening smartphone market, per Micron and Samsung comments, until July 14 when TSM reports its June quarter results. Also late in the week, Acer reported its June revenue, noting its Desktop PC business rose 9.3% year-over-year, while revenue for its gaming business soared 25.7% in June. Acer went on to share 2Q 2022 revenue for its Acer gaming subsidiary rose 42.9% year-over-year. As the June-quarter earnings season kicks into gear, we'll be looking for other points of demand confirmation for AMD, as well as those to confirm recent comments by Micron that it now sees the PC unit volumes down 10% this year vs. its prior forecast that called for volumes to be flat year-over-year. Based on the data and what it points to for the back half of 2022, we may be inclined to add to the portfolio's position size. When AMD eventually reports its quarterly, we expect an update on its cost synergies associated with its acquisition of Xilinx.
1-Wk. Price Change: 7.7% 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 $160; Rating: One
AMN Healthcare Services, Inc. (AMN) ; $113.17; 1,170 shares; 3.9%; Sector: Health Care Services
WEEKLY UPDATE: The May Jolts Report identified 2.0 million health care and social assistance jobs openings, up from 1.54 million in May 2021 and 1.95 million in April 2022. With 768,000 hires for the category in May, we continue to see a bright outlook for AMN's contract labor offerings. As we approach AMN's quarterly earnings report date, we'll dial into those reports from HCA Healthcare and others that have used contract health care labor to mitigate staffing challenges. We'll be looking to see what the expected return to more normalized contract labor usage is in the coming quarters, but so far that demand has held up stronger than expected. We will also be keeping watch on the fresh Covid variant, dubbed "Centaurus," which is being reported to escape immunity more than any other Covid strain thus far.
1-Wk. Price Change: -1.4%; 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 $125; 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.
Cboe Global Markets Inc. (CBOE) ; $118.68; 925 shares; 3.3%; Sector: Financials
WEEKLY UPDATE: Cboe reported favorable year-over-year June metrics that confirmed investors continue to utilize its financial products to combat market volatility. The monthly figures also point to further share gains for the company's European business. Following the surprisingly better than expected June Employment Report that should keep the Fed on its rate hike path, we continue to see market volatility ahead, a positive for Cboe's core options contracts business.
1-Wk. Price Change: 3.5% Yield: 1.7%
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 $140; Rating: One.
RISKS: IT spending, competition, supply chain challenges
ChargePoint Holdings Inc. (CHPT) ; $13.38; 10,000 shares; 4%; Sector: Electrical Components & Equipment
1-Wk. Price Change: 5.4% Yield: 0.00%
WEEKLY UPDATE: None.
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 $22; Rating: One
RISKS: EV adoption of passenger and fleet applications, changing technology, subscription renewals.
Chipotle Mexican Grill (CMG) ; $1,339.28; 70 shares; 2.8%; Sector: Restaurants
1-Wk. Price Change: 2.5% Yield: 0.00%
WEEKLY UPDATE: Mastercard's June SpendingPulse report showed consumer spending at restaurants remained strong during the month, rising 11.6% vs. 6.1% for total retail sales ex-auto and ex-gas for the month. Ahead of Chipotle's quarterly earnings report date on July 26, we'll get the June Retail Sales report, which should shed another light on June restaurant sales. We'll also be looking for the latest industry data from Black Box Research. In terms of input cost pressures, beef prices appear to have moved off their recent peak but chicken prices continued move higher as did those for rice. While Chipotle has taken pricing action, the question is will it take further action during the second half of the year? As we get that answer as well as an update on its footprint expansion plans, we'll look to revisit our current price target on the shares.
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.
Costco Wholesale (COST) ; $501.54; 290 shares; 4.3%; Sector: Consumer Staples
WEEKLY UPDATE: Costco did it again. The company reported its June sales rose 20.4% year-over-year to $22.78 billion with same-store comp sales up 18.1% year-over-year, or 13.0% once adjusted to exclude impacts from gas-price changes and foreign exchange. Those figures are head and shoulders above the overall spending reported by Mastercard's June SpendingPulse report. Sizing up those two data sets, Costco also took e-commerce share as its ecommerce sales rose 8.3% in June vs. the 1.1% increase found by the June SpendingPulse report. Ever the straight shooter, Costco noted in its press release that this year's June retail month benefited from an extra shopping day in the U.S. relative to last year given the timing of Independence Day. This amounted to a roughly 2% benefit to overall sales as well as an approximately 3% benefit to U.S. sales.
1-Wk. Price Change: 3.2% Yield: 0.7%
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. Earlier this year, Costco announced a 13.9% increase for its quarterly dividend to $0.90 per share.
Target Price: Reiterate $620. Rating: One
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
WEEKLY UPDATE: Shares of Deere & Co. received a boost this week from Citi, which upped their rating to "Buy." Also today, DA Davidson issued bullish comments for DE shares given its models point to record cash receipts and profits for farmers both this year and next. That suggest a strong outlook for agricultural equipment at least through 2023 and into 2024. DA Davidson also echoed the comments we made on the July Member-Only Call about the difference between the planting season and the harvest season when it comes to crop prices. Current crop conditions for the latest planting season are good, but given the importance of July and August weather, the data we'll be watching will be the USDA's World Agricultural Supply and Demand Estimates report due out in August. Ahead of that report, we'll be digging into competitor AGCO's (AGCO) quarterly results on July 28. Deere's other key competitor CNH Industrial has yet to share its June quarter earnings date, but we'll be sure to share it with members once we have it.
1-Wk. Price Change: 1% Yield: 1.4%
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.
WEEKLY UPDATE: Citing a "perfect storm" in digital advertising amid recession concerns and rising competition, Barclays trimmed its price target on GOOGL shares to $3,000 from $3,200 but admitted that given the fall in the share price much of that storm is likely priced into the shares. Soon thereafter, Guggenheim also lowered its price target on GOOGL shares to $2,700 from $3,000 citing macro headwinds and the risk of a greater than expected pullback in digital ad spend. While we concede there is downside risk to advertising spend, advertisers are likely to accelerate the pivot in ad spending to digital platforms at the expense of TV, print, and radio to reach consumers eyeballs where they are. Late in the week, The Wall Street Journal reported Google proposed splitting up its advertising technology business as a concession to avoid another antitrust suit. Under the proposal, Google would split parts of its business that auctions and places ads on websites and apps into a separate company under the Alphabet umbrella. To us this is more form over substance, and may not satisfy the Department of Justice's demands. We would note, however, that Google's willingness to offer concessions to avoid a U.S. lawsuit is an evolution of the company's past strategy for legal and regulatory issues.
1-Wk. Price Change: 9.8%; 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 "moat" that will provide for new avenues of growth. AI is what has made the company's search, video 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
Microsoft Corp (MSFT) ; $267.66; 500 shares; 4.0%; Sector: Technology
WEEKLY UPDATE: Piper Sandler reiterated its Outperform rating on MSFT shares as it reduced its price target to $312 from $352 over concerns of foreign exchange currency headwinds and the company 50% international business mix. We also suspect that revision reflects recent comments by Micron that it now sees the PC unit volumes down 10% this year vs. its prior forecast that called for volumes to be flat year-over-year. Alongside that trimming, Piper shared expectations for Microsoft's Cloud business to cross over the $100 billion annualized run-rate milestone for the first time in the June quarter. Also this week, the UK's Competition and Markets Authority (CMA) announced it is launching an investigation into Microsoft's proposed acquisition of videogame maker Activision Blizzard. The CMA has provisionally set itself a deadline of September 1, when it will either approve the deal or instigate a more in-depth phase two review.
1-Wk. Price Change: 3.1% Yield: 0.9%
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 $320; 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) ; $76.73; 1,385 shares; 3.2%; Sector: Financials
WEEKLY UPDATE: Morgan Stanley will report its quarterly results on July 14 amid a frenzy of banks and other financial institutions. The quarter's results will reflect the very slow investment banking industry, but it should also allow its fixed fee and asset management business to shine. We'll be looking for an update on management's efforts to grow that business given its longer-term targets. Sizing up Morgan Stanley's results against JPMorgan, BNY Mellon, and Citigroup should remind investors of the businesses Morgan Stanley isn't in and are being impacted by higher interest rates.
1-Wk. Price Change: 0%; Yield: 3.6%
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.
Target Price: Reiterate $105; Rating: One
RISKS: Capital Markets activity, Integration risk on recent acquisitions, increased regulation of banking industry, low interest rates
WEEKLY UPDATE: The week was a positive one for AMD as comments from Samsung built on the recent ones from Micron pointing to continued strength in the data center/server market. Late in the week, Taiwan Semiconductor also upped its revenue outlook for the June quarter, but we won't be able to confirm that was due to data center/high performance computing strength compensating for the weakening smartphone market, per Micron and Samsung comments, until July 14 when TSM reports its June quarter results. Also late in the week, Acer reported its June revenue, noting its Desktop PC business rose 9.3% year-over-year while revenue for its gaming business soared 25.7% in June. Acer went on to share 2Q 2022 revenue for its Acer Gaming subsidiary rose 42.9% year-over-year. As the June quarter earnings season kicks into gear, we'll be looking for other points of demand confirmation for NVDA, as well as those to confirm recent comments by Micron that it now sees the PC unit volumes down 10% this year vs. its prior forecast that called for volumes to be flat year-over-year. Based on the data and what it points to for the back half of 2022, we may be inclined to add to the portfolio's position size. We like the company's net cash balance, its cash flow generation that has ample free cash flow and its dividend, which is admittedly modest as it continues to invest for future growth.
1-Wk. Price Change: 9.1% Yield: 0.1%
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 $225; 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
United Rentals (URI) ; $248.86; 335 shares; 2.5%; Sector: Industrials
WEEKLY UPDATE: None.
1-Wk. Price Change: 1.8% 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 $380; Rating: One
RISKS: Industry and economic risk, competition and competitive pressures, acquisition risk.
Verizon Communications (VZ) ; $50.49; 970 shares; 1.5%; Sector: Communication Services
WEEKLY UPDATE: Verizon will report its June quarter results on July 21. The day before competitor AT&T will reports its June quarter, setting the tone for what we could hear from Verizon. We expect recent price at Verizon should buoy margins in the coming quarters, keeping its relatively defensive businesses humming.
1-Wk. Price Change: -2.2% Yield: 5.1%
INVESTMENT THESIS: Verizon Communications is one of the largest communication companies in the U.S. Its Consumer business, includes wireless equipment and services as well as residential fixed connectivity solutions, including internet, video, and voice services, is ~75% of Verizon's revenue stream but ~90% of its operating income. Exiting the March 2022 quarter, the company had 115.2 million wireless customers split between 91.4 million pre-paid and 23.8 million postpaid, and 7.1 million broadband consumers, the vast majority of which are Fios Internet customers. From a revenue and operating profit contribution perspective, the Business segment accounts for ~25% and 10%, respectively. Through this segment Verizon offers wireless and wireline communications services and products, including data, video and conferencing services, corporate networking solutions, security and managed network services, local and long-distance voice services, and network access to deliver various Internet of Things (IoT) services and products.
Target Price: Reiterate $160; Rating: One
RISKS: Industry and economic risk, competition and competitive pressures, acquisition risk, labor relations, and the regulatory environment.
ACTIONS, ANALYSIS & MORE: Here's Why We're Attracted to This Telecom, Exiting 2 Positions, Initiating 1, and Adding to 3, Investor Relations
WEEKLY UPDATE: We moved to the side lines with AMZN shares in late April amid concerns for e-commerce spending in the June quarter and tough year-over-year comparisons for Amazon's June-quarter results given the timing of Prime Day in 2022 vs. 2021. Mastercard's June SpendingPulse survey pointed to modest year-over-year e-commerce spend, and we'll revisit that once we have the June retail sales report in hand at the end of next week. Our expectations is to revisit AMZN shares once the company has reported its June quarter results given the prospect for favorable year-over-year September quarter comparisons given the July 12-13 timing for Prime Day 2022. On the regulatory front, we have yet to hear about next steps in the UK's Competition Market Authority (CMA) investigation into Amazon's Marketplace platform.
1-Wk. Price Change: 5.5%; 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 $175; Rating: Two
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.
American Water Works (AWK) ; $150.86; 600 shares; 2.7%; Sector: Utilities
WEEKLY UPDATE: As expected American Water Works continues to petition Public Utility Commissions for rate increases, continuing to drive revenue growth, cash flow and dividend increase prospects in the coming years. American Water Works subsidiaries in Missouri and California are seeking rate increases to fund infrastructure investments and service improvements. Missouri American Water asked the Missouri Public Service Commission to review water and wastewater rates because of nearly $770 million in completed or planned investments from January 2021 to May 2023. The review is expected to take 11 months and any new rates are not expected to become effective until mid-2023. California American Water is seeking approval from the California Public Utilities Commission to set new rates for each of its service areas for 2024 through 2026.
1-Wk. Price Change: -7%; Yield: 1.9%
INVESTMENT THESIS: American Water is the largest and most geographically diverse, publicly-traded water and wastewater utility company in the United States, as measured by both operating revenues and population served. The company's primary business involves the ownership of utilities that provide water and wastewater services to residential, commercial, industrial, public authority, fire service and sale for resale customers. The company's utilities operate in approximately 1,700 communities in 14 states in the United States, with 3.4 million active customers in its water and wastewater networks. Services provided by the Company's utilities are subject to regulation by multiple state utility commissions or other entities engaged in utility regulation, collectively referred to as public utility commissions (PUCs). Residential customers make up a substantial portion of the Company's customer base in all of the states in which it operates. The Company also serves (i) commercial customers, such as food and beverage providers, commercial property developers and proprietors, and energy suppliers, (ii) fire service customers, where the Company supplies water through its distribution systems to public fire hydrants for firefighting purposes and to private fire customers for use in fire suppression systems in office buildings and other facilities, (iii) industrial customers, such as large-scale manufacturers, mining and production operations, (iv) public authorities, such as government buildings and other public sector facilities. Because there is usually only one water utility available, the business has a rather wide moat, and the company has used its scale and balance sheet to acquire smaller, regional water utilities thereby further expanding its scale. pending rate increases under pin the company's 7%-9% annual EPS growth targets between now and 2026 as well as its stated objective to increase its annual dividend by 7%-10% over the next several years.
Target Price: Reiterate $165; Rating: Two
RISKS: Regulatory oversight risks, environmental safety laws and regulation, weather related service disruptions.
WEEKLY UPDATE: When Samsung previewed its June quarter, it telegraphed weakness in the smartphone market, confirming prior comments made by Micron (MU). Estimated smartphone shipments by Samsung's mobile business in 2Q 2022 quarter were 62 million-64 million vs. 74 million in 1Q 2022. Late in the week, Taiwan Semiconductor upped its revenue outlook for the June quarter, but we won't be able to confirm that was due to data center/high performance computing strength compensating for the weakening smartphone market, per Micron and Samsung comments, until July 14 when TSM reports its June quarter results. Given Apple's Apple Silicon efforts and its partnership with TSM, next week's TSM earnings report should give us a much better feel for what Apple is likely to say when it reports its June quarter results on July 28. Similarly, June quarter results from Qualcomm on July 27 should also help set that table given its exposure to the global smartphone market.
1-Wk. Price Change: 5.8% Yield: 0.6%
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 $160; Rating: Two
RISKS: Slowdown in consumer spending, competition, lack of new product innovation, elongated replacement cycles, failure to execute on Services growth initiative
Applied Materials (AMAT) ; $91.19; 1,160 shares; 3.2%; Sector: Industrial Machinery
WEEKLY UPDATE: The last few weeks have brought a fresh round of pressure on AMAT shares amid recession concerns and how that may translate into excess chip capacity in the short-term. The stalling of the CHIPs act in Washington has also been a factor even though chip demand is expected to double over the next 8-10 years driving demand for chip equipment as the industry looks to match capacity to meet that demand. While the near-term could remain challenging for Applied it's the longer-term outlook we're focusing on here given the pain already baked into the shares, which has them trading at less than 12-times forward earnings. As we wait for that market to turn and collect the company's $0.26 per share per quarter dividend, odds are the company is utilizing its buyback program to shrink the share count, a positive for EPS comparisons down the road.
1-Wk. Price Change: 5.7% Yield: 1%
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. Applied's next $0.26 per share quarterly dividend will be paid on Sept. 15 to shareholders of record on Aug. 25.
Target Price: Reiterate $135; Rating: Two
RISKS: Semiconductor capital equipment spending. Geopolitical tensions and international trade disputes.
First Trust Nasdaq Cybersecurity ETF (CIBR) ; $43.13; 2,000 shares; 2.6%; Sector: Cybersecurity
WEEKLY UPDATE: The latest WatchGuard Technologies Threat Lab Internet Security Report revealed ransomware detections in Q1 2022 doubled the total volume reported for 2021. A recent Global Cyber Security Services Market report forecasts the total cost of cybercrime globally is expected to zoom to $10.5 trillion by 2025 annually from the current $1 trillion level. The combination of those costs, accelerating attacks and the growing number of data privacy regulations is expected to grow the cyber security services market to $305 billion by 2027 vs. $150 billion in 2020. We continue to like the broad-based cybersecurity ETF brings to the portfolio and we have ample room to take advantage of the pullback and improve our cost basis.
1-Wk. Price Change: 4.8% Yield: 0%
INVESTMENT THESIS: The First Trust Nasdaq Cybersecurity ETF is an exchange-traded fund. The Fund seeks investment results that correspond generally to the price and yield (before the Fund's fees and expenses) of an equity index called the Nasdaq CTA Cybersecurity Index. The Nasdaq CTA Cybersecurity Index is designed to track the performance of companies engaged in the cybersecurity segment of the technology and industrials sectors. It includes companies primarily involved in the building, implementation, and management of security protocols applied to private and public networks, computers, and mobile devices in order to provide protection of the integrity of data and network operations. To be included in the index, a security must be listed on an index-eligible global stock exchange and classified as a cybersecurity company as determined by the Consumer Technology Association (CTA). Each security must have a worldwide market capitalization of $250 million, have a minimum three-month average daily dollar trading volume of $1 million, and have a minimum free float of 20%.
Target Price: Reiterate $62; Rating: Two
RISKS: Cybersecurity spending, technology and product development, timing of product sales cycle, new products, and services in response to rapid technological changes and market developments as well as evolving security threats.
ACTIONS, ANALYSIS & MORE: We're Swapping One Cybersecurity Stock for Another, ETF Product Summary
Ford Motor (F) ; $11.62; 8,670 shares; 3%; Sector: Industrials
WEEKLY UPDATE: Ford Motor reported its monthly sales data for June, which rose 31.5% year-over-year to 152,262 vehicles, with the higher margin truck and SUVs accounting for almost 97% of the overall mix. The company's EV effort continued to gain traction during the month, as its sales of EVs rose 76.6% year-over-year to 4,353 vehicles, roughly 2.9% of its overall June sales. To top it off, initial indications are Ford gained market share as its performance during June compared to the estimated 11% drop in overall industry sales during the month. On a month-over-month basis, however, there is no denying Ford's June sales inched lower vs. the 154,461 vehicles sold during May with sequential declines in both SUVs and EVs that were offset by gains in both trucks and cars. Panning the monthly sales data camera back and looking at Ford's June quarter, its total vehicle sales rose 1.8% to 483,688, missing the expected gain between 3.3%-5.1% that Wall Street was looking for. Recession concerns have weighed on the shares, and suggest a challenging September quarter lies ahead that could hamper its ability to showcase cost reduction and other synergies. Given the average age of cars and light trucks on the roads today, however, there is longer-term opportunity for Ford that should also benefit from its ongoing transformation efforts.
1-Wk. Price Change: 2.7% Yield: 2.6%
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 $15; 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) ; $323.06; 275 shares; 2.6%; Sector: Info. Tech
WEEKLY UPDATE: Mastercard released its June SpendingPulse report that showed U.S. consumer retail spend rose 6.1% year-over-year (9.5% excluding auto). Excluding auto and gas, in-store retail sales rose 11.7% year-over-year, easily outstripping e-commerce sales that climbed 1.1% during the month. Reinforcing those figures, the Bank of America Institute reported aggregate credit and debit card spending climbed 11% year-over-year in June, with credit card spending rising 16% and debit card spending +6%. The report from Bank of America is noteworthy given the sequential strengthening in spending, up 11% year-over-year in June vs. 9% year-over-year in May. We'll want to size both up against next week's June Consumer Price Index and June Retail Sales reports, but so far indications are consumers continued to spend toward the end of the June quarter. The question we are asking ourselves is how much of this recent strength could be spending pull-forward ahead of higher borrowing costs in the second half of 2022 vs. the first half? That could goose transaction volumes at Mastercard in the near-term but we continue to like the longer-term driver that is the ongoing shift to debit, credit and mobile payments from cash and check across the globe.
1-Wk. Price Change: 1.5% 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. Mastercard's next $0.49 per share quarterly dividend will be paid on Aug. 9 to shareholders of record on July 8.
Target Price: Reiterate $425 Rating: Two
RISKS: The recovery in cross-border transactions, regulation in payments market, competition from other fintechs, pricing pressures.
McCormick & Co. Inc. (MKC) ; $82.07; 1,280 shares; 3.1%; Sector: Food; Consumer Non-Durables
WEEKLY UPDATE: Following the company's recent quarterly earnings report, Barclays echoed our thoughts about the back half weighted outlook that should benefit from further pricing action in August and the seasonal pick-up in demand for its products. Cumulative pricing action lays the groundwork for a more favorable 2023 especially if input pricing pressures ease sooner than expected. From a position size perspective, we have room to round out our position size in the coming weeks. The catalyst for that action will be a pick-up in grocery sales as well as confirmation its August price increase sticks.
1-Wk. Price Change: -7% Yield: 1.8%
INVESTMENT THESIS: McCormick is a global leader in flavor that manufacture spices, seasoning mixes, condiments, and other flavorful products to the entire food industry-retailers, food manufacturers and foodservice businesses. Roughly 65% and 75% of the company's sales and operating income are derived from its consumer business with the balance from its "Flavor Solutions" one. With consumers feeling the pinch of higher food prices, they are likely to repeat the historical pattern of shifting toward increasing food consumption at home, a driver of demand for McCormick's products. We are also entering the seasonally strong time of year for this dividend payer, which has increased its dividend each year over the past 37 years.
Target Price: Reiterate $110 Rating: Two
RISKS: Local economic and market conditions, input cost inflation, exchange rate fluctuations, and restrictions on investments, royalties, and dividends.
WEEKLY UPDATE: Nucor announced it will report its June-quarter results on July 21. Like many other companies that are in their earnings quiet period, there was no company specific news this week even though China's potential infrastructure stimulus is likely to be a positive catalyst for steel prices, adding to the demand in the coming quarters alongside that from the Biden Infrastructure Law. As we shared on the July Members-Only Call, Nucor is a quality company but with the June quarter earnings season ahead of us we are not rushing in to build out the position size just yet.
1-Wk. Price Change: 3.2% Yield: 1.7%
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 $175 Rating: Two
RISKS: Steel prices, decline in industrial activity, no comprehensive infrastructure package.
PepsiCo Inc. (PEP) ; $171.88; 560 shares; 2.9%; Sector: Consumer Defensive
WEEKLY UPDATE: The company was firmly in its quiet period ahead of reporting its June-quarter results early next week. Ahead of that report, however, we saw a fair amount of price target juggling with Barclays keeping its "Overweight" rating, but trimming its target to $183 from $187; JPMorgan inched its price target lower to $185 from $186; and Deutsche Bank upped its target to $178 from $175. We'd note that each of those targets are ahead of our own $177 target. When PepsiCo reports next week, we will be looking closely at its comments on input costs and whether the company is poised to take further pricing action in the second half of 2022. If so, that could lead to us to revisit our price target, but given the movement in PEP shares we would need to see upside to $195 to reconsider our current rating.
1-Wk. Price Change: 1.5%; Yield: 2.5%
INVESTMENT THESIS: PepsiCo is one of the largest food and beverage companies globally. It makes, markets, and sells a slew of brands across the beverage and snack categories, including Pepsi, Mountain Dew, Gatorade, Doritos, Lays, and Ruffles. The firm uses a largely integrated go-to-market model, though it does leverage third-party bottlers, contract manufacturers, and distributors in certain markets. In addition to company-owned trademarks, Pepsi manufactures and distributes other brands through partnerships and joint ventures with companies such as Starbucks. The combination of the consumable nature of those products along with PepsiCo's ability to realize price increases has led to consistent revenue, EPS and dividend growth during both the Great Recession and the Covid pandemic. This company's most recent dividend increase marks its 50th consecutive one and that 7% bump moves the annualized dividend to $4.60 per share up from the prior $4.30. The new quarterly dividend of $1.15 per share is payable on June 30 to shareholders of record on June 3.
Target Price: Reiterate $177; Rating: Two
RISKS: Economic conditions, supply chain constraints, raw material costs.
United Parcel Service (UPS) ; $185.40; 520 shares; 2.9%; Sector: Industrials
WEEKLY UPDATE: While there was no company-specific news this week, the Mastercard June SpendingPulse report showed a modest year-over-year gain in e-commerce sales, which will size up against next week's June retail sales report. With gas prices receding, Amazon's 2022 Prime Day to be had in the coming weeks, and before too long the Back-to-School shopping season, we'll look to revisit UPS shares once we've digested its June quarter earnings report on July 26.
1-Wk. Price Change: .2% Yield: 2.7%
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 $230; Rating: Two
RISKS: Weakness in the broader economy, rising fuel prices, execution, cost management, pricing power.
Energy Select Sector SPDR Fund (XLE) ; $71.59; 505 shares; 1.1%; Sector: Energy
WEEKLY UPDATE: Aiming to cut Russian President Vladimir Putin's revenue for the war in Ukraine, the U.S. and its allies have discussed trying to cap the price on Russian oil at $40-$60/bbl, but run the risk that a poorly executed plan could lead to a spike in oil prices. Understandably, the U.S. is concerned that the European ban that starts to come into force at the end of the year could contribute to oil prices spiking even further, adding to recession concerns. Meanwhile, as part of its efforts to stimulate its economy and close the gap to its 5.5% GDP target, China's Ministry of Finance is considering allowing local governments to sell 1.5 trillion yuan ($220 billion) of special bonds in the second half of this year and be used to pay for infrastructure spending. Late in the week, Goldman Sachs renewed its call that structural supply issues due to underinvestment in recent years paired with expected shortages could lead oil prices to the $140 level. Members will recall the notion that oil prices would move higher as Europe severs energy ties with Russia later this year was one of our reasons for adding the Energy Select Sector SPDR ETF shares to the portfolio. Now we can add China's latest efforts to jumpstart its economy as a potential driver for the global demand for oil to outstrip supply later this year. We have room to expand the portfolio's exposure to this holding, and will look to do so as signs confirm the supply issues is poised to outstrip recession related demand destruction.
1-Wk. Price Change: -2.2; Yield: 3.9%
INVESTMENT THESIS: Energy Select Sector SPDR Fund is an exchange-traded fund (ETF) that tracks the performance of the Energy Select Sector Index. The ETF holds large-cap U.S. energy stocks. It invests in companies that develop & produce crude oil & natural gas, provide drilling and other energy related services. The holdings are weighted by market capitalization.
Target Price: Reiterate $98; Rating: Two
RISKS: interest rates, weakness in the broad economy, energy prices. seek
ProShares Short QQQ ETF (PSQ) ; $13.66; 2,940 shares; 1.2%
WEEKLY UPDATE: With the Fed on path to tame inflation, a move that will see further interest rate hikes in the coming months, we are increasingly concerned about the upcoming June quarter earnings expectations and a downward reset in expectations for the second half of 2022. Adding to this concern for the upcoming earnings season are the dollar's strengthening vs. other currencies in the June quarter and likelihood recession concerns could weigh on forward guidance. As such we intent to keep the portfolio's position in PSQ shares active as we move into that earnings season. Unlike the ProShares Short S&P 500 ETF, PSQ shares specifically target tech stocks, an area that has been pressured in a rising rate environment. We see this position offering protection in the near-term while we focus on the longer-term opportunities with the portfolio's tech positions.
1-Wk. Price Change: -4.6%; Yield: 0.00%
INVESTMENT THESIS: ProShares Short QQQ seeks daily investment results, before fees and expenses, that correspond to the inverse (-1x) of the daily performance of the Nasdaq-100 Index. The Nasdaq-100 Index includes 100 of the largest domestic and international non-financial companies listed on The Nasdaq Stock Market based on market capitalization.
Target Price: N/A
RISKS: Because QQQ shares track the inverse of the Nasdaq 100 Index, QQQ shares will move lower when the Nasdaq 100 Index moves higher.
ACTIONS, ANALYSIS & MORE: Selling Shares in 1 Position, Closing Another, Adding to 1 and Initiating 1
ProShares Short S&P 500 ETF (SH) ; $16.01; 3,310 shares; 1.6%
WEEKLY UPDATE: With the Fed on path to tame inflation, a move that will see further interest rate hikes in the coming months, we are increasingly concerned about the upcoming June quarter earnings expectations and a downward reset in expectations for the second half of 2022. Adding to this concern for the upcoming earnings season are the dollar's strengthening vs. other currencies in the June quarter and likelihood recession concerns could weigh on forward guidance. As such we are intent to keep the portfolio's position in SH shares active as we move into that earnings season.
1-Wk. Price Change: -2%; Yield: 0.00%
INVESTMENT THESIS: The ProShares Short S&P 500 ETF seeks daily investment results, before fees and expenses, that correspond to the inverse (-1x) of the daily performance of the S&P 500®. We are using SH shares to blunt market volatility and hedge the portfolio's performance against its benchmark, the S&P 500. Given the tactical nature of this position, we do not expect to hold SH shares for the same length of time as we do the portfolio's long positions.
Target Price: NA
RISKS: Because SH shares track the inverse of the S&P 500, SH share will move lower when the S&P 500 moves higher.