Analysis: AMN CBOE COST DE GLD GOOGL URI VZ AMD AMZN AWK AAPL CHPT CMG CIBR F MA MSFT MKC NUE PEP UPS VMC XLE PSQ SH XTN MS

We had twin concerns coming into this challenging week: Whether an uptick in inflation readings would lead the Fed to further hike interest rates and whether earnings expectations for the second half of the year would continue to be revised lower.

As the week unfolded, the news tumbled in. We got downside guidance from Oracle, a weaker-than-expected outlook at Adobe and more of the same at FedEx, which also pulled its fiscal 2023 guidance it issued in June. In addition, we got that hotter-than-expected August consumer price index number and the mixed August producer price index. This led us to reconsider the pace of the economy, prospects for interest rate hikes, and the probability we haven't heard the last of slowing business spend -- or the last of concerns over consumer spending, dollar headwinds, and continued supply chain issues. 

That last item was called out by General Electric CFO Carolina Dybeck, who shared during an investor conference appearance that "With the continued supply chain pressures, we are continuing to deliver later in the quarter." Raytheon Technologies also shared it now expects delayed delivery for some of its Pratt & Whitney commercial engines and KLA Tencor commented supply chain issues remain very challenging with the impact lasting at least through the March 2023 quarter. We also learned of new layoffs from the likes of Twilio and others while Bed Bath & Beyond posted a list of 56 store closures on its website, part of its previously stated plan to close about 150 lower-producing Bed Bath & Beyond stores and cut 20% of jobs across the corporate and supply chain.

With two weeks to go until we close the current quarter and a little more than three weeks until the September quarter earnings season gets underway, odds are we will see more companies trimming back expectations leading investors to once again question current valuations. With the S&P 500 breaking through the 3,900 level late in the week, we are likely to see market watchers become increasingly concerned the market will re-test its June lows.

Over the last several weeks, we've shifted the portfolio to more defensive, domestically focused, inelastic business model and dividend paying companies as well as those that are poised to benefit from stimulative efforts out of Washington. For the time being we will continue to keep our inverse ETFs in play and patiently look for opportunities to utilize the portfolio's cash, which has done a great job of helping us play defense against the bear market.

The AAP Portfolio

During the week we trimmed the portfolio's exposure to Morgan Stanley and downgraded the remaining slug of shares to a Three rating with a target exit of $91. Dollar headwinds and softer enterprise spending led us to trim back the portfolio's positions in both Microsoft and Alphabet. We also closed out the portfolio's position in Applied Materials, given a number of headwinds that could drive the shares lower and little signs of an identifiable catalyst until the CHIPS Act kicks into gear in the second half of 2023. We used the proceeds from those moves to expand the portfolio's exposure to shares of the Energy Select Sector SPDR Fund, as well as those for Verizon, American Water Works, and Cboe Global Markets.

Late in the week, we took advantage of the surge in ChargePoint shares to cull them back, locking in a portion of the more than 30% jump in the shares in recent weeks. We funneled those gains into Costco Wholesale and United Rentals. Next week Costco reports its quarterly results, and we have some additional room with which to round out the position size based on what we learn next week.

As we made those trades, we shared the net effect will add to the portfolio's cash position, not a bad place to be as the market continues to grapple with the unfolding interest rate, dollar, and earnings landscape. On our shopping list are the shares of AMN Healthcare closer to $100, Costco Wholesale, Vulcan Materials, and United Rentals, as well as the Energy Select Sector SPDR Fund shares and potentially one or two names from the Bullpen. That said we are in no rush to make these additions given further potential downside in the market as it broke the 3,900 technical support level and expectations for both the macroeconomy and earnings are likely to be revised lower in the coming weeks. As members can likely deduce, we will keep our inverse ETF positions in play and prudently deploy the cash on hand, both of which helped insulate the portfolio from this week's market move.

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)

Economy

We saw fresh signs this week that efforts to combat inflation have had little success thus far as evidenced by the price indexes for August, the CPI and PPI. The headline and core figures for this latest CPI report inched lower vs. those in July but were a few ticks higher than the respective consensus forecast. The PPI data was a mixed bag with the headline figure coming in a tad softer vs. the consensus forecast while the core reading came in hotter than expected on both a month over month and year-over-year basis.

By the numbers, the headline reading for August CPI came in at 8.3% vs. the expected 8.1% and July's 8.5% figure. Food prices rose low-double digits for both at and away from home, while energy higher energy prices relating to electricity and natural gas overshadowed declines in oil and gas prices. While the Core CPI was expected to tick higher on a sequential basis, the August reading of 6.3% was up vs. July's 5.9% figure amid continued pricing pressure for rent, medical care, new vehicle prices and airline fares, which more than compensated for the month-over-month drop in used car prices.

That report led to yet another re-think on not only the pace of interest rate hikes by the Fed but also how long those rates are likely to remain at elevated levels to bring inflation back in line with the Fed's 2% target. Clearly the market was looking for some progress on the inflation fight, but the August CPI report confirmed its going to be a long, drawn-out battle.

By the numbers, the headline PPI figure for August registered 8.7%, down from 9.8% in July and a tick below the 8.7% consensus. The core PPI reading for August rose 0.4% month over month vs. the expected 0.3% increase and the 0.2% one booked for July, which led to a 7.3% increase on a year-over-year basis, hotter than the expected 7.1% figure. Granted, the core August print was down vs. 7.6% in July but the pace of decline isn't as quick as the market had thought.

Digging into the meat of the August PPI report, we find prices paid for "processed goods for intermediate demand" still up some 14% year-over-year while prices paid for "Services for intermediate demand" rose 1.0% in August, far faster than July's 0.2% figure. Taken together, these suggest the pace of declines toward the Fed's target won't be speedy.

As we shared during the week, while this may be a new realization to some, some time ago we acknowledged the long road ahead to the Fed's 2% target. One Fed member said last week they don't see the 2% objective being hit until 2025. Fed funds futures are already reflecting a funds rate between 4.25% to 4.5% by the end of 2022. As market participants factor in that likely hood, expectations for the speed of the economy and earnings expectations will continued to be reset and we saw the dollar rebound, pointing to continued currency headwinds ahead.

The headline figure for the August Retail Sales report came in better than expected at +0.3% for the headline figure vs. the expected 0.0% reading. Adjusting for auto and related sales during the month, however the August data fell 0.3% vs. July vs. the expected increase of 0.1%.

As members know, there are several ways to slice and dice the monthly Retail Sales report, and our preferred way to view it is to examine auto, the impact of gas prices, and food services & drinking establishments on their own, leaving a clearer picture of true "retail."

We also favor a year over year view for the data because that's how we and companies tend to not only think about their businesses but how they report their quarterly results. We ran through those positives during the week with members and that alert can be read here.

Sticking with U.S data for the week, headline industrial production fell 0.2% in August missing the expected 0.1% increase and came in well below the +0.5% reading for July. As we expected, that report along with other data published this week led the Atlanta Fed's GDPNow model to reduce its outlook for the current quarter to 0.5% from 1.3% last week and 2.6% on September 1.

Looking outside the U.S., China's industrial production increased 4.2% year over year in August, beating the market consensus that called for a 3.8% increase following July's 3.8% gain. The August reading was the fourth straight month of growth in industrial output, and the fastest pace since March. China's Retail Sales rose by a stronger than expected 5.4% year over year in August, exceeding market estimates of 3.5% and up from July's 2.7%. That marked the third straight month of increase in retail trade and the strongest pace in the sequence as COVID restrictions were loosened.

Amid supply chain improvements, including those for chips, passenger car registrations in the EU surged 4.4% year over year to 650,305 units in August, bringing an end to thirteen months of consecutive declines.

The August Consumer Price Index for the Euro Area increased at a record pace of 9.1% year over year, matching the consensus forecast and up from 8.9% in July. Core consumer prices, which exclude energy, food, alcohol, and tobacco, increased at a record pace of 4.3% year over year in August percent year-on-year in August, also matching the consensus forecast.

The latest Bank of England Survey showed public expectations for inflation rose to a record 4.9% over the coming year, up from 4.6% in May. Expectations for inflation in five years' time fell to 3.1% from 3.5%, below the survey's long-run average. The survey also revealed public satisfaction with the BoE's efforts to control of inflation fell to its lowest level since the survey started in 1999. Potential food for thought as the central bank gets ready for its next interest rate decision on September 22.

Retail Sales in the UK fell 5.4% year over year in August, the fifth consecutive decline and worse than market forecasts of a 4.2% drop as inflation weighed on consumer spending.

Adding to the comments from FedEx CEO Raj Subramaniam he sees a recession is impending for the global economy, this week the World Bank shared its view that "As central banks across the world simultaneously hike interest rates in response to inflation, the world may be edging toward a global recession in 2023... Unless supply disruptions and labor-market pressures subside, those interest-rate increases could leave the global core inflation rate (excluding energy) at about 5 percent in 2023-nearly double the five-year average before the pandemic."

And during the week, the U.S. Senate committee approved legislation that would significantly enhance US military support for Taiwan, including provisions for billions of dollars in additional security assistance, amid increased pressure from China. The approval paves the way for a vote in the full Senate, but when such a vote may occur is TBD.

As we prepare for the conclusion of the Fed's monetary policy next week, we expect the two dueling narratives that have plagued the market - hotter than expected inflation and the Fed's efforts to contain it vs. the risk of a recession - will continue to do so. As we mentioned above, this has us keeping our inverse ETF position in play and patiently deploying the cash war chest.

Chart of the Week: Transports Are Moving in Reverse

The transport ETF (XTN) has fallen sharply since mid-August, making lower highs and lower lows on its way to some longer-term support levels. (To see the chart in more detail, click here.) It's no surprise the XTN is weak today, given the bad news from FDX overnight. But the chart has been week for some time and there seems to be more downside left. The $66 level is up next, the support from June/July but if that doesn't hold there is plenty more room to fall.

The lower indicators like relative strength index are bearish and notice when the KST at the bottom turned, right after the peak. SAR (dots on the top pane) are flashing bearish as well. This is a good sign that lower prices are ahead. Stay away from these names like airlines and rails for now. There will be opportunities to buy but it's just not right now.

The Coming Week

Once again, we start off the coming week on a rather slow note as we wait for the Fed's September monetary policy decision. Given the sharp fall in the weekly MBA Mortgage Applications Index, odds are we will see another decline when August Housing Starts are reported on Tuesday, Sept. 20. While we have no exposure to the homebuilding sector, given the multiplier effect of housing on the economy we have to acknowledge the impact to be had as interest rates and therefore mortgage rates move higher, reducing the affordability and demand for housing.

Following the August Consumer Price Index and Producer Price Index reports, the CME FedWatch Tool sees an 84% probability the Fed will raise interest rates by three-quarters a percentage point, exiting that meeting. Alongside that decision the Fed will release its latest economic projections for GDP, the Unemployment Rate and its preferred inflation metric, the Personal Consumption Expenditure index. When the Fed last updated these expectations in late June, it dialed back its GDP forecast to 1.7% for both this year and 2023 and increased its PCE inflation forecast for this year to 5.2% from 4.3% in March. Given what we've seen on the inflation front as well as other indicators for the speed of the economy, odds are they will make another similar round of adjustments in their forthcoming update.

With the market wrapping its head around the notion the Fed will need to "go bigger, longer" to get inflation back to its 2% target, a larger cut to the Fed's GDP forecast for this year and next runs the risk of reigniting recession concerns. This also likely means that while Fed Chair Powell will keep a firm tone about fighting inflation, he will likely choose he words carefully when discussing the impact to the economy. Exiting the week brings the September Flash PMI reports from S&P Global, and what they have to say will be used to scrutinize the Fed's update economic forecast even further.

Here's a closer look at the economic data coming at us next week:

U.S.

Monday, September 19

  • NABH Housing Market Index - September (10:00 AM ET)

Tuesday, September 20

  • Housing Starts & Building Permits - August (8:30 AM ET)

Wednesday, September 21

  • Weekly MBA Mortgage Applications (7:00 AM ET)
  • Existing Home Sales - August (10:00 AM ET)
  • Weekly EIA Crude Oil Inventories (10:30 AM ET)
  • Federal Reserve Monetary Policy Decision and FOMC Economic Projections (2 PM ET)
  • FOMC Press Conference - 2:30 PM ET

Thursday, September 22

  • Weekly Initial & Continuing Jobless Claims (8:30 AM ET)
  • Weekly EIA Natural Gas Inventories (10:30 AM ET)

Friday, September 23

  • S&P Global Flash Manufacturing & Services PMIs - September (9:45 AM ET)

International

Monday, September 19

  • Eurozone: Construction Output - July

Tuesday, September 20

  • Japan: Consumer Price Index - August
  • Germany: Producer Price Index - August

Wednesday, September 21

  • UK: CBI Industrial Trends Orders - September

Thursday, September 22

  • Japan: Bank of Japan Interest Rate Decision
  • UK: Bank of England Monetary Policy Meeting
  • Eurozone: Consumer Confidence - September

Friday, Sept. 23

  • Eurozone: S&P Global Flash Manufacturing & Services PMIs - September

As we move through next week, there will be a slow start on the corporate earnings front but another round of investor conferences as more companies approach the quarter-end quiet period. Next week's conference schedule includes:

  • Wells Fargo 5th Annual Consumer Conference
  • JPMorgan 13th Annual U.S. All Stars Conference
  • Sidoti Fall Small Cap Virtual Conference
  • DA Davidson 21st Annual Diversified Industrials & Services Conference

We will continue to watch for earnings pre-announcements both good and bad from the portfolio's holdings but also customers, competitors, and suppliers as we get ready for the forthcoming September quarter earnings season.

Portfolio resident Costco (COST) will report its latest quarterly results, and amid the items we'll be watching we'll be interested in what the company has to say about its plans to continue to grow its warehouse footprint, a leading indicator of high-margin membership fee revenue stream. FedEx (FDX) will report its August quarter results but its comments and guidance on e-commerce will be something we dig into given the potential pull-forward of the holiday shopping season by cost conscious consumers. With quarterly results from Darden (DRI), food inflation, wage pressures and pricing action will be on the menu as we get ready for the September quarter earnings season. And when General Mills (GIS) reports we will be digging into that report with an eye toward what it says about grocery demand and pricing given our holdings in PepsiCo (PEP) and McCormick & Co. (MKC) shares.

Here's a closer look at the earnings reports coming at us next week:

Monday, September 19

  • Open: AutoZone (AZO), Cognyte Software (CGNT).

Tuesday, September 20

  • Open: Apogee Enterprises (APOG)
  • Close: Stitch Fix (SFIX)

Wednesday, September 21

  • Open: General Mills (GIS)
  • Close: KB Home (KBH), Lennar (LEN), Trip.com (TCOM)

Thursday, September 22

  • Open: Accenture (ACN), Darden Restaurants (DRI)
  • Close: CalAmp (CAMP), Costco (COST), FedEx (FEX)

ONEs

AMN Healthcare Services, Inc. (AMN) ; $105.08; 1,135 shares; 3.4%; Sector: Health Care Services

WEEKLY UPDATE: The July JOLTS jobs report as well as a growing number of news articles point to the ongoing nursing shortage. This should set a favorable tone for AMN's management appearance at the Sidoti Fall Small Cap Virtual Conference 2022 on Sept. 21.

1-Wk. Price Change: -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: One

RISKS: Economic downturns and the pace of economic recovery; the ability to win new contracts; the ability to recruit and retain quality healthcare professionals.

ACTIONS, ANALYSIS & MORE:, Initiation (1/27/22), Our Aging of the Population Investment Theme Explores Medical Staffing Issues, Investor Relations

Cboe Global Markets Inc. (CBOE) ; $120.90; 950 shares; 3.3%; Sector: Financials

WEEKLY UPDATE: During the week we added to the portfolio's position in CBOE shares given the prospects for continued market volatility ahead that should foster continued usage of Cboe's products by investors. At the Barclays Global Financial Services Conference this week, Cboe confirmed that view, sharing it continues to see investor interest in macro hedging and demand for its Data and Access Solutions remains strong. On Friday, Cboe paid its latest quarterly dividend of $0.50 per share to shareholders of record on Aug. 31.

1-Wk. Price Change: -2.5% Yield: 1.5%

INVESTMENT THESIS: Cboe's business, which centers on market infrastructure, data solutions, and tradable products for equities, derivatives, and foreign exchange across North America, Asia Pacific, and Europe. Those operations include the largest options exchange and the third largest stock exchange operator in the U.S., one of the largest stock exchanges by value traded in Europe, and EuroCCP, a leading pan-European equities and derivatives clearinghouse among others. The two primary drivers of the company's earnings are its options and North American equities business, which combined drive around 75% of its revenue but more importantly roughly 85% of its operating income. Viewed from a different perspective, 28%-30% of Cboe's revenue stream is from recurring non-transaction revenue that includes proprietary market data as well as access and capacity fees. We like the sticky nature and predictability of that business. The core driver of the company's business hinges on continued growth in options trading volume and the company expanding its recurring non-transaction revenue.

Target Price: Reiterate $140; Rating: One.

RISKS: IT spending, competition, supply chain challenges

ACTIONS, ANALYSIS & MORE: Addition to AAP Portfolio; Initial Technical Review, Addition to Bullpen, Investor Overview.

Costco Wholesale (COST) ; $504.14; 245 shares; 3.6%; Sector: Consumer Staples

WEEKLY UPDATE: Comparing Costco's August retail sales data against the August retail sales report confirmed that Costco continues to win consumer wallet share. That led us to use the pullback over the last few weeks to snap up COST shares this week. During the week CEO Craig Jelinek shared that while there is inflation it should subside in six months to a year. Jelinek also reiterated that now is not the time to raise the company's membership fee. When COST reports its quarterly results next week, one of the items we'll be focused on its plans to expand its warehouse footprint over the coming 12 months. As members know, we see this as a leading indicator for the key high-margin membership fee revenue stream.

1-Wk. Price Change: -6% 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

Deere & Co. (DE) ; $354.50; 310 shares; 3.2%; Sector: Farm Machinery & Equipment

WEEKLY UPDATE: None.

1-Wk. Price Change: -4.8% 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.

Price Target: Reiterate $425; Rating: One.

RISKS: Geopolitical uncertainty, economic conditions, raw material and other input prices, prices for key agricultural commodities.

ACTIONS, ANALYSIS & MORE: Initiation (10/25/21), Investor Relations

SPDR Gold Shares ETF  (GLD) ; $155.84; 312 shares; 1.4%; Sector: Commodities

WEEKLY UPDATE: Gold remains a good hedge for us against inflation, though plenty of selling across borders has put pressure on the price of the metal. The dollar remains strong, which is also adding to pressure on gold. While the asset has seen poor returns in 2022, if inflation remains with us that may suddenly push investors back to gold. In addition, uncertainties in Eastern Europe continue to be present, as there is potential for a more explosive outcome. We'll hold tight here.

1-Wk. Price Change: -2.5% 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.

Alphabet (GOOGL) ; $102.80; 1,000 shares; 3.0%; Sector: Communication Services

WEEKLY UPDATE: Early in the week Google closed its acquisition of cybersecurity company Mandiant, which will be folded into the Google Cloud security portfolio, canceled the next version of its Pixelbook computer and has closed down the team that was building it. Also, during the last few days, Google Cloud and C3.ai (AI) expanded their year-old joint sales and co-development partnership with a three-year expansion to target Fortune 2000 companies leveraging Google Cloud's Vertex AI, machine learning capabilities, and data analytics. On a somewhat negative note, the European Court of Justice's General Court largely maintained a decision by EU antitrust regulators against Alphabet's unit Google that it imposed "unlawful restrictions" on Android mobile phone makers and network operators to strengthen the dominant position of its search engine but reduced the fine to €4.125 billion. Given concerns over slowing enterprise spending and dollar headwinds, we trimmed back the portfolio's position in GOOGL shares midweek. On October 6th, Google will hold an event that is expected to showcase its new Pixel 7 smartphone as well as a new version of its Pixel Watch.

1-Wk. Price Change: -7.1%; 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

ACTIONS, ANALYSIS & MORE: FY2Q21 Earnings Analysis (7/27/21), Why GOOGL Has Shrugged Off Antitrust Headlines in Early Trading Tuesday (10/20/20), Initiation (11/27/13), Investor Relations

United Rentals (URI) ; $286.04; 360 shares; 3.0%; Sector: Industrials

WEEKLY UPDATE: Bloomberg Intelligence (BI) thinks the North American equipment-rental market forecast for 6%-7% expansion in 2023 and 3% in 2024 may be conservative as pent-up demand persists with a growing backlog of large projects, and as U.S. legislation generates substantial construction spending over the next 3-5 years. BI also sees nonresidential construction's 2023 forecast of 6% gains as likely being conservative. That perspective adds to our bullish stance on URI shares, a position that we added to during the week.

1-Wk. Price Change: -8.1% 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.

ACTIONS, ANALYSIS & MORE: Initiating a Position in This Equipment Rental Company, We're Adding This Equipment Rental Company to the Bullpen, Investor Relations.

Verizon Communications (VZ) ; $41.25; 2,335 shares; 2.8%; Sector: Communication Services

WEEKLY UPDATE: Verizon shares traded off this week following comments from Chief Executive Hans Vestberg at Goldman Sachs' Communacopia conference that the company expects consumer wireless subscribers to drop in the third quarter in response to price hikes in May that led to an upturn in Consumer customer churn. Vestberg also shared those declines would be partially mitigated by continued business subscriber gains for the quarter. While we can understand the markets focus on subscriber numbers, the average revenue per user (ARPU) is a far better metric by which to gauge the company's prospects. Vestberg also commented favorably on another bright spot for the company, its fixed wireless business that is winning customers from cable companies and the company will continue to bundle services to add incremental ARPU. The retreat in the shares led their dividend yield to move just over 6%, and we seized that opportunity to add to the portfolio's position once again in VZ shares. We'd remind members that during its BofA 2022 Media Communications & Entertainment Conference presentation last week, Verizon teased two major announcements, one at the end of September and another in October. Verizon's recently increased dividend of $0.6525 per share will be paid on Nov. 1 to shareholders of record on Oct. 7.

1-Wk. Price Change: -2.3% Yield: 6.1%

INVESTMENT THESIS: Verizon Communications is one of the largest communication companies in the U.S. Its Consumer business, includes wireless equipment and services as well as residential fixed connectivity solutions, including internet, video, and voice services, is ~75% of Verizon's revenue stream but ~90% of its operating income. Exiting the March 2022 quarter, the company had 115.2 million wireless customers split between 91.4 million pre-paid and 23.8 million postpaid, and 7.1 million broadband consumers, the vast majority of which are Fios Internet customers. From a revenue and operating profit contribution perspective, the Business segment accounts for ~25% and 10%, respectively. Through this segment Verizon offers wireless and wireline communications services and products, including data, video and conferencing services, corporate networking solutions, security and managed network services, local and long-distance voice services, and network access to deliver various Internet of Things (IoT) services and products.

Target Price: Reiterate $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

TWOs

Advanced Micro Devices (AMD) ; $85.45; 1,160 shares; 2.6%; Sector: Info. Tech.

WEEKLY UPDATE: At the Goldman Sachs Communacopia + Technology Conference, AMD discussed its product roadmap and shared expectations for share gains in its Enterprise business following significant share gains in cloud, a market in which it doesn't see any slowdown. The company is seeing some decision making extend at the Enterprise segment alongside high win rates but confirmed the PC market continues to track lower than expected. With only 30% of its revenue stream from the US, AMD does face dollar headwinds. That paired with the weakening PC market and slower business spending, we will sit on the sidelines with AMD shares for now even though we have ample room to scale up the position size.

1-Wk. Price Change: -10.5% 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: Two

ACTIONS, ANALYSIS & MORE: FY2Q21 Earnings Analysis (7/27/21), CEO Interview (7/29/20), Readthroughs Are Still Positive for AMD (7/24/20), Initiation (7/7/20), Investor Relations

Amazon (AMZN) ; $123.53; 710 shares; 2.5%; Sector: Consumer Discretionary

WEEKLY UPDATE: The August retail sales report revealed consumers in the U.S. are re-embracing digital shopping, a positive for Amazon's business and our shares. We expect to see more of the same as we head into the holiday shopping season given inflationary pressures faced by consumers. As it increasingly contends with unionization efforts, Amazon announced several additional worker benefits that are expected to tally $450 million over the coming year. During the week, California Attorney General Rob Bonta announced a lawsuit against Amazon accusing the e-commerce giant of artificially inflating prices in the state. We have doubts about this effort but will continue to see how it progresses. Late in the week, AMZN shares traded off following FedEx (FDX) lowering its near-term outlook and rescinding its full-year outlook. Given little if any exposure to Amazon, we see FedEx's comments offering us an opportunity to add to our AMZN position as we head into the holiday shopping season.

1-Wk. Price Change: -7.3%; 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.

ACTIONS, ANALYSIS & MORE: FY2Q21 Earnings Analysis (7/29/21), 2020 Letter to Shareholders (4/15/21), Initiation (2/2/18), Investor Relations

American Water Works (AWK) ; $148.40; 705 shares; 2.0%; Sector: Utilities

WEEKLY UPDATE: Amid a very quiet week for the largest publicly traded water utility, we used the proceeds from our exit of Applied Materials to further bulk up on the shares of this defensive dividend payer.

1-Wk. Price Change: -4.3%; 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.

ACTIONS, ANALYSIS & MORE: We're Initiating 1 Name While Adding to Another Initiating a Position in This Public Water Utility Company, Investor Relations presentation.

Apple (AAPL) ; $150.70; 750 shares; 3.3%; Sector: Technology

WEEKLY UPDATE: Following last week's unveiling of the company's latest iPhone and Apple Watch models, Morgan Stanley suggested the iPhone 14 cycle is starting off stronger than expected, with an eye toward relative lead times and early data from China. Reports indicate long lines for those new products in China as they begin to hit shelves. We typically see this early rush, but the key will be continued demand in the coming weeks amid concerns over consumer spending power and the macroeconomic picture. Morgan Stanley sees 51 million iPhone shipments in the September quarter and 84.5 million for the December quarter, suggesting the seasonal strength in the company's December quarter is poised to unfold. We'll be looking into what key suppliers have to say about those prospects in the coming September quarter earnings season. We continue to wait for another Apple event geared toward iPads and Macs, something chatter suggests could come in early October.

1-Wk. Price Change: -4.3% Yield: 0.6%

INVESTMENT THESIS: While we acknowledge that near- to- midterm performance remains heavily influenced by iPhone sales, the dynamic is shifting as investors finally being to place greater emphasis on Services growth. We are bullish on the 5G upgrade cycle and believe longer-term upside will continue to come as Services revenue grows its share of overall sales. Services provide for a recurring revenue stream at higher margins, a factor that serves to reduce earnings volatility while allowing for a higher percentage of sales to fall to the bottom line, as a result, we believe that Services growth and the installed base, are much more important than how many devices the company can sell in a given 90-day period. In addition to improved profitability, we also believe the transparent nature of this revenue stream will demand an expanded price-to-earnings multiple as segment sales grow. Furthermore, we believe that Apple's desire to push deeper into the healthcare arena will help make its devices invaluable as more life-changing features are added and the company works to democratize health records. Lastly, also see upside resulting from increased adoption of wearables (think the Apple Watch) and potential new product announcements such as an AR/VR headset or an update on project Titan, the company's secretive autonomous driving program.

Target Price: Reiterate $175; Rating: Two

RISKS: Slowdown in consumer spending, competition, lack of new product innovation, elongated replacement cycles, failure to execute on Services growth initiative

ACTIONS, ANALYSIS & MORE: FY3Q21 Earnings Analysis (7/27/21), Apple Product Launch Event Takeaways (4/20/21), Takeaways from WWDC (6/22/20), Initiation (1/4/10), Investor Relations

ChargePoint Holdings Inc. (CHPT) ; $17.97; 8,040 shares; 4.2%; Sector: Electrical Components & Equipment

1-Wk. Price Change: 1.6% Yield: 0.00%

WEEKLY UPDATE: CHPT shares a strong resurgence this week due in part to bullish commentary, including that from President Joe Biden, at the Detroit Auto Show. That popped CHPT shares to within striking distance of our $21 price target (as well as the Wall Street consensus of $22), but the 33% move since the start of September led the position size to swell to 5% of the portfolio. That prompted us to do some prudent register ringing as well as downgrade CHPT shares to a Two rating from One. Even after that trim, the portfolio has a sizable position in CHPT shares, given that we are only entering the beginning of the EV charging station buildout. When we see clear upside to more than $24 or if the shares pull back below $17, we'll reconsider this week's downgrade to a Two rating.

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.

ACTIONS, ANALYSIS & MORE: We're Calling Up a Name From the Bullpen, The Needle Could Begin to Move on This Bullpen Name, Investor Relations.

Chipotle Mexican Grill (CMG) ; $1,693.57; 70 shares; 3.4%; Sector: Restaurants

1-Wk. Price Change: -1.7% Yield: 0.00%

WEEKLY UPDATE: The August retail sales report showed food service & drinking retail sales in August rose 10.9% vs. the year ago level, up from 10.3% the prior month. Adding to that, findings from Baird's Real-Time Restaurants Survey showed that step up continued into September with same-store sales for the week ending Sept. 4 up 6% vs. +5% in August, and +4% in July. We see that as a positive for our shares of Chipotle as cost conscious consumers pivot to quick service options from casual and fast casual ones. Another positive for Chipotle is its "geographic" mix as it has 98% of its locations in the US, which means that unlike McDonald's and other competitors, it has very modest exposure to dollar-currency issues. During the week, the company announced its latest limited time menu item, Garlic Guajillo Steak will be available nationwide. We expect to do some product sampling, but generally speaking we like this strategy as it spurs repeat traffic while also improving ticket size.

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.

ACTIONS, ANALYSIS & MORE: Initiating a New Position in Chipotle, We're Adding Chipotle to the (Bullpen) Menu

First Trust Nasdaq Cybersecurity ETF (CIBR) ; $40.80; 2,590 shares; 3.1%; Sector: Cybersecurity

WEEKLY UPDATE: The European Commission issued a proposal for a new Cyber Resilience Act to protect consumers and businesses from products with inadequate security features. This is a first ever EU-wide legislation of its kind and introduces mandatory cybersecurity requirements for products with digital elements, throughout their whole lifecycle. During the week, there were a number of other cyberattack related headlines including the one on pharmaceutical company IPCA Laboratories in India that reportedly saw 500 gigabytes of data stolen, Starbucks Singapore sharing it experienced "unauthorized access to customer details" and Uber investigating a new breach on its computer system. Those and other related headlines confirm our view that cybersecurity is a growth industry, and we continue to like the well-rounded exposure CIBR shares bring to the portfolio. Despite these points of confirmation, CIBR shares traded off this week, but we have ample room to build out the portfolio's position. CIBR shares are on our shopping list.

1-Wk. Price Change: -6.7% 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) ; $14.72; 7,850 shares; 3.3%; Sector: Industrials

WEEKLY UPDATE: Amid supply chain improvements, including those for chips, passenger car registrations in the EU surged 4.4% year-over-year to 650,305 units in August, bringing an end to thirteen months of consecutive declines. The August retail sales report not only showed another view on the year-over-year improvement in U.S. auto sales, but also re-confirmed share gains by Ford during the month. At the Detroit Auto Show, as expected, Ford showed off the F-150 Lightning, Mustang Mach-E SUV, as well as the Bronco lineup that includes the Sport SUV and Heritage edition with styling cues from the 1966 original. Also at the auto show, President Biden issued bullish comments on the industry shift toward EVs, which plays right into Ford's strategy. Ford also shared it is asking nearly 3,000 dealers to invest in upgrades to sell all-electric vehicles. And we have to mention the late in the week news that minerals and mining company Glencore (GLNCY) said it will begin trading lithium given "hot demand due to the rapidly growing production of electric vehicles (EVs)." While that is a favorable data point, we will continue to watch auto loan costs amid the forward interest rate environment and what that could mean for new car and truck demand. As we shared with members, the longer-term outlook is favorable given subsidies for EVs and the double-digit average age of cars on US roads today. We will continue to watch for other states that follow in California's footsteps of instilling new regulations that require all new cars, pickups, and SUVs to be electric or hydrogen-powered by 2035. At last report, there are 17 potential states mulling this over including Washington, Massachusetts, New York, Oregon, Vermont, Virginia, Minnesota, and Colorado. Should additional states institute similar requirements, we'd look to revisit our long-term price target on F shares.

1-Wk. Price Change: -4.5% Yield: 2%

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 $17; 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) ; $315.13; 275 shares; 2.5%; Sector: Info. Tech

WEEKLY UPDATE: The company appeared at two investor conferences this week, the Goldman Sachs Communicopia & Technology Conference and the Autonomous Research Virtual Annual Future of Commerce Symposium. Mastercard reminded that it continues to expand the reach of its payment processing network and now has more than 90 million merchants with continued growth prospects ahead. We see that tying with the continued global growth in debit, credit, and mobile/contactless payments at the expense of cash and check. A potential positive for Mastercard is the U.S. Consumer Financial Protection Bureau looking to regulate Buy Now Pay Later firms. Given the unfolding macroeconomic environment, we could see slower spending patterns emerge especially as interest rates drive borrowing costs higher. This could weigh on transaction volumes for Mastercard's network. In keeping with our Two rating, we'd be inclined to take advantage of pullbacks in the share price given the long-term prospects for the payments industry. Offering support for the shares, exiting Jun, the company had $7.1 billion remaining on its current share repurchase authorization.

1-Wk. Price Change: -6.2% Yield: 0.7%

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.

Target Price: Reiterate $425 Rating: Two

RISKS: The recovery in cross-border transactions, regulation in payments market, competition from other fintechs, pricing pressures.

Microsoft Corp (MSFT) ; $244.74; 420 shares; 3.0%; Sector: Technology

WEEKLY UPDATE: Given the renewed strength in the dollar, we trimmed back our position in MSFT shares because roughly half of its revenue is derived from markets outside the U.S. The UK's Competition and Markets Authority announced it would be taking a deeper look into Microsoft's pending $69 billion acquisition of Activision Blizzard given potential anticompetitive effects. The transaction is also expected to get a similar review in the coming weeks from the European Commission. At the Goldman Sachs Communcopia & Technology Conference, Microsoft focused on the longer-term opportunities with the "digital age" and continued needs to drive productivity across a number of end markets including financial services and healthcare. While we agree with that, the company's business does face slowing PC demand and currency headwinds that keep our Two rating intact for now.

1-Wk. Price Change: -7.5% Yield: 1.1%

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: Two.

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)

McCormick & Co. Inc. (MKC) ; $79.14; 1,415 shares; 3.2%; Sector: Food; Consumer Non-Durables

WEEKLY UPDATE: Following last week's downside guidance, we continue to watch the $74-$75 level in the shares. When McCormick reports its quarterly results on October 6, we'll have a clearer picture as to how much of the August shortfall was due to the divestiture and how much to the other factors. We'll also be quite interested in the progress on the company's previously announced pricing initiatives that were instilled during August. Increases like those tend to be weaved in with the full benefit being had in the ensuing months. Insight into that effort and how sticky those increases are will help us determine any potential downside risk to McCormick's new 2022 EPS target of $2.63-$2.68 vs. the $3.03 consensus that is based on 2022 revenue of $6.32-$6.44 billion vs. the $6.55 billion consensus. Parsing the revised guidance, it implies second half revenue will still rise 6%-10% with the bulk of that coming in the company's November quarter. Historically, that has been the company's strongest quarter given sell-in for holiday related demand and this year it should see benefits from those August price increases. The question we are wrestling with is whether the shares can rally back to their highs earlier this year, which would lead to the portfolio recovering its losses against the position's $97 cost basis. The answer will likely be had on Oct. 6 and hinge on what the company has to say about its pricing efforts vs. input cost inflation. Should we see MKC shares break below $75, we are inclined to revisit the position in the shares.

1-Wk. Price Change: -0.9% Yield: 1.8%

INVESTMENT THESIS: McCormick is a global leader in flavor that manufacture spices, seasoning mixes, condiments, and other flavorful products to the entire food industry-retailers, food manufacturers and foodservice businesses. Roughly 65% and 75% of the company's sales and operating income are derived from its consumer business with the balance from its "Flavor Solutions" one. With consumers feeling the pinch of higher food prices, they are likely to repeat the historical pattern of shifting toward increasing food consumption at home, a driver of demand for McCormick's products. We are also entering the seasonally strong time of year for this dividend payer, which has increased its dividend each year over the past 37 years.

Target Price: Reiterate $110 Rating: Two

RISKS: Local economic and market conditions, input cost inflation, exchange rate fluctuations, and restrictions on investments, royalties, and dividends.

Nucor (NUE) ; $117.08; 325 shares; 1.1%; Sector: Materials

WEEKLY UPDATE: Nucor cuts its outlook for the current quarter putting the shortfall relative to consensus expectations weaker than expected results at the steel mills segment due to margin pressures and lower volumes. Offsetting that, the steel products segment is expected to have another strong quarter with results roughly in-line with the June quarter with the same holding true for the raw materials segment as well. The larger question is how it will guide the December quarter, and that of course will hinge on a rebound in its steel mills segment and it means relative to the $5.35 consensus EPS forecast. Arguably, Nucor is a quality company as evidenced by its ability to grow its dividend over the past 48 years and it continues to support the shares with its buyback program, repurchasing 5.3 million shares at an average price of $122.24 in the current quarter. Exiting the June quarter, Nucor had $2.14 billion remaining under its current $4 billion share repurchase authorization. Factoring in that activity in the current quarter, it has roughly $1.5 billion left to support the shares. We also have to remember that construction (building and infrastructure) is the largest end market for steel, account for roughly 52%, and that end market should see improving demand as the Biden Infrastructure Law ramps. While we may eventually add to the NUE position given that infrastructure exposure, we aren't inclined to consider doing so until we have more clarity on the issues behind its steel mill weakness and how they are likely to shape the company's business and earnings in the coming quarters.

1-Wk. Price Change: -18.4% Yield: 1.6%

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 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 $150 Rating: Two

RISKS: Steel prices, decline in industrial activity, no comprehensive infrastructure package.

ACTIONS, ANALYSIS & MORE: Nucor Preannounces Stronger-Than-Expected Third-Quarter Earnings (9/16/21), FY2Q21 Earnings Analysis (7/22/21), Initiation (6/7/21), Investor Relations

PepsiCo Inc. (PEP) ; $166.97; 650 shares; 3.1%; Sector: Consumer Defensive

WEEKLY UPDATE: Another quiet week for this global beverage and snack company but the year-over-year increase in grocery retail sales reported in the August Retail Sales report supports our bullish stance on PEP shares. In last week's Roundup, we mentioned the pullback in the shares and the shares are on our shopping list. Such a move would not only add to the portfolio's position, but it would also increase its overall dividend exposure. PepsiCo will report its results for the current quarter on Oct. 12.

1-Wk. Price Change: -3.6%; Yield: 2.6%

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.

ACTIONS, ANALYSIS & MORE: Adding to 2 Positions on Market Weakness, We're Initiating 1 Name While Adding to Another, This Stock Should Have 'Pep,' Even in a Recession, Investor Relations

United Parcel Service (UPS) ; $176.71; 565 shares; 2.9%; Sector: Industrials

WEEKLY UPDATE: The August retail sales showed continued strength in nonstore retail sales, better known as digital shopping, a positive for UPS. Later in the week, however, FedEx issued downside guidance for its August and November quarters and pulled its fiscal 2023 guidance it issued on June 23 of this year. That hits UPS shares but we have to remember the differences between the two companies, including their end market mix, UPS's far smaller international exposure vs. FedEx, and FedEx's own misstep in overestimating demand prospects amid a slowing economy. By comparison, UPS's mix more favorable exposure to digital shopping and the company is a best-in-class operator. Exiting June, the company had $3.3 billion remaining under its current share repurchase authorization, and in July UPS shared it expects to spend $3 billion in share repurchase activity in 2022. That implies roughly $1.8 billion in activity in the second half of the year, up from $1.2 billon in the first half. Given the sharp pullback following the FedEx news, we could see UPS approach that target sooner than later. As we assess the FedEx news and the fallout on UPS shares, we may be inclined to scoop up some shares in the coming days. UPS The company will report its September quarter results on Oct. 25.

1-Wk. Price Change: -11.1% Yield: 2.9%

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.

ACTIONS, ANALYSIS & MORE: FY2Q21 Earnings Analysis (7/27/21), Investor/Analyst Day Analysis (6/9/21), Initiation Post (9/25/20), Investor Relations

Vulcan Materials Company (VMC) ; $159.40; 305 shares; 1.4%; Sector: Building Materials

WEEKLY UPDATE: We echo our comments above regarding United Rentals as the same drivers for North American equipment rental demand identified by Bloomberg Intelligence - pent-up demand persists with a growing backlog of large projects, with US-passed legislation generating substantial construction spending over the next 3-5 years - supports out thesis on VMC shares as well. That follows the recently published report from Freedonia Focus Reports sees U.S. engineering service revenues to rise 4.5% per year in nominal terms through 2026 that we touched on in last week's Roundup. Also similar with United Rentals this week, we also added to the portfolio's position in VMC shares this week.

1-Wk. Price Change: -7.1% Yield: .9%

INVESTMENT THESIS: Vulcan Materials Company operates primarily in the U.S. and is the nation's largest supplier of construction aggregates (primarily crushed stone, sand, and gravel), a major producer of asphalt mix and ready-mixed concrete, and a supplier of construction paving services. Its products are the indispensable materials building homes, offices, places of worship, schools, hospitals, and factories, as well as vital infrastructure including highways, bridges, roads, ports and harbors, water systems, campuses, dams, airports, and rail networks. Ramping spending associated with the Biden Infrastructure Law should drive demand for Vulcan's products over the coming years. Vulcan has historically complimented its organic growth prospects by acquiring business to expand its geographic reach and product scope. Since 2014, the company has acquired more than two-dozen companies, including the 2021 acquisition of U.S. Concrete. That combination has allowed the company to deliver steady top and bottom-line growth over the last decade, with only a modest decline when the pandemic hit in 2020.

Target Price: Reiterate $222; Rating: Two

RISKS: General economic and business conditions; dependence on the construction industry; timing of federal, state, and local funding for infrastructure; changes in the level of spending for private residential and private nonresidential construction.

ACTIONS, ANALYSIS & MORE: Initiation Post, Investor Relations

Energy Select Sector SPDR Fund (XLE) ; $78.44; 735 shares; 1.7%; Sector: Energy

WEEKLY UPDATE: As we telegraphed in the September Members-Only call, this week we added to our position in XLE shares. News this week that the U.S. may begin refilling the Strategic Petroleum Reserve should further restrict available supply, helping provide a potential floor in oil prices despite macroeconomic concerns. Year over year, oil prices remain higher exiting the week. Despite a pullback this week, natural gas prices remain elevated compared to year-ago levels. As we head into the weekend, we'll continue to watch efforts to cap Russian oil and what that could mean for oil prices.

1-Wk. Price Change: -2.7; Yield: 3.7%

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

ACTIONS, ANALYSIS & MORE: Adding to 2 Positions on Market Weakness, We're Initiating a Position in the Energy Sector, State Street Global Advisors SPDR Fact Sheet for XLE.

THREEs

Morgan Stanley (MS) ; $87.43; 500 shares; 1.3%; Sector: Financials

WEEKLY UPDATE: As MS shares approached the $91 level, we trimmed the shares back given concerns over the prospects of the IPO market. Later in the week, we downgraded the shares to a Three rating and established a targeted exit price of $91, down from our prior target of $100. Reports indicating Goldman Sachs (GS) and BMO Capital Markets, the Bank of Montreal's (BMO) capital-markets business, is making a series of job cuts as the unit gets stung from worsening market conditions supports our rationale in making this move with MS shares.

1-Wk. Price Change: -2.3%; Yield: 3.2%

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 $91; Rating: Three

RISKS: Capital Markets activity, Integration risk on recent acquisitions, increased regulation of banking industry, low interest rates

ACTIONS, ANALYSIS & MORE: 2Q21 Earnings Report (7/15/21), Initiation (7/12/21), Investor Relations

Market-Hedging Positions

ProShares Short QQQ ETF (PSQ) ; $13.81; 4,070 shares; 1.6%

WEEKLY UPDATE: We continue to receive reports of slowing enterprise spending that is forcing technology companies to revise expectations lower and increasingly focus on managing costs. Both Oracle and Adobe joined the growing number of companies citing a challenging macroeconomic environment and currency headwinds, with those two guiding respective revenue guidance below consensus expectations. We continue to suspect that more of the same lies ahead, leading us to keep PSQ shares in action.

1-Wk. Price Change: 5.8%; Yield: 0.00%

INVESTMENT THESIS: ProShares Short QQQ seeks daily investment results, before fees and expenses, that correspond to the inverse (-1x) of the daily performance of the Nasdaq-100 Index. The Nasdaq-100 Index includes 100 of the largest domestic and international non-financial companies listed on The Nasdaq Stock Market based on market capitalization.

Target Price: N/A

RISKS: Because QQQ shares track the inverse of the Nasdaq 100 Index, QQQ shares will move lower when the Nasdaq 100 Index moves higher.

ACTIONS, ANALYSIS & MORE: Selling Shares in 1 Position, Closing Another, Adding to 1 and Initiating 1

ProShares Short S&P 500 ETF (SH) ; $16.02; 3,310 shares; 1.5%

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. As Fed Chair Powell said in his Jackson Hole remarks, "Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation." We are also seeing signs of slowing enterprise spending that are likely to lead to further downward revisions to GDP and earnings expectations. We will lean into the short wave of September investor conferences for more meaningful company updates, but our suspicion is we will continue to see companies trimming back expectations. That concern keeps SH shares in play as we navigate the evolving economic landscape and the Fed's September monetary policy meeting next week.

1-Wk. Price Change: 4.8%; 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.

ACTIONS, ANALYSIS & MORE: Selling Shares in 1 Position, Closing Another, Adding to 1 and Initiating 1, Trimming 2 Names While Initiating Coverage of a Third

The AAP is long all stocks in the portfolio including GLD SH PSQ XLE UPS PEP NUE MA F CIBR AWK AMZN VZ URI NVDA MS MSFT MKC GOOGL DE COST CMG CHPT CBOE AAPL AMN VMC.