Stocks continued to chug higher this week, as inflation pressures appear to have peaked. Even though we still have a journey ahead to reach the Fed's inflation target of 2%, the market is breathing a sigh of relief that we are starting to see some progress on prices. That led expectations for monetary policy as tracked by the CME FedWatch Tool to slip back to a 50-basis point rate hike at the Fed's September monetary policy meeting, another sigh of relief for the market that the Fed has less of a chance of sinking the economy. Also, this week, we had positive progress on the stimulus front for both the CHIPS Act, as well as the inflation reduction act, which was constructive for our shares of Applied Materials, Ford Motor and Charge Point.
That was the data this week, and while encouraging for the markets and a positive for the AAP portfolio, the data train will continue the next several weeks until we get to that Fed meeting. Let's remember that we are about to see a shift in the June-quarter earnings season to retail, with retailers having to work off bloated inventories, efforts that are likely to hit margins and bottom-line results. For now, we'll enjoy the market rebound, but as members saw this week, we prudently booked profits on positions that ran significantly in recent and funneled a portion of those profits into positions that should have legs between now and the end of 2022.
With the market as measured by the S&P 500 approaching resistance levels near 4,300 we'll remain on a cautious path even as we continue to position the portfolio for the coming months. As we noted during the week, the market rally led to a similar shift in investor sentiment even though we continue to hear of more layoffs from the likes of Best Buy, Microsoft, Peloton and others while inflation is still running at elevated levels. As we close out the week, the CNN Business Fear & Greed Index is on the cusp of Greed with its 54 rating, a sharp change from Extreme Fear (25) just a few weeks ago. More reason to think of this week's market move as one tied to relief. Typically, when this happens, however, the next move in the market is determined by the next round of data and news.
Corporate earnings continue to be mixed and expectations for second quarter 2022 earnings for the S&P 500 have fallen to 6.7% year-over-year, but if we exclude the Energy sector, 2Q 2022 earnings are more like -3.7%. That earnings strength in Energy along with some improvement in oil and natural gas prices lifted our SPDR Energy Select Sector Fund shares this week.
Our intent is to not get sucker punched as trading volumes more than likely diminish in the weeks building to the Labor Day holiday. This means we will continue to closely follow both the fundamental economic, earnings and other data as well as the market's technical set up with an eye for risk management as well as additional upside for the market and the portfolio.
The AAP Portfolio
Following the continued rebound in the stock market as we hit the halfway mark for the current quarter, a number of positions in the AAP Portfolio closed the week significantly ahead of the S&P 500 on a quarter-to-date basis. Among that stable are the shares of United Rentals, Nucor, ChargePoint Holdings, AMD, Chipotle, and Ford Motor, as well as a number of other positions. Aside from the decline in Verizon shares, which we used to build out the position this week, the only other real drags on the portfolio were our inverse ETF positions.
We continued to book profits with Morgan Stanley, Ford, and Costco shares, funneling a portion of those proceeds into shares of UPS, McCormick & Co., and SPDR Gold Shares. We also downgraded the shares of Chipotle to a "Two" rating from "One" and did the same with Nvidia shares early in the week following its downwardly revised guidance.
With the market as measured by the S&P 500 approaching resistance levels near 4,300 we'll remain on a cautious path, even as we continue to position the portfolio for the coming months. As we noted during the week, we've seen a sharp move in the S&P 500 and a similar shift in investor sentiment, even though we continue to hear of more layoffs and inflation still running at elevated levels. Technically, the markets are still very overbought and could be vulnerable to a pullback at any time. For now, we'll keep those inverse exchange-traded fund positions in play at least until the technicals suggest otherwise. As we enter the typically quiet last few weeks of August and the lead up to the Labor Day holiday, club members are likely to see some new entrants into the Bullpen even as we continue to revisit the risk-to-reward tradeoff of existing portfolio positions.
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 2Q 2022 preliminary figures for Unit Labor Costs clocked in at a hotter than expected 10.8% compared to the 9.5% consensus. Even though the figure was down from the upwardly revised 12.7% for 1Q 2022, it points to wage inflation pressures remaining at elevated levels. With the July NFIB Small Business Optimism Index revealing that 49% of business owners having job openings they could not fill, odds are wage inflation will persist past what we saw in the July Employment Report.
The July Consumer Price Index came in a below consensus expectations with the headline reading unchanged month-over-month. The magnitude of the month-over-month decline was rather small on a year-over-year basis, suggesting inflation pressures remain at elevated levels despite the rollover in the pump gas prices. By the numbers, headline CPI for July came in at 8.5% vs. the expected July headline figure of 8.7% and 9.1% the prior month. Core CPI for July was far less changed coming in at 5.9% vs. the expected core CPI reading of 6.1% and 5.9% the prior month.
Looking through the data contained in the July CPI report, food inflation continued to rise with both food at home and food away from home posting hotter numbers compared to June. While gas and fuel oil prices eased in July vs. June, electricity prices continued to trend higher compared to last year as did transportation services, medical care services and medical care commodities.
The July CPI report also showed a month-over-month decline in pricing for Apparel, which we see as a confirmation point that retailers are indeed using aggressive pricing to work down those bloated inventories, as we discussed a few months ago. With most apparel and related retailers having July quarter ends, the coming days should give us some insight as to how aggressive they are being in working those inventories down and what that could mean for the August CPI report. More aggressive pricing translates into larger margin pressures, which means we're likely to be on the mainstream retailer sidelines until at least the worst of the inventory clearing process is over.
The July Producer Price Index followed in the steps of the July Consumer Price index report as headline PPI for the month contracted 0.5% on a sequential basis and came in at 9.8% on a year-over-year basis, below the consensus forecast of 10.4%. While the core PPI figure for July matched the consensus forecast of 7.6% on a year over year basis it was down vs. June's 8.2% reading while its month-over-month comparison fell to 0.2%, also below the consensus forecast.
Late in the week, the August Preliminary reading for the University of Consumer Sentiment Index came in better-than-expected something we attribute to AAA's report that the national average gas price fell to $3.978 on Friday. While still high year-over-year, the move below $4 is a powerful one from a psychological perspective. Adding some much-needed context to the Consumer Sentiment reading, it was only five points ahead of June's all time low reading and well below last August 70.3 figure. On the inflation front, the preliminary August report showed consumer inflation expectations were little changed dipping to 5.0% for the year ahead vs. 5.2% in the prior report. What jumped out to us was that that 48% of consumers blame inflation for eroding their standard of living -- a figure that was little changed month over month.
Given announced pricing action by a variety of food and restaurant companies, including our own McCormick & Co. and Chipotle, as well as Coca-Cola and others, odds are food-related inflation isn't likely to come down as quickly as gas and fuel oil has. Given PepsiCo's comments on how price-inelastic its products have been -- lower than historic norms -- we could see it follow Coke's lead with yet another round of price increases. Wendy's also jumped on board thee growing list of companies that will take additional pricing action in the current quarter, as it looks to combat higher costs as well as weakening comp sales.
In addition to the rash of restaurants and food companies that have targeted additional pricing action for this month, CBOT lumber futures moved higher this week, at one point hitting their highest intraday price in several weeks, following production cuts at West Fraser Timber that amount to ~2.5% of its total North American capacity. Rental costs in the US are soaring at the fastest pace in more than three decades, surpassing a median of $2,000 a month for the first time ever and pushing rents above pre-pandemic levels in most major cities.
Even though AAA has reported the average retail gasoline price fell below $4 per gallon, the wholesale cost of gasoline in New York surged more than 40% against futures after regional supplies sank to the lowest level in a decade, raising the risk of shortages. Oil prices have also edged higher after the International Energy Agency boosted its forecast for global demand growth this year. The U.S. Energy Information Administration's latest weekly report on oil found that at 432.0 million barrels, U.S. crude oil inventories are about 5% below the five-year average for this time of year. Total motor gasoline inventories decreased by 5.0 million barrels last week and are about 6% below the five-year average for this time of year. At the same time, the International Energy Agency boosted its forecast for global demand growth this year giving oil prices some lift this week. We will continue to watch the $85 level for oil closely. Late in the week, U.S. natural gas prices surged to hit their highest level since July 26 as those stocks are also below year ago levels and almost 12% below their 5-year average for this time of year.
All of the above suggests the path to returning to the Fed's inflation target won't be a short one, and we have more rate hikes ahead of us. We'll continue to evaluate whether the Fed will hit a soft or hard landing for the economy, but the probability is rather high its efforts will drive borrowing costs higher, leading consumers and businesses re-thinking spending plans. That tells us a vibrant economy in the coming months isn't likely to emerge. We will continue to position the AAP portfolio accordingly.
Chart of the Week: Consumer Staples Select Sector SPDR Fund
The Consumer Staples Select Sector SPDR Fund (XLP) has been flirting with a breakout for several days. A couple of closes above the $75 level would solidify that move and create a nice bullish move. Resistance is clearly back to the May highs around $78, so that would be a good target for now.
We like the Moving Average Convergence Divergence (MACD) oscillator strength and solid relative strength, the highs from April are not far off. The group has been paced by strong retailers and restaurant names, and with some improvements in the economy and lower inflation readings. This just might be the one to consider. Volume trends are neutral but started to turn upward in early August. We'll be watching for a price breakout.
The Coming Week
Next week brings us another rash of key economic data and even though the June quarter earnings season continues, we will see a noticeable step down in the pace of report. By the middle of next week, we could see the usual late summer fade in trading volumes as final vacations are taken before the start of the upcoming school season.
Setting the stage for next week's economic data, the Atlanta Fed's most recent GDPNow model update for the current quarter lifted its growth rate to 2.5% from 1.5%. Before we jump to the conclusion the economy is picking up speed vs. the negative March and June quarter GDP prints, let's remember we are only part way through the July data with more to come next week and before too long that for August. Let's remember too, the Atlanta Fed GDPNow model is a running compilation of data, and we should expect it to bob and weave with each newfound set of data. All of that said, we have seen recent economic data come in somewhat better than expected, leading the Citibank Economic Surprise Index, better known as the CESI, to turn up. Still negative but far better than it was in recent months.
Among the July economic data to be had will be Industrial Production, Housing Starts and Retail Sales. While all three will receive the usual picking apart and lead to revisions in GDP expectations, it will be the retail sales figures that likely get the most intense review and analysis. We'll use that report to confirm continued share gains at Costco, as well as compare what it has to say against the Mastercard July SpendingPulse report that showed, among other things, a sharp rebound in digital shopping and far slower growth in restaurant spend.
Here's a closer look at the economic data coming at us next week:
Monday, August 15
- Empire State Manufacturing Index - August (8:30 AM ET)
- NAHB Housing Market Index - August (10:00 AM ET)
Tuesday, August 16
- Housing Starts & Building Permits - July (8:30 AM ET)
- Industrial Production & Capacity Utilization - July (9:15 AM ET)
Wednesday, August 17
- Weekly MBA Mortgage Applications (7:00 AM ET)
- Retail Sales - July (8:30 AM ET)
- Business Inventories - June (10:00 AM ET)
- Weekly EIA Crude Oil Inventories (10:30 AM ET)
Thursday, August 18
- Weekly Initial & Continuing Jobless Claims (8:30 AM ET)
- Philadelphia Fed Index - August (8:30 AM ET)
- Existing Home Sales - July (10:00 AM ET)
- Weekly EIA Natural Gas Inventories (10:30 AM ET)
Monday, August 15
- Japan: Industrial Production & Capacity Utilization - June
- Germany: Wholesale Price Index - July
Tuesday, August 16
- UK: Employment Change, Average Hourly Earnings - June
- Germany: ZEW Current Conditions & Economic Sentiment - August
- Eurozone: ZEW Economic Sentiment - August.
Wednesday, August 17
- Japan: Core Machinery Orders - June
- Japan: Imports/Exports - July
- UK: CPI, PPI - July
- Eurozone: 2Q 2022 GDP
Thursday, August 18
- Eurozone: CPI - July
Friday, August 19
- Japan: CPI - July
- UK: Retail Sales - July
- Germany: PPI - July
As we mentioned above, the pace of quarterly earnings reports will slow dramatically next week with just under 300 companies reporting vs. almost 1,400 this past week. As we've shared previously with members, we will see a pronounced shift toward retail companies next week, which will be rather convenient given the timing of the trailing three-month data contained in the July Retail Sales report. As those results come in, knowing the inventory issues many retailers have faced, we'll be sizing up where those levels stand exiting July and what they mean for margins and earnings in the coming quarters. We'll also be factoring in their forward guidance for the Back-to-School shopping season as well as any early looks into the soon to be upon us holiday shopping season.
Outside of retail, we have quarterly results from Applied Materials (AMAT) and while we exited the portfolio's position in Cisco (CSCO) shares a few months ago, we will be listening to what it says about end market demand and supply chain issues given continued Covid lockdowns in Asia.
Here's a closer look at the earnings reports coming at us next week:
Monday, August 15
- Open: Clear Secure (YOU), Lu Auto (LI).
- Close: Fabrinet (FN), ZipRecruiter (ZIP).
Tuesday, August 16
- Open: Home Depot (HD), Walmart (WMT).
- Close: Agilent (A), Jack Henry (JKHY).
Wednesday, August 17
- Open: Analog Devices (ADI), Brinker (EAT), Lowe's (LOW), Target (TGT), TJX Companies (TJX).
- Close: Bath & Body Works (BBBY), Cisco (CSCO), Wolfspeed (WOLF).
Thursday, August 18
- Open: BJ's Wholesale (BJ), Estee Lauder (EL), Kohl's (KSS), Macy's (M).
- Close: Applied Materials (AMAT), Ross Stores (ROST).
Friday, August 19
- Open: Buckle (BKE), Deere (DE), Foot Locker (FL).
Advanced Micro Devices (AMD) ; $100.83; 1,160 shares; 3.2%; Sector: Info. Tech.
WEEKLY UPDATE: Despite Micron's guidance cut early in the week, shares of AMD recovered following confirming reports the company continues to win market share from Intel in every segment of the CPU market while also winning share in the server market for the 13th consecutive quarter. AMD will present at the Rosenblatt 2nd Annual Technology Summit: The Age of AI Scaling on Aug. 23. Then on Sept. 15, AMD will participate in the Goldman Sachs Communacopia & Technology Conference. At that time, we and the rest of Wall Street will be looking for any additional comments on the current quarter and 2022.
1-Wk. Price Change: -1.4% 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) ; $119.64; 820 shares; 2.69%; Sector: Financials
WEEKLY UPDATE: None.
1-Wk. Price Change: -.7% 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) ; $18.87; 9,000 shares; 4.65%; Sector: Electrical Components & Equipment
1-Wk. Price Change: 17.5% Yield: 0.00%
WEEKLY UPDATE: We started the week off modestly trimming the portfolio's position in CHPT shares given the strong run since they bottomed below $9 in mid-April. Despite the trade, CHPT shares remained the portfolio's largest position given several positives to be had in the coming months. These include the growing demand for EV chargers, as the adoption of electric vehicles continues and the forthcoming funding as part of the Biden Infrastructure Law. An estimated $7.5 billion out of $1.2 trillion tied to the Biden Infrastructure Law will be for EV infrastructure growth as part of the 2030 target for 500,000 EV charging station in the U.S. There is also the $7,500 EV credit associated with the Inflation Reduction Act that will commence in January 2023 and run through the end of 2032. There are also similar initiatives in the U.K. and Europe, markets ChargePoint is attacking as well. Also, this week, Starbucks (SBUX) in partnership with Volvo Cars announced the first Starbucks stores with electric vehicle charges powered by ChargePoint. We expect more such partnerships to be announced as the flow of infrastructure spending dollars accelerate. ChargePoint will report its latest quarterly results on August 30.
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.
Costco Wholesale (COST) ; $537.21; 240 shares; 3.53%; Sector: Consumer Staples
WEEKLY UPDATE: As we pointed out in last week's Roundup, we have been watching COST shares continued to move higher since we bought the last slug in mid-May at $434.81. That led us to modestly ring the register, converting some of those gains into realized ones for the portfolio and members. We continue to see Costco extremely well positioned in the coming quarters, which is why even after this trade we will still have ~3.5% of the portfolio's assets in COST shares, making it a top 5 position. Our price target on COST shares remains $620.
1-Wk. Price Change: -.26% 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 the USDA's World Agriculture Supply and Demand Estimates report for August boosted its global wheat supply forecast, it raised its world consumption by a greater amount leading to a modest reduction in its ending stock forecast for the commodity. The same WSDE report reduced its outlook for the coming corn crop, citing lower crop yields vs. prior forecasts while the forecast for soybeans was little changed. We see the report supporting favorable year-over-year prices for the key farm commodities that drive farmer income, a leading indicator of ag equipment purchases. Evercore ISI boosted it price target on DE shares to $416 from $401 this week while Bloomberg Intelligence shared a view like our own - higher production, better price realization and continued supply chain improvements should point favorable revenue growth when Deere reports its quarterly results on Dec. 19.
1-Wk. Price Change: 7.2% 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) ; $167.87; 312 shares; 1.43%; Sector: Commodities
WEEKLY UPDATE: During the week we modestly added to the portfolio's GLD position as we continue to like gold as a hedge against the dollar, which has weakened in recent weeks, as well as during period of uncertainty. While the market has traded higher this week on signs inflation is relenting, we still have a long way to go to even approach the Fed's 2% target. We will continue to hold GLD given the likelihood investor sentiment has once again gotten ahead of itself.
1-Wk. Price Change: 1.6% 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: During the week, Google announced several updates for its Workspaces collection of cloud and productivity tools, including live sharing. Reports also suggest an update to its Wear OS later this year and Google Fiber is planning its biggest expansion in years, targeting Arizona, Colorado, Idaho, Nebraska and Nevada, a move that would eventually bring its footprint to 22 metro areas. Also this week, we shared the latest market share data for Google Search, which shows it continues to be the dominant player, as well as data that underscores our view its has the right products to continue to win advertising dollar share. With rumblings the Justice Depart is likely to sue Google over its ad-market dominance as soon as September, we will continue to follow the arguments even though we expect Google to trot out the view there is enormous competition among social media and other media platforms as well as services like those from The Trade Desk.
1-Wk. Price Change: 3.6%; 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) ; $291.91; 500 shares; 4%; Sector: Technology
WEEKLY UPDATE: Microsoft continued to fine tune its cost structure this week, likely in response to the slowing PC market. The company made additional layoffs this week concentrated in its Modern Life Experiences unit, reducing the number of outside contractors, and reportedly asked teams across the company to rein in expenses including business travel, outside training and company gatherings. Meanwhile the cloud business and other segments should continue to outpace the PC centric business, and we continue to think this will lead Wall Street to re-think how its values MSFT shares in the coming months. When Guggenheim initiated coverage on MSFT shares this week, the firm sees "hyper growth rates" for the Azure cloud computing business continuing. As MSFT shares approach the $290 level, we are revisiting our current $310 price target, which compares to the current consensus of $330.
1-Wk. Price Change: 3.2% 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)
United Rentals (URI) ; $336.55; 380 shares; 3.50%; Sector: Industrials
WEEKLY UPDATE: As we discussed on the recent August Members Only Call, given the pronounced move in URI shares from the $240 level in mid-July to the current share price, we are contemplating doing 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. As the shares approach the $345 level, we are also inclined to revisit our current "One" rating.
1-Wk. Price Change: 4.1% 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) ; $45.15; 1,625 shares; 2.01%; Sector: Communication Services
WEEKLY UPDATE: As we alluded to in last week's Roundup, this week we added to the portfolio's position in VZ shares. During the week, the company presented at the Oppenheimer technology conference with its remarks focused on the company's wireless, broadband, and cloud businesses sharing it sees a $90 billion total available market opportunity. Verizon shared it is seeing good lift in its Verizon Business 5G offering as it replaces legacy cable connections with prices in the range of $6-$200 per month, roughly 2.5x average revenue per user vs. its smartphone customers.
1-Wk. Price Change: .4% 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: It was a comparatively quiet week for Amazon as the company announced it would expand its Amazon One payment service by rolling out its palm-scanning technology to 65 Whole Foods locations across California. And after debuting in late 2021, Amazon Web Services launched AWS Private 5G, a new service designed to help companies deploy their own private 5G networks. The offering is now available to AWS customers starting in its U.S. East regions, with plans to roll it out internationally "in the near future." Finally, even though digital shopping lagged in the first half of 2022, the findings in the July Mastercard SpendingPulse survey were positive, but fresh data sees digital shopping continuing to win consumer wallets in the coming years. Per Bloomberg Intelligence, U.S. e-commerce sales look to grow at a 13% CAGR to $2.27 trillion in 2025 vs. $1.22 trillion in 2020. Amazon is expected to reach $1.2 trillion in gross merchandise volume by 2026, driven by the potential for double-digit third-party gains as more merchants shift to e-commerce and join the platform. We like the long-term outlook, and should we see favorable digital shopping data in the July Retail Sales report we may look to revisit our current rating on AMZN shares.
1-Wk. Price Change: 2%; 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) ; $114.23; 1,170 shares; 3.35%; Sector: Health Care Services
WEEKLY UPDATE: None.
1-Wk. Price Change: -3.1%; 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 $132; 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) ; $158.33; 600 shares; 2.60%; Sector: Utilities
WEEKLY UPDATE: None, however, we continue to look for opportunities to build out the portfolio's position in this dividend dynamo water utility.
1-Wk. Price Change: 1.7%; 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: Bloomberg reported Apple asked suppliers to build at least as many next generation iPhones this year as it did in 2021, roughly 90 million units. For 2022, the report indicates the iPhone maker targets ~220 million iPhones roughly level with 2021. Given concerns over expected declines in lower-tier smartphone production, the report backs recent comments from known Apple suppliers including Qualcomm, Skyworks, and Qorvo. Other reports suggest Apple could boost the price of its upcoming iPhone models by "about 15%" compared to iPhone 13 models but that could also reflect changes in memory and storage configurations for the new models as well.
1-Wk. Price Change: 4.1% 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) ; $110.38; 1,160 shares; 3.51%; Sector: Industrial Machinery
WEEKLY UPDATE: This week President Biden signed the CHIPS Act the bill provides $52.7 billion for American semiconductor research, development, manufacturing, and workforce development. This includes $39 billion in manufacturing incentives, including $2 billion for the legacy chips used in automobiles and defense systems, $13.2 billion in R&D and workforce development, and $500 million to provide for international information communications technology security and semiconductor supply chain activities. It also provides a 25% investment tax credit for capital expenses for manufacturing of semiconductors and related equipment. It's not going to undo years of offshoring overnight, but it is a step in the right direction towards what we'll call silicon independence. As the funds are released, we expect to learn of more chip building plans. announced plans to spend $40 billion over the coming decade to build its US chip capacity. As members likely suspect, we see Applied Materials being a major beneficiary of that multi-year domestic buildout.
1-Wk. Price Change: .7% 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.
Chipotle Mexican Grill (CMG) ; $1,663.70; 70 shares; 3.19%; Sector: Restaurants
1-Wk. Price Change: 3.9% Yield: 0.00%
WEEKLY UPDATE: We downgraded CMG shares to a "Two" rating from "One," following the 35% move in the shares since mid-June and kept our $1,850 price target intact. 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: Two
RISKS: Input costs, particularly for the protein complex, labor costs, consumer spending, food safety, industry dynamics and competition.
First Trust Nasdaq Cybersecurity ETF (CIBR) ; $46.11; 2,220 shares; 2.80%; Sector: Cybersecurity
WEEKLY UPDATE: We continued to learn of new cyber-attacks this week, including an unnamed automotive supplier that had its systems breached and files encrypted by three different ransomware gangs over two weeks in May, with two of the attacks happening within just two hours. Also, this week CIBR constituent CyberArk was the lasts holding in this ETF to deliver a beat and raise quarter, which sent its shares and subsequently our CIBR shares higher. We have room to add to this position and are likely to do so before too long.
1-Wk. Price Change: 3.6% 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) ; $16.18; 7,850 shares; 3.48%; Sector: Industrials
WEEKLY UPDATE: The Inflation Reduction Act is expected to renew the $7,500 EV tax credit in January 2023 and it will last until the end of 2032. The new credits would apply to trucks, vans and SUVs priced under $80,000 and cars up to $55,000 (only families with adjusted gross incomes of up to $300,000 would be eligible). We see this helping spur the shift to EVs from combustion vehicles, a tailwind for Ford's strategy. Electric vehicle subscription startup Autonomy placed a $1.2 billion order for 23K electric vehicles with 17 global automakers, including Ford. Also this week, Ford announced it re-open the order books for its F-150 Lighting truck and raise the prices 7%-18% depending on the configuration. This puts the cheapest version of the truck starting at ~$47k, roughly $7k higher than its original sub-$40,000 starting price tag. The culmination of the week's news led F shares to chug even higher quarter to date, which prompted us to trim back the position, but we still kept a meaningful exposure in the portfolio so as to capture additional upside in the coming quarters as the benefits of its cost savings and transformation efforts materialize. With F shares above our $15 price target as well as the $14 Wall Street consensus target, we will look to the company's August vehicle sales data and upcoming consumer income/spending data as the next catalysts to re-think our target.
1-Wk. Price Change: 5.8% Yield: 1.9%
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) ; $354.27; 275 shares; 2.67%; Sector: Info. Tech
WEEKLY UPDATE: Mastercard shares were added to Citibank's Thematic Thirty list for the second half of 2022 as a play on the emerging market consumer. We have no issue with that categorization, but we also see the company continuing to benefit from the global pivot away from cash and check to credit, debit and mobile payments. 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: -0.9% 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) ; $90.67; 1,415 shares; 3.51%; Sector: Food; Consumer Non-Durables
WEEKLY UPDATE: The company sold its Kitchen Basics brand to Del Monte Foods for $99 million, not a bad return for a business it bought in 2011 for $40 million. We see that move as part of McCormick's ongoing portfolio assessment as it looks to remove underperforming brands. During the week we added to our position in MKC shares. This not only builds our exposure to this dividend dynamo company, but it does so as the company enacts its latest price increase just as we move into its seasonally strongest time of year. For now, we'll keep our MKC price target at $110 and our Two rating intact. Should we see data pointing to the shift to dining at home/grocery accelerating from dining out/restaurants, we'll look to revisit both that target and our rating.
1-Wk. Price Change: 2.6% Yield: 1.6%
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) ; $91.66; 1,250 shares; 3.14%; Sector: Financials
WEEKLY UPDATE: Shares of Morgan Stanley continued their upward climb this week following the July data that suggested inflation has peaked. The double-digit move higher since mid-June put the shares in overbought territory, and during the week we trimmed back our position given the continued weakness in the investment banking market, especially for the IPO market. Longer-term we continue to like the Morgan Stanley investment banking franchise and recognize we will see a rebound in the IPO and M&A market activity. That eventual return paired with the strategic growth of its fixed fee business is what keeps us bullish on MS over the longer-term.
1-Wk. Price Change: 6.4%; Yield: 3.1%
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 $100; Rating: Two
RISKS: Capital Markets activity, Integration risk on recent acquisitions, increased regulation of banking industry, low interest rates
WEEKLY UPDATE: Reports this week indicate Nucor sent a letter to customers announcing an attempted base sheet price increase by at least $50 per short ton, effective immediately. This marks the first attempted price increase by Nucor since mid-March, when it increased sheet base prices by $125 per short ton. We see the company looking to capitalize on the upcoming infrastructure spending boom, but we will need to what realized pricing is in the coming weeks. As we learn this, we'll look to revisit the portfolio's NUE position size.
1-Wk. Price Change: 4.6% 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.
WEEKLY UPDATE: Early in the week we downgraded NVDA shares to a "Two" rating from "One" and lowered our price target to $200 from $225 following the company's downside pre-announcement for its July quarter. Even though the company's data center business generated a record quarter, up 1% sequentially and ~61% vs. the year ago quarter, the deep drop in its gaming business, down 44% sequentially and 33% year over year, was the primary culprit for the revised outlook. The uncertainty of the gaming market, which even after the July quarter fall, still accounts for ~30% of the Nvidia's revenue stream and hefty chunk of its gross profit, have a high probability of keeping the shares rangebound at least until Nvidia reports its quarterly results on Aug. 24.
1-Wk. Price Change: -1.5% 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 $200; Rating: Two
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
PepsiCo Inc. (PEP) ; $177.33; 560 shares; 2.72%; Sector: Consumer Defensive
WEEKLY UPDATE: When PepsiCo announced its partnership and investment with Celsius Holdings, we said it was a shrewd move. This week reported its latest quarterly results, and they blew the doors off consensus expectations with revenue up 136.7% year over year and a 110% increase in its gross profit. That ensuing climb in CELH shares above $100 means PepsiCo's 7.33 million convertible preferred shares that priced at $75 are more than performing even before we factor in the 5% annual dividend. Next week brings the July Retail Sales report and we'll be looking for confirmation for the rebound in grocery sales evidenced by Mastercard's July SpendingPulse report.
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.
Target Price: Reiterate $190; Rating: Two
RISKS: Economic conditions, supply chain constraints, raw material costs.
United Parcel Service (UPS) ; $204.89; 565 shares; 3.17%; Sector: Industrials
WEEKLY UPDATE: United Parcel Service said it would buy Italy-based health care logistics firm Bomi Group to bolster its capability in delivering medicines that require cold storage. UPS expects to add more than 350 temperature-controlled vehicles and four million square feet (0.37 square kilometer) across 14 countries from the deal. We like the transaction as it not only expands the companies geographic presence but also diversifies its end market exposure. Following last week's July Mastercard SpendingPulse Survey, we added to the portfolio's UPS exposure this week. In next week's July Retail Sales report, we'll be looking for confirmation in digital shopping. The week's trade also grows our exposure to UPS' dividend - the company recently announced its regular quarterly dividend of $1.52 is payable Sept. 1 to shareowners of record on Aug. 15.
1-Wk. Price Change: 4.1% Yield: 2.5%
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: Even though AAA reported the average retail gasoline price fell below $4 per gallon, the wholesale cost of gasoline in New York surged more than 40% against futures after regional supplies sank to the lowest level in a decade, raising the risk of shortages. Building on that, the U.S. Energy Information Administration's latest weekly report on oil found that at 432.0 million barrels, U.S. crude oil inventories are about 5% below the five-year average for this time of year. Total motor gasoline inventories decreased by 5.0 million barrels last week and are about 6% below the five year average for this time of year. At the same time, the International Energy Agency boosted its forecast for global demand growth this year giving oil prices some lift this week. We will continue to watch the $85 level for oil closely. Late in the week, U.S. natural gas prices surged to hit their highest level since July 26 as those stocks are also below year ago levels and almost 12% below their 5-year average for this time of year.
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) ; $12.15; 2,940 shares; .98%
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 remain headwinds, companies are reporting 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: -2.6%; 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) ; $14.54; 3,310 shares; 1.32%
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 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 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: -3.3%; 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.