We had a mixed week for stocks, as more earnings landed and jobs data surprised investors.
Employment numbers powered past expectations, while earnings have largely continued to hold up better than expected. But still, our call in late June that expectations would get revised lower for the S&P 500 during the second half of 2022 turned out pretty accurate, as we can see in the below chart.
At the margin, this means the market is incrementally more expensive. But we also have to recognize that bloated retail inventories will be a problem in the coming weeks. More than likely, those quarterly results will mimic what we recently heard from Walmart, as its margins took it on the chin as it has to work down its highest level of inventory in at least the last 20 years. We would not be surprised to see another leg down in EPS expectations for the S&P 500 for the last six months of 2022 and for 2023.
Also, this week, the market had to once again readjust its expectations for the dueling fears of a recession and interest rate hikes. Signs the economy is stronger than recent gross domestic product data suggest -- and is more than likely able to absorb further interest rate hikes aimed a quashing inflation -- erased some of the markets' gains from earlier in the week.
It also looks like we could have renewed supply chains issues, thanks to the latest variant of Covid-19. Japanese companies are temporarily shutting offices or suspending production as they battle a record wave of Covid-19. Japan had more than 1.4 million new Covid cases over the past week, World Health Organization data showed. We would also point out another woe for supply chains that could keep inflation at elevated levels: troubles for California truckers. We will add those items to our watch list.
As we head into the weekend, we'd share with members that we have a way to go until the Fed concludes its September monetary policy meeting and as more data is had we are likely to see expectations for the economy, Fed actions and coming EPS to be revised further. As that happens, we'll continue to update the technical view on the market as well as our fundamental and thematic framework as well. Should the market find firmer footing, we'll be ready to put capital to work, but we aren't in a rush to do so given current overbought conditions.
The AAP Portfolio
This week held the latest AAP Member's Only Call, in which we discussed the portfolio top to bottom. If you missed that live event, you can watch the replay or read the transcript here.
With the S&P 500 finishing the week little changed, there were a number of outperformers in the portfolio, includig AMD, ChargePoint, the First Trust Nasdaq Cybersecurity ETF, Nvidia, Ford Motor, Amazon, and AMN Healthcare shares. Offsetting those gains were moves lower in both Verizon and the Energy Select SPDR Fund, both the impact of those declines on the overall portfolio was limited given their relatively small position sizes.
We made no additions to the portfolio, nor did we exit any existing position or trim any shares. As we saw late in the week, even though the market made some technical progress, we are still in a bear market with at least a bit more to go with expectation resetting. More than likely the market has yet to find its footing and could give back some of its July gains in the coming days. We'll continue to act prudently with existing positions that have leapt considerably over the course of the last few weeks as well as adding new ones.
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)
The July Manufacturing PMI moved lower month-over-month to a reading of 52.8 vs. June's 53. While the July figure points to the manufacturing economy still growing, its rate of growth is far slower compared to the second half of 2021. We can easily say that given the July figure was the lowest since June 2020. For the second month in a row, the New Orders Index posted below the expansion/contraction line that is 50, coming in at 48 for July, indicating further slowing ahead. We also saw the inventories component rise to 57.3 from 56 in June, another sign of a slowdown. Even though it ticked higher month-over-month, the Employment Index was still in contraction mode adding some hard data to the company commentary we've heard in the last few months. On a positive note, the Prices Index fell 18.5 points to hit 60 in July, suggesting that inflationary pressures have improved even though they are still growing.
Like ISM's picture of the US Manufacturing economy in July, S&P Global US Manufacturing Purchasing Managers' Index slipped to 52.2 from 52.7 in June and was largely in line with the previously released "flash" estimate of 52.3. Per the report, "Lower production levels were often attributed to weak client demand and a further fall in new orders... . New orders fell for the second month running in July, with the pace of decline modest but the steepest seen since 2009 with the exception of pandemic lockdown months... further supply chain disruption and hikes in prices weighed on customer spending. Similarly, foreign client demand weakened at the start of the third quarter. New export orders fell at the fastest rate since May 2020."
Those findings paint a very similar picture to that from ISM, but where they differ is on pricing. S&P Global found "input prices paid by manufacturers rose markedly again in July due to greater transportation, fuel and raw material prices." With firms sharing they continued to pass-through higher costs to clients, suggesting the retreat in inflationary pressures to consumers may not be a quick one, weakening of payroll growth to the lowest for six months.
Turning to the twin reports from ISM and S&P Global for the service economy, we saw an even greater divergence. While ISM's findings pointed to a month-over-month uptick for the Services sector with improvements in nearly every category vs. June, S&P Global found the U.S. services economy decreased at a solid pace in July, with the fall in output the fastest since May 2020. On a positive note, S&P reported input costs and output charges during the month increased at the slowest paces for five and 16 months, respectively.
Pulling the economic data lens back, the JPMorgan Global Composite PMI report for July found "the rate of global economic growth ease to its weakest during the current 25-month sequence of expansion." More specifically, the July PMI figure fell to 50.8 from 53.5 in June as "growth slowed to a six-month low in the services sector, while output stagnated at manufacturers." To us, the final comment in the report sums it up best: "Declines in survey details such as new orders, employment and future output also highlight the current weakness of the economic cycle as recession risks continue to build. While the July survey provides further signs of inflationary pressures moderating, this mainly reflects softer demand."
Closing out the week was the employment report, which as we discussed during Friday's Daily Rundown video, came in hotter than expected for both the number of jobs created during the month, but also regarding wage inflation pressures. By the numbers, 528,000 jobs were created during the month, significantly greater than the expected 250,000 and initially reported 372,000 in June. We'd also note the number of jobs added in both May and June were revised higher to 386,000 and 398,000, respectively.
That level of job creation repels concerns the U.S. economy is in a recession and suggests it can handle the Fed's inflation fighting steps. Odds are those steps will be larger than recently expected given that once again the year-over-year growth in Average Hourly Earnings came in higher than expected at 5.2% vs. the expected 4.9% and June's 5.1% figure. As one might suspect, we've seen a shift in the CME FedWatch Tool with that indicator now seeing an almost 68% probability for a three-quarters percentage point rate hike following the Fed's September monetary policy meeting. Previously, that indicator skewed toward a 50-basis point hike.
Late on Friday, June consumer credit data was released, and it showed moth-over-month increases in both nonrevolving credit and revolving credit. Given the nature of revolving credit, which includes both lines of credit as well as credit cards, that's the one most will focus on as it ties more to consumer spending. That line item rose 16% month-over-month in June, indicating consumers reversing the decline seen in May, putting total revolving credit at its highest level in the last several years. While job growth and wage gains should help consumers manage that debt load, we have to consider that as the Fed hikes interest rates further that debt service will get incrementally more expensive. Similarly, with a labor force participation rate of 62.1% and an employment to population ratio of 60.0% per the July jobs report, more than likely there will be some consumer pain in the coming months.
Chart of the Week: Russell 2000 Needs a Breather
Breaking that downtrend line on the daily chart of the Russell 2000 fund (IWM) was a relief to the bulls on this chart. Note, the day the IWM closed above the line and confirmed it, there was a switch from bearish to bullish. That stoked a nice rally up, but now the index is at June highs and that is resistance. Notice the indicators below the chart are starting to roll over, and that means more corrective measures. The ultimate oscillator has not rolled over as of yet, but certainly has peaked. Could a big correction be coming? We're not so sure, but at least a 50% pullback from low ($160) to high ($190) means a drop to $175, where buyers may pick up the stock. We often see the Russell 2, leading the other indices, and that could be the case once again.
The Coming Week
This past week was one focused on June quarter earnings as well as how the manufacturing and services economy fared during July. As we discussed above, the July Employment Report and its stronger than expected reading for both job creation and wage inflation led to yet another rethink about the pace of the economy and steps the Fed is likely to take to quell inflation.
Coming into the week, the Atlanta Fed's GDPNow saw 2.1% for the current quarter vs -0.9% for the June quarter but by the end of the week that model was eyeing 1.4%. That latest revision was before the July Employment Report, and that data should be reflected in the models next update due on August 10. We expect an upward revision to that GDP forecast but recognize it should also include the upcoming July CPI report as well. Also exiting the week, the CME FedWatch Tool shifted from an almost 60% change of a 50-basis point rate hike at the Fed's September monetary policy meeting with a around a 40% chance for a three-quarter percentage point move to one that favors a three-quarter percentage point hike. We point all of this out because next week brings several pieces of domestic inflation data that could lead to changes in that Fed monetary policy forecast, influencing GDP revisions as well.
As such we see the market paying close attention to the 2Q 2022 Unit Labor Cost as well as the July Consumer Price Index and Producer Price Index reports. With the July data for both the CPI and PPI we expect favorable sequential comparisons, especially given the rollover in gas prices. However, it will be the magnitude of the move lower that will determine the movement in the CME FedWatch Tool.
Here's a closer look at the economic data coming at us next week:
Monday, August 8
- CB Employment Trends Index - July (10:00 AM ET)
Tuesday, August 9
- Productivity and Unit Labor Cost - 2Q 2022 (8:30 AM ET)
Wednesday, August 10
- Weekly MBA Mortgage Applications (7:00 AM ET)
- Consumer Price Index - July (8:30 AM ET)
- Wholesale Inventories - June (10:00 AM ET)
- Weekly EIA Crude Oil Inventories (10:30 AM ET)
Thursday, August 11
- Weekly Initial & Continuing Jobless Claims (8:30 AM ET)
- Producer Price Index - July (8:30 AM ET)
- Weekly EIA Natural Gas Inventories (10:30 AM ET)
Friday, August 12
- Import/Export Prices - July (8:30 AM ET)
- University of Michigan Consumer Sentiment Index (Preliminary) - August (10:00 AM ET)
Monday, August 8
- Japan: Economy Watchers Current Index - July
- Eurozone: Sentix Investor Confidence - August
Wednesday, August 10
- Japan: Producer Price Index - July
- China: Consumer Price Index, Producer Price Index - July
- Germany: Consumer Price Index - July
- Italy: Consumer Price Index - July
Thursday, August 11
- Germany: Thomson Reuters Ipsos Monthly Global Primary Consumer Sentiment Index - August
Friday, August 12
- Japan: Thomson Reuters Ipsos Monthly Global Primary Consumer Sentiment Index - August
- China: China Thomson Reuters Ipsos Monthly Global Primary Consumer Sentiment Index - August
- Eurozone: Industrial Production - June
If you thought the more than 1,550 earnings reports had this past week was over the top, next week has just over 1,200 on tap. While we have no companies reporting next week, we will be paying close attention to the guidance issued at Blink Charging (BLNK) and EVgo (EVGO) ahead of ChargePoint's (CHPT) quarterly earnings report in the coming weeks. Bullpen resident Wendy's (WEN) will be reporting as will Jack in the Box (JACK), and with both we'll be looking to see how they are handling inflation pressures, whether further pricing action will be taken, and if they are seeing any pullback in demand. Sizing up food inflation one step further will be quarterly results from chicken and beef company Tyson Foods (TSN).
Given equity positions in Rivian Automotive (RIVN) held by Ford Motor (F) and Amazon (AMZN), what Rivian has to say could influence what's next for their RIVN shares.
Following Walmart's (WMT) recent guidance cut, we expect what's said by Ralph Lauren (RL), Dillard's (DDS), Capri Holdings (CPRI) and Canadian Goose (GOOS) will add additional color to inventory and margin pressures. We'll also be sizing up what they have to say about shopping expectations through the balance of the year.
Here's a closer look at the earnings reports coming at us next week:
Monday, August 8
- Open: Barrick Gold (GOLD), Radware (RAD), Tyson Foods (TSN)
- Close: Blink Charging (BLNK), International Flavors & Fragrances (IFF), Take-Two (TTWO), Tanger Factory Outlet (SKT), Trex (TREX), Veeco Instruments (VECO).
Tuesday, August 9
- Open: Capri Holdings (CPRI), CEVA (CEVA), EVgo Inc. (EVGO), Global Foundries (GFS), Ingredion (INGR), Ralph Lauren (RL), Sysco (SYY).
- Close: Akami (AKAM), Alarm.com (ALRM), Axon (AXON), Inter Parufms (IPAR), Rackspace Technology (RXT), Repay Holdings (RPAY), Roblox (RBLX).
Wednesday, August 10
- Open: CyberArk (CYBR), Jack in the Box (JACK), Wendy's (WEN).
- Close: Dutch Bros. (BROS), Red Robin Gourmet (RRGB), Walt Disney (DIS).
Thursday, August 11
- Open: Canada Goose (GOOS), Cardinal Health (CAH), Dillard's (DDS), Nio (NIO).
- Close: ForgeRock (FORG), Indie Semiconductor (INDI), Poshmark (POSH), Rivian Automotive (RIVN), Sierra Wireless (SWIR), Toast (TOST).
Friday, August 12
- Open: Honest Company (HNST), Spectrum Brands (SPB).
Advanced Micro Devices (AMD) ; $102.31; 1,160 shares; 3.3%; Sector: Info. Tech.
WEEKLY UPDATE: AMD reported better-than-expected June-quarter results. It widened out its 2022 outlook, citing continued strength in data center even as it reduced its outlook for the PC market. But when comparing its outlook vs. the hard chop issued by Intel, suggests AMD continues to eat Intel's lunch in a variety of markets. The proof of that will be AMD delivering comparatively better revenue in the back half of the year compared to Intel and others. Based on what we've seen in the past and factoring in ramping product wins, we give this a rather high degree of happening. In keeping with other recent price target revisions, we adopted a more cautious view with AMD shares, reducing our price target to $140 from $160. We acknowledge the real share price performance will come as AMD continues to prove it is winning market share in all of its business segments.
1-Wk. Price Change: 8.3% 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 $140; Rating: One
Cboe Global Markets Inc. (CBOE) ; $120.48; 820 shares; 2.7%; Sector: Financials
WEEKLY UPDATE: Following last week's June-quarter earnings report, UBS adjusted its price target to $145 vs. our $140 target. Midweek, Cboe published its monthly metrics for July, which showed its average daily volume (ADV) in SPX options expiring on the trade date reached an all time high at 880,000 contracts, accounting for 42% of all S&P 500 Index (SPX) options volume. During July, the company continued to win market share in European Equities with 24.7%, its highest month since January 2016. With the prospects of greater than expected rate hikes by the Fed back on the table and the concern those moves could scuttle the domestic economy, the prospects for a volatile market remain. As such, we continue to see Cboe's core product offering being utilized by investors. With close to 15% upside to our $140 target, we will revisit the current One rating should CBOE shares gain additional ground as we expect.
1-Wk. Price Change: -2.4% Yield: 1.6%
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) ; $16.06; 10,000 shares; 4.4%; Sector: Electrical Components & Equipment
1-Wk. Price Change: 6.3% Yield: 0.00%
WEEKLY UPDATE: It was a relatively quiet week for ChargePoint shares, even though the July auto volumes reinforced the continued adoption of EVs. While those data points were favorable, we continue to see the next major catalyst for CHPT shares being the ramping spending on EV charging stations associated with infrastructure spending. Next week brings quarterly results from Blink Charging and EVgo, and we look forward to what they have to say about that spending for the coming quarters.
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) ; $1,600.78; 70 shares; 3.1%; Sector: Restaurants
1-Wk. Price Change: 2.3% Yield: 0.00%
WEEKLY UPDATE: Mastercard's July SpendingPulse report saw U.S. restaurant spending rise 9.5% during the month vs. July 2021 and up 42.6% compared to pre-pandemic levels in July 2019. Granted that July figure is marks another sequential deceleration in spending from +11.6% year-over-year in June, and +17.5% year-over-year in May, but we continue to see the company's quick service, healthier as well as limited time menu offerings holding up better than casual dining. Continued margin pressures should be addressed with the forthcoming 4% price increase that is being rolled out this month. According to data collected by KeyBank Capital Markets, the company has increased menu prices already this month is ~700 of its more than 3,000 US locations. Finally, this week BofA Securities boosted its CMG price target to $1,920 from $1,677, well ahead of our $1,850 target. We will continue to watch monthly restaurant data, and look to revisit our thoughts on CMG shares should we see that data point to year-over-year declines in consumer restaurant spending.
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 $1,850; Rating: One
RISKS: Input costs, particularly for the protein complex, labor costs, consumer spending, food safety, industry dynamics and competition.
Costco Wholesale (COST) ; $540.67; 265 shares; 4.0%; Sector: Consumer Staples
WEEKLY UPDATE: During the August Member's Only Call, one question put to us was "What's the bear case for Costco shares?" Our response was it's hard to see one as the company is poised to benefit from wallets share gains should recessionary fears takeover, but also as it continues to expand its warehouse footprint, a leading indicator for its high margin, membership fee revenue stream. Well, last night Costco answered the question itself with its July comparable sales growth of 10%, with net sales up 10.8% to $16.8 billion. Total comparable sales for the month excluding impacts from changes in gasoline prices and forex grew 7% year-over-year, while its e-commerce comparable sales increased 10.2%, and excluding impact from gas prices and forex, grew 11.5%. Costco pointed out the month had one less shopping day compared to last year, which negatively impacted its total and comparable sales by ~2.5%, and its U.S. total and comparable sales by ~3.5%. We continue to like COST shares, and we are examining upside relative to our $620 price target. We are also aware of the more than 20% move in COST shares since we bought the last slug in mid-May at $434.81. This could lead us to do some prudent register ringing in the coming days even as we keep a sizable position in COST shares intact to capture further upside ahead.
1-Wk. Price Change: -0.1% Yield: 0.6%
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: While we wait for the next World Agricultural Supply and Demand Estimates (WASDE) crop report on Aug. 12, reports suggest declines in corn, wheat, and soybean prices have flushed speculators out of the market. Despite the declines, they remain at historically high prices even as the froth from the Russia-Ukraine has been removed. Ahead of that next WASDE report that will reset the table for forthcoming harvests, we'll continue to take in weather reports in key crop growing regions. According to some estimates, the hot summer weather combined with droughts has led to declining corn, soybean, and wheat growing conditions over the past six weeks. That could translate into declining crop yields that would push inventory to consumption levels to all-time lows, pushing ag commodity prices higher. Should that come to pass, it would be a positive for our DE shares given the boost to farmer income, but also the need to drive productivity in the 2022-2023 harvest amid expected fertilizer production cuts. Deere will report its quarterly results on August 19.
1-Wk. Price Change: 0.0% Yield: 1.2%
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.
SPDR Gold Shares ETF (GLD) ; $164.10; 212 shares; 1.0%; Sector: Commodities
WEEKLY UPDATE: None
1-Wk. Price Change: .7% Yield: 0%
INVESTMENT THESIS: The GLD ETF is a proxy for gold. This "trust" buys and sells gold futures each day in an attempt to mimic the daily moves in the underlying asset, in this case gold. We see gold as an ideal hedge against a weaker dollar, strong inflation (which tends to weaken the dollar) alternative and in uncertain times (worry over war and battles). For the past 15 years gold has been a strong asset class held by fund managers, countries and banks. The metal is not correlated with markets and will move based on the demand/supply dynamic in the marketplace. Other precious metals such as silver and platinum are good proxies for the criteria stated earlier, however gold is far more liquid and offers better upside opportunities.
Target Price: Reiterate $200; Rating: One
RISKS: Weak inflation data, interest rate risk, dollar strength relative to other currencies, geographic risk.
WEEKLY UPDATE: Reports indicate the European Commission's antitrust enforcers are investigating Google's app store rules, probing billing terms and developer fees for the Google's Play Store. Signs are emerging that advertising spend could hold up better than expected following quarterly results from advertising company WPP as it boosted its annual sales guidance to +6% to 7% this year from 5.5%-6.5%. We are also hearing reports that mid-term political ad spending for this year is heating up. Nexstar shared its political revenue was pacing "more than 40% ahead of 2020 year to date levels. We continue to see Alphabet's well positioned to capture advertising spend that continues to shift to digital media at the expense of what is increasingly viewed as legacy media (print, TV, and radio).
1-Wk. Price Change: 1%; 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.
Target Price: Reiterate $155; Rating: One
RISKS: Regulatory risk (data privacy), competition, macroeconomic slowdown impacting consumers and therefore ad buyer activity
Microsoft Corp (MSFT) ; $282.91; 500 shares; 3.9%; Sector: Technology
WEEKLY UPDATE: Activision Blizzard topped bookings expectations in the second quarter where it saw broad quarter-over-quarter gains in operating income. We concur with comments that there is a "significant" second-half game pipeline that should serve as catalysts for growth in December quarter and into 2023. The deadline for the UK's Competition and Markets Authority investigation into Microsoft's pending acquisition of Activision is September 1. Comments from AMD this week on the PC market remind that headwind for Microsoft, but AMD's comments on expected data center and cloud strength also speak to Microsoft's strengths as well. As those dynamics play out in the coming months, we continue to see Wall Street re-thinking how MSFT shares are valued. We're inclined to stick around for that and the ensuing benefits to come.
1-Wk. Price Change: .8% Yield: 1%
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 $310; 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)
WEEKLY UPDATE: Ahead of Nvidia's quarterly earnings report on Aug. 24, results from AMD point to continued strength in the data center market, a positive for Nvidia. While the gaming and PC markets are expected to be challenging in the near-term, comments from Activision suggest a rebound in gaming demand later this year. That leads us to think that much like AMD, Nvidia will keep its 2022 guidance relatively intact. Comparing that guidance against Intel's (INTC), will likely confirm further share loss at Intel, leading investors to a positive stance on NVDA shares post-earnings, just like we saw with AMD shares this week.
1-Wk. Price Change: 4.5% 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) ; $323.43; 380 shares; 3.4%; Sector: Industrials
WEEKLY UPDATE: Following last week's strong June quarter earnings report and boosted outlook for the back half of 2022, we saw several price target increases for URI shares this week, including the boost in BofA Securities' target to $350 from $300. Our price target remains $380, and we continue to rate URI shares a One; all things being equal, we would look to revisit that rating as URI shares passed the $330 level. As we discussed on the August Members Only Call this week, given the pronounced move in URI shares from the $240 level in mid-July to the current share price, we are likely to do the prudent thing in the coming days and recognize some of those outsized gains. Given the expected spending ramp tied to Biden Infrastructure Law spending, we expect to keep ample URI skin in the game.
1-Wk. Price Change: .2% 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) ; $44.95; 1,300 shares; 1.6%; Sector: Communication Services
WEEKLY UPDATE: Verizon shares retreated further this week, adding to the overall move lower during the last month. As members know, we purposely started off small with this position, looking to grow its size in the portfolio at favorable prices, a strategy that has served us well with other holdings. We like the improved risk-to-reward tradeoff in the shares and the enviable dividend yield as well. Given concerns the Fed's may need to move greater than expected to fight inflation following the July Employment Report, we're eyeing adding to this position.
1-Wk. Price Change: -2.7% Yield: 5.7%
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 $55; 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: The week was positive AMZN shares, given the positive data contained in the July Mastercard SpendingPulse report that showed a pick-up in digital shopping inside the U.S. Per the report, e-commerce spending rose 11.7% year-over-year in July vs. 1.1% in June. We see implying consumers not only pivoted back to digit shopping to stretch their spending dollars amid inflation concerns, but also to the power of Amazon's 2022 Prime Day event. We'll look for confirmation in both the July retail sales report and look for continued strength in the August Mastercard SpendingPulse data before we add to the portfolio's AMZN position. Late in the week Amazon made a $61 per share all, cash offer for iRobot (IRBT), a company that specializes in robots and home intelligence solutions. We can see several synergies between Amazon's Device business but also its warehousing units as well.
1-Wk. Price Change: 4.3%; 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.
AMN Healthcare Services, Inc. (AMN) ; $117.83; 1,170 shares; 3.5%; Sector: Health Care Services
WEEKLY UPDATE: Ahead of AMN's better June quarter beat and raise earnings report late in the week, the June JOLTS report as well as quarterly results from Cross Country Healthcare pointed to that possibility. Revenue for the June quarter soared around 67% year-over-year to $1.43 billion and EPS for the quarter clocked in at $3.31. While the company continues to expect a return to more normalized levels of industry usage for contract labor, its top line guidance for the current quarter is $1.08 billion-$1.11 billion vs. the $1.04 billion consensus. Similarly, its $2.03 EPS forecast for the September-quarter was also above the consensus forecast. With reports that hospitalizations associated with the BA.5 variant of the coronavirus have soared and the Biden administration declaring the current monkeypox outbreak a public health emergency, demand for health care contract labor is likely to remain strong as we move through the current quarter. This is leading us to increase our price target on AMN shares to $132 from $125, and we will look to revisit that target as future JOLTS reports are published.
1-Wk. Price Change: 4.8%; 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: Raise to $132 from $125; Rating: Two
RISKS: Economic downturns and the pace of economic recovery; the ability to win new contracts; the ability to recruit and retain quality healthcare professionals.
American Water Works (AWK) ; $155.64; 600 shares; 2.6%; Sector: Utilities
WEEKLY UPDATE: With less than 10% upside to our $165 price target, we are keeping our "Two" rating intact, but would look to revisit that if the shares retreated below the $145 level. Given the concerns over a possible recession, we see a low probability of the shares hitting that level given the inelastic nature of the company's business.
1-Wk. Price Change: .1%; Yield: 1.6%
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. American Water declared its latest quarterly dividend of $0.655 per share will be paid on Sept. 1 to shareholders of record as of Aug. 9.
Target Price: Reiterate $165; Rating: Two
RISKS: Regulatory oversight risks, environmental safety laws and regulation, weather related service disruptions.
WEEKLY UPDATE: Entering the week, UBS named AAPL shares to its High Conviction List for 2022, reiterating its $185 price target. While we wait for Apple's formal announcement for when it will unveil its latest hardware updates, including its next iPhone, we'll continue to lean into comments from Apple and smartphone suppliers during the June-quarter earnings season. During the week, radio frequency semiconductor company Qorvo reported its Mobile Products revenue during the June quarter contracted largely due to smartphone volumes in the Android ecosystem. Despite the miss, the company's guidance for the current quarter points to the typical seasonal ramp ahead of new smartphone introductions in the last four months of the year. June-quarter results and guidance from Skyworks that pointed to sequential revenue gains in the current quarter added confirmation this seasonal pattern will hold in 2022. This supports the view calling for stronger iPhone shipments in the second half of 2022 vs. 1H 2022, which should drive similarly favorable revenue and EPS comparisons.
1-Wk. Price Change: 1.7% 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 $175; 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) ; $109.62; 1,160 shares; 3.5%; Sector: Industrial Machinery
WEEKLY UPDATE: Next week President Biden will sings the CHIPS Act, starting the process to release the flow of $52 billion in government subsidies for research and U.S. production of semiconductors. It also includes an investment tax credit for chip plants estimated to be worth $24 billion. We see this not only building domestic capacity but also adding the favorable outlook for chip equipment and our shares of Applied Materials. AMAT will report its quarterly results on August 18 after the market close.
1-Wk. Price Change: 3.4% Yield: 0.9%
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) ; $44.52; 2,220 shares; 2.7%; Sector: Cybersecurity
WEEKLY UPDATE: There were several positive developments for this holding over the last few days. First, Ping Identity, a provider of the Intelligent Identity services for the enterprise and 1.1% holding in the CIBR ETF, entered into a definitive agreement to be acquired by software investment firm Thoma Bravo for $28.50 per share in an all-cash transaction. The offer represents a premium of ~63% over Ping Identity's closing share price. While we do not put positions in the portfolio solely for their takeout prospects, we have to recognize that as the type of cyberattacks grows and the number of attack vectors proliferates further, we are likely to see periodic M&A activity in CIBR's holdings. Similar to the Ping-Thoma Bravo deal, we'll take it as a positive reminder as to why we added CIBR shares to the portfolio in the first place. Second, CIBR's third largest holding Cloudflare (NET) not only bested June quarter expectations but upped its outlook for the balance of the year, adding another layer of confirmation behind our investment rationale for CIBR shares. We have room to add to this position, and are likely to do so before too long.
1-Wk. Price Change: 5.6% 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) ; $15.30; 8,670 shares; 3.7%; Sector: Industrials
WEEKLY UPDATE: After delivering an expectation crushing June-quarter earnings report last week, this week the automaker reported its total July vehicle sales increased 36.6% year-over-year, growing to 163,900 units sold in the month. The marked gain was noted as a stark contrast to the broader industry trend that saw overall sales slide 10.5%. SUV sales surged 70% vs. year-ago levels and EV sales soared 168.7% year-over-year as demand for the Lighting 150 remained robust and supply chain issues improved. As we shared last week, even though we continue to like the Ford's transformation and the longer-term replacement cycle for autos on the road today, at least for the very short-term we are taking a more cautious stance on F shares given consumer spending concerns and incrementally higher auto loan costs.
1-Wk. Price Change: 4.2% Yield: 2.0%
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. Ford recently hiked its quarterly dividend to $0.15 per share from $0.10, and the first installment of this new dividend will be paid on Sept. 1 to shareholders as of Aug. 11.
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) ; $357.51; 275 shares; 2.7%; Sector: Info. Tech
WEEKLY UPDATE: Following last week's June quarter results, Morgan Stanley boosted its price target on MA shares to $457 while Truist Securities lifted its to $420 and Jefferies inched its up to $410. During the week, Mastercard published its July Mastercard SpendingPulse report, which found U.S. retail spending excluding automotive increased +11.2% year-over-year in July, while retail sales excluding automotive and gas rose +9.0%. Notably, e-commerce sales were up 11.7% year-over-year, a sharp increase after months of softer growth. We'd point out to members those figures include the impact of inflation given the report's findings reflect "nominal spending" and are not adjusted for inflation. Paired with the stronger than expected July Employment Report, the consumer remains in a good position relatively speaking. As new consumer spending data is had, we will continue to revisit not only the expectation for consumer spending, but also our "Two" rating on MA shares.
1-Wk. Price Change: 1% Yield: 0.5%
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) ; $88.33; 1,280 shares; 3.1%; Sector: Food; Consumer Non-Durables
WEEKLY UPDATE: While there was no company specific news this week, we'd remind members the company targets its latest price increase to thwart inflationary pressures going into effect in August. That timing coupled with other price increases taken in recent quarters should augment the seasonal demand we see over the coming next 6 to 8 months. Should recession concerns continue, we should also see demand for McCormick's product benefit as consumers shift back to eating at home, a time-honored habit during recessions. With that in mind, the July Mastercard SpendingPulse report showed grocery sales jumped 16.8% year-over-year during the month vs. the 14.0% increase posted in June.
1-Wk. Price Change: 1.1% Yield: 1.7%
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.
Morgan Stanley (MS) ; $86.13; 1,385 shares; 3.3%; Sector: Financials
WEEKLY UPDATE: On the August Members-Only Call, we shared that with the IPO market remaining an unknown for Morgan Stanley as the economic landscape continues to slow and the shares approaching the upper end of the trading box they've been in, the shares could be a modest source of funds to build out other existing portfolio positions. While we continue to like the company's franchise positions, lacking the full firepower of its investment banking business means the company will face challenging year-over-year comparisons in the second half of 2022.
1-Wk. Price Change: 2.2%; Yield: 3.3%
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: Two
RISKS: Capital Markets activity, Integration risk on recent acquisitions, increased regulation of banking industry, low interest rates
WEEKLY UPDATE: While there was no company-specific news this week, given the prospects associated with Biden Infrastructure Law spending we're eyeing adding to the portfolio's NUE position should the shares give back some of their recent run up over the last three weeks.
1-Wk. Price Change: .6% Yield: 1.4%
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) ; $174.55; 560 shares; 2.7%; Sector: Consumer Defensive
WEEKLY UPDATE: This global snack and beverage company expanded its reach this week with two new partnerships. The first was with Celsius Holdings, the company behind global fitness energy drink, CELSIUS. In exchange for being Celsius' U.S. distribution partner and investing $550 million in the company, PepsiCo receives ~7.33 million convertible preferred shares priced at $75, a 5% annual dividend on the shares, and the ability to nominate a director to the Celsius' Board. The second was a strategic agreement with premium Romanian spring water AQUA Carpatica to acquire 20% equity stake. While terms were not released, it was shared that PepsiCo will have rights to distribute the spring water in Romania and in Poland with opportunities to expand into other markets, including the United States. Taking the back-to-back announcements together, PepsiCo continues to manage its beverage offerings to meet evolving consumer preferences. We see this as a positive, and as we reflect on the impact of the Celsius equity investment and the continued strength in the company's core business, we are increasing our price target to $190 from $180. With competitor Coca-Cola (KO) eyeing an additional price increase, we will closely watch to see if PepsiCo follows, a move that would likely lead to Wall Street lifting its EPS expectations for late this year and 2023. Finally the favorable grocery data contained in the July Mastercard SpendingPulse adds to our conviction in PEP shares.
1-Wk. Price Change: -0.2%; 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.
Target Price: Reiterate $180; Rating: Two
RISKS: Economic conditions, supply chain constraints, raw material costs.
United Parcel Service (UPS) ; $196.76; 520 shares; 2.8%; Sector: Industrials
WEEKLY UPDATE: UPS announced its regular quarterly dividend of $1.52 is payable Sept. 1 to shareowners of record on Aug. 15. As we head into the seasonally strong shopping season, we are warming up to UPS shares as they are a derivative play on the continued shift to digital shopping. With consumer looking to maximize their spending dollars, we see them returning to digital shopping and driving incremental volumes at UPS. The July Mastercard SpendingPulse report showed a nice jump in digital shopping inside the U.S. during the month, likely due to Amazon's 2022 Prime Day as well as competing efforts from Target (TGT) and others.
1-Wk. Price Change: 1% Yield: 2.6%
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) ; $73.08; 505 shares; 1.12%; Sector: Energy
WEEKLY UPDATE: Oil prices retreated to their lowest level in six months amid recession concerns. On the supply side of the energy equation, a symbolic increase in production from OPEC+ isn't expected to reduce the tight supply of oil and in Europe, energy-saving measures have been put in place to gradually reduce demand for gas and avoid blackouts in the coming winter. Near-term, additional lockdowns in China due to mounting coronavirus cases will likely lead global energy supplies higher. We will continue to watch the $85 level for oil closely.
1-Wk. Price Change: -6.8; 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) ; $12.48; 2,940 shares; 1%
WEEKLY UPDATE: With the Fed on path to tame inflation, a move that will see further interest rate hikes in the coming months, we remain concerned over the potential for the Fed to overreach and scuttle the domestic economy. Dollar headwinds and lingering supply chain issues will remain headwinds, and companies are reporting a inventory destocking and pockets of weak demand. All of this has us keeping our PSQ shares in play at least until we clear the Fed's September monetary policy meeting. 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: -2%; 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) ; $15.03; 3,310 shares; 1.4%
WEEKLY UPDATE: With the Fed on path to tame inflation, a move that will see further interest rate hikes in the coming months, we remain concerned over the potential for the Fed to overreach and scuttle the domestic economy. Another reason to think the Fed's fight could take longer than expected, more companies shared they are will announce further pricing action during the quarter, including our own McCormick & Co. and Chipotle Mexican Grill. Meanwhile, California trucker issues could lead to further supply chain issues as well as higher shipping costs. Dollar headwinds and lingering supply chain issues will remain headwinds, and companies are reporting a inventory destocking and pockets of weak demand. Considering this, we're keeping our SH shares in play at least until we clear the Fed's September monetary policy meeting.
1-Wk. Price Change: -.3%; 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.