Weekly Roundup

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

As we closed yet out another tumultuous week for equities, one thing is becoming clear. The stock market is realizing the Fed will indeed "go bigger, for longer" to fight inflation. And investors are increasingly concerned the Federal Reserve may overreach with its efforts.

To put this into context, the S&P 500 shed 4.6% this week alone, bringing its fall over the last 30 days to 9.0%. Factoring in those declines, the benchmark index is down 22.5% on a year-to-date basis, while the Nasdaq Composite is down more than 30% on the same basis.

As the market digested the sobering news from the Fed this week, the big expectations rethink for the economy and corporate earnings that we've been calling for has started to unfold. Alongside that, higher interest rates and more to come have started to weigh on valuations for both the stock market and individual equities. So far Goldman Sachs cut its target for the S&P 500 to 3,600 and Bank of America forecasts the S&P 500 to trade between 3,300 and 3,500. Even ahead of those revisions, we've seen investor sentiment more than soften as evidenced by the $30.3 billion inflows to cash vs. the $7.8 billion outflows for global equity funds for the week ending Sept. 21. Not only does that mean investors are increasingly nervous about the market, but it also signals the market isn't likely to see much support in the near-term. Another reason to tread carefully in the short-term.

As we transition from the fallout of the Fed's September monetary policy meeting to the September earnings season, investor sentiment is likely to give way to a "show me" mood for stocks given growing concerns about earnings for the second half of 2022 and into 2023. Even though we have started to see those expectations move lower, there is still more room to go as the delayed impact of the Fed's efforts is felt. We also continued to hear more about supply chain issues, dollar headwinds, and inflation pressures this week, another reason to think earnings expectations need to be re-jiggered lower.

In recent months and even more so in the last several weeks, we've been preparing the portfolio for this. With more expectation re-setting to be had in the coming weeks, we'll remain on the prudent path waiting for a greater degree of clarity to emerge in the markets.

The AAP Portfolio

The sharp move lower in the market reverberated through the AAP portfolio this week save for our cash position that once again acted as a market buffer. On a positive note, the portfolio's inverse-exchange-traded fund positions continue to blunt declines in both the S&P 500 and the Nasdaq Composite. To be clear, it was a difficult week for the market. We'll take solace that while the S&P 500 fell so far this week, a number of our holdings, including Apple, AMN Healthcare, Cboe Global Markets, PepsiCo, Vulcan Materials, and Verizon outperformed on a relative basis as did a few others. While still far from pleasant, we see it confirming the pivot in the portfolio toward defensible and inelastic business models as well as dividend payers. Even so, the portfolio's growthier and more consumer-facing stocks were hit alongside the market this week.

Early in the week, we closed out the portfolio's position in Morgan Stanley near $87.50, which was far better than where the shares closed the week. We used those proceeds to expand the portfolio's exposure to healthcare with the addition of Elevance Health, a position we will look to expand over time. As fresh data is available, we will continue to evaluate the portfolio's current lineup of holdings even as we examine potential candidates for the Bullpen.

Above we commented the rise in interest rates and prospects for earnings revisions are likely to yield price target revisions across Wall Street for both the S&P 500 and individual stocks. We're starting to see that happen for both, and we expect to join that effort in the coming days.

As we shared on Friday's Daily Rundown, we consciously pivoted the portfolio during the summer months given our concerns for inflation, the dollar, the Fed's likely course of action, and the collective impact on growth for the global economy and corporate earnings. With the big "re-think" that we've been calling for unfolding, the market is starting to catch up to that repositioning. We have ample cash on hand and the inverse ETF positions, and we will remain on the cautious path as we approach and move through the September quarter earnings season. Our suspicion is it will be another period of expectation re-setting, during which we will be fine-tuning our shopping list. Near-term we will be looking for companies with qualities like those found in the portfolio's newer 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)

Economy

Ahead of the Fed's September monetary policy meeting, August housing starts and building permits were reported. Housing starts totaled 1.575 million, surpassing expectations but building permits came in at 1.517 million, well below expectations and sharply lower than the revised count of 1.685 million in July. While the August starts data surprised to the upside, weakness in the permits data along with that in the weekly MBA Mortgage Application Index data suggests that strength in starts is not sustainable.

That data was a mere appetizer to the week's main course, which was the conclusion of the Fed's September monetary policy meeting. As we learned, it boosted the Fed Funds rate by three-quarters of a percentage point to a target of 3% to 3.25% and telegraphed telegraphing likely additional rate hikes in the coming months.

In its updated Economic Projections, the Fed now sees gross domestic product cuts across the board for 2022, 2023, and 2024. It now sees GDP of just 0.2% in 2022, down from its prior forecast of 1.7% in June. Given the GDP figures for the first half of 2022 and slowing economic data received so far in the current quarter, we weren't surprised by the size of that cut although it could catch many market watchers off guard. To us the larger question is the logic behind the Fed seeing GDP rebound to 1.2% in 2023 vs. its prior forecast of 1.7%, given that it sees the Fed Funds rate hitting 4.4% this year, climbing further to 4.6% in 2023.

That 4.4% Fed Funds rate for 2022 suggests the November and December monetary policy meetings would collectively add another one to one-and-a-quarter percentage points. Heading into the September Fed meeting, the market was adjusting to the view the Fed Funds rate could be north of 4% exiting 2022, but that new forecast is likely to lead to another round of expectation resetting. We saw that begin to happen later in the week. When it comes to the Fed, they are somewhat of a cheerleader no matter what the economic data is signaling, and that means it could once again misread recession risk.

We see the outcome of that meeting confirming our view the Fed is likely to "go bigger, for longer" and both the policy statement and economic projections suggest that is the path ahead. We expect the fallout will include a number of revisions for interest rates, borrowing costs, the dollar, GDP, and corporate earnings in the coming days and weeks. To sum it up, the Fed is making its best effort to snuff out inflation, albeit a bit too late. We think it is smart to take a prudent and cautious approach until the committee can get a better handle on things.

Later in the week, S&P Global issued several Flash September PMI reports, the sum of which confirmed the economies of the U.K., Eurozone, and the U.S. continued to slow.

The S&P Global Eurozone Flash Manufacturing PMI fell to 48.5 in September from 49.6 in August, missing the 48.7 consensus. This marked the third consecutive contraction in factory activity and the biggest since June 2020. The Flash Services PMI for September followed suit falling to 48.9 in September vs. 49.8 in August and the 49.0 consensus with the report showing that both input and output cost inflation accelerated.

The S&P Global/CIPS UK Flash Manufacturing PMI rose to 48.5 in September from 47.3 in the previous month and above market expectations of 47.5. However, the data was still well below the expansion-contraction line that is 50 and showed continued weakness in new orders. The September Flash Service PMI fell to 49.2 vs. 50.9 in August and the expected reading of 50. Per the report, the slowdown reflected the cost-of-living crisis and rising economic uncertainty.

For the U.S., the Flash September composite PMI signaled the third consecutive month of output declines with inflation pressures remaining at elevated levels while new order growth rose modestly compared to August. Once again, historically elevated increases in costs were, partially passed on to customers, reaffirming our view the path to the Fed's 2% inflation target won't be a short one.

While the S&P Global PMI data isn't factored into the Atlanta Fed's GDPNow model, its next update will be had on Tuesday, Sept. 27. Given the lack of fresh inputs since the 0.3% figure issued on Sept. 20, we aren't expecting any significant changes until perhaps early October when we receive the usual start of the month data. This time around that will be for September and it should lead to a much tighter set of revisions. Should the Atlanta Fed's GDPNow tilt into negative territory that would mark the third potential quarter for negative GDP. If that comes to pass, we are likely to see even stronger worries emerge about a recession.

Chart of the Week: Health Care May Have Avoided the ER

It is tough to find any places to hide in this market. We've seen some nice moves up, but those do not last for very long and stocks end up moving backward. Two steps forward, three steps back, so to speak. That may be the case here with the health care exchange-traded fund, the Health Care Select Sector SPDR Fund (XLV) , which carries some of the biggest names in the world -- like Merck, Bristol Myers, and Pfizer. This may be a strong name to hold up during difficult times, but frankly, in a bear market, nothing is safe. (For a better view of the chart below, click here.)

Yet, we see the potential for a short-term bottom if that Jun low holds, and while we're not excited about that prospect it has yet to crack. The Moving Average Convergence Divergence (MACD) oscillator
is on a sell right now while relative strength index on this weekly chart (trendspider) is bending lower. The Advance/Decline line at the bottom pane may be signaling exhaustion, but we would wait for other signals like price and strong volume to get warmed up to the XLV.

The Coming Week

Once again, we have a somewhat quiet start to the economic calendar next week, which will be made even more so given the drop-off in investor conferences. Among the items coming at us next week, the two that we will be most focused on will be the August Personal Income & Spending report given what it will tell us about the health of consumers but also because it will contain the latest reading on the PCE Price Index, one of the Fed's preferred inflation metrics. As we exit this week, the latest poll by Reuters calls for an uptick to 0.3% month-over-month for the headline PCE Price Index from July's 0.2% figure, while the core reading is projected to heat up even further to 0.4% vs. July's 1% reading. Should the data match those expectations or suggest inflation pressures remain stubborn, we'll look for the market's reaction in the CME FedWatch Tool expectations for the November and December Fed meetings.

The second piece of economic data we'll be watching closely next week is the data out of China late in the week. In addition to what we learn about the impact of recent Covid related lockdowns, we'll also be assessing to what degree energy-related problems impacted the economy and supply chains to the west.

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

U.S.

Tuesday, September 27

Durable Orders - August (8:30 AM ET)
FHFA Housing Price Index - July (9:00 AM ET)
S&P Case-Shiller Home Price Index - July (9:00 AM ET)
Consumer Confidence - September (10:00 AM ET)
New Home Sales - August (10:00 AM ET)

Wednesday, September 28

Weekly MBA Mortgage Applications (7:00 AM ET)
Pending Home Sales - August (10:00 AM ET)
Weekly EIA Crude Oil Inventories (10:30 AM ET)

Thursday, September 29

Weekly Initial & Continuing Jobless Claims (8:30 AM ET)
2Q 2022 GDP - Third Estimate (8:30 AM ET)
Weekly EIA Natural Gas Inventories (10:30 AM ET)

Friday, September 30

Personal Income & Spending - August (8:30 AM ET)
PCE Price Index - August (8:30 AM ET)
Chicago PMI - September (9:45 AM ET)
University of Michigan Consumer Sentiment (Final) - September (10:00 AM ET)

International

Monday, September 26

Germany: 3Q 2022 GDP (Preliminary)
Germany: Business Expectations - September

Tuesday, September 27

China: Industrial Profits - August

Wednesday, September 28

Germany: GfK Consumer Climate - October

Thursday, September 29

UK: BoE Consumer Credit - August
Eurozone: Business and Consumer Survey, Consumer Confidence, Consumer Inflation Expectations - September
Germany: CPI - September (Preliminary)

Friday, September 30

Japan: Retail Sales - August
China: Manufacturing and Non-Manufacturing PMIs - September
China: Caixin Manufacturing PMI - September
Germany: Import/Export Prices, Retail Sales - August
Eurozone: Consumer Price Index - September

Here's a closer look at the earnings reports coming at us next week. Among the ones we'll be paying closer attention to are Cintas (CTAS), CarMax (KMX), Micron (MU), and Nike (NKE) given what is likely to be said about hiring expectations and cost cutting, auto demand, the PC and larger consumer electronics market, consumer spending and dollar headwinds.

Monday, September 26

Open: Dentsply Sirona (XRAY)

Tuesday, September 27

Open: Cracker Barrel (CBRL), Jabil (JBL), United Natural Foods (UNFI)
Close: Blackberry (BB), Cal-Maine Foods (CALM), Progress Software (PRGS)

Wednesday, September 28

Open: Cintas (CTAS), Paychex (PAYX), Thor Industries (THO)
Close: Jefferies (JEF), Vail Resorts (MTN)

Thursday, September 29

Open: CarMax (KMX), Rite Aid (RAD)
Close: Micron (MU), Nike (NKE)

ONEs

AMN Healthcare Services, Inc. (AMN) ; $103.95; 1,135 shares; 3.4%; Sector: Health Care Services

WEEKLY UPDATE: Jefferies issued bullish comments on the contract health care market this week, noting not only an increase in the number of jobs available but also an increase in billing rates. Comments from Cross Country Healthcare that the lack of adequate nurse labor supply is impacting the health care market's ability to fill open positions, a view that supports our these for AMN shares. In addition to that structural pain point, we continue to like the domestic only exposure of AMN's business. Members that are underweight AMN shares should nibble at current levels.

1-Wk. Price Change: -1.1%; 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) ; $116.10; 950 shares; 3.3%; Sector: Financials

WEEKLY UPDATE: While there was no new development this week, given our concerns over the upcoming September-quarter earnings season and the high degree of probability for downward revisions in GDP expectations following the Fed's latest Economic Forecast update, we continue to see a robust environment for Cboe's options business. This follows the recent comments at the Barclays Global Financial Services Conference this week, Cboe confirmed that view, sharing it continues to see investor interest in macro hedging.

1-Wk. Price Change: -4% Yield: 1.7%

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

Target Price: Reiterate $140; Rating: One.

RISKS: IT spending, competition, supply chain challenges

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

Costco Wholesale (COST) ; $466.40; 245 shares; 3.4%; Sector: Consumer Staples

WEEKLY UPDATE: Costco Wholesale reported August quarter earnings of $4.20 per share, a few pennies ahead of the $4.17 consensus. Revenue for the quarter also modestly topped consensus expectations, coming in at $72.09 billion vs the $72 billion consensus. Comparable sales for the quarter, excluding the impacts from changes in gasoline prices and foreign exchange, increased 10.4% YoY with comps sales in the U.S. rising 9.6%, besting the 9.3% consensus forecast. E-Commerce increased by 8.4% on adjusted basis. Exiting the quarter, Costco operating 838 warehouse locations and targets opening 29 new warehouses vs. 23 net new locations over the prior 12 months. That bodes very well in our opinion for Membership fee revenue, which accounted for 72% of Costco's net income over the last 12 months. We continue to see the company winning consumer wallet share and while the company shared it has no plans to raise its membership fees in the near-term, it did share that such an increase will happen at some point. That bodes very well in our view for continued growth in the high margin Membership Fee revenue stream. Not only is that stream a key differentiator vs. other retailers it also means Costco's profit structure is less influenced by the consumer spending. As we shared heading into Costco's earnings report, we would look to add to portfolio's position in the coming days even as we reassess our current $620 price target.

1-Wk. Price Change: -7.5% Yield: 0.7%

INVESTMENT THESIS: We like Costco's long-term prospects, driven by a club-based operating model that focuses on volumes, not margins, and therefore offers its customers a value proposition of everyday low prices. The strength of this model has created an incredible loyal customer base with low churn and continued share gains in both brick and mortar and e-commerce. And this is a global concept, evidenced by the strength of sales both in the U.S. and abroad, which includes an emerging China opportunity. We see the company's membership model as a key differentiator vs. other retailers and its plans to open additional warehouse locations in the coming quarters should drive retail volumes and the higher margin membership fee income as well. We also appreciate management's approach to capital returns and their willingness to return cash when it is in excess on the balance sheet. Earlier this year, Costco announced a 13.9% increase for its quarterly dividend to $0.90 per share.

Target Price: Reiterate $620. Rating: One

RISKS: Inability to pass through higher costs, fuel prices, weaker consumer, membership churn.

ACTIONS, ANALYSIS & MORE: FY4Q21 Earnings Analysis (9/23/21), FY2Q21 Earnings Analysis (3/4/21), Upgrading Costco to a One (2/25/21), $10 Per Share Special Dividend (11/16/20), Recent Buy Alert (2/28/20), Initiation (1/27/20), Investor Relations

Deere & Co. (DE) ; $334.22; 310 shares; 3.1%; Sector: Farm Machinery & Equipment

WEEKLY UPDATE: Prices of key agricultural commodities wheat, corn and soybeans rebounded this week due to renewed concerns about supplies out of the Black Sea following comments from Russia that it would attempt to formally annex captured areas of Ukraine. That comes ahead of the Ukraine-Russia safe passage deal that expires in November. Alongside those concerns, the U.S. Department of Agriculture reported further declines in corn and soybean crop conditions in its latest weekly Crop Progress report. This latest rebound adds to the year-over-year distance in corn, wheat, and soybean prices, bolstering prospects for farmer income, a leading indicator of ag equipment purchases. While signs of renewed supply chain issues in other industries could hamper ag equipment shipments or margins in the near term, we continue to see signs of vibrant demand for the coming year. We intend to play the long game with DE shares. With that in mind, we'll look to add to the portfolio's DE position should the share price erode further.

1-Wk. Price Change: -5.7% Yield: 1.3%

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) ; $153.01; 312 shares; 1.4%; Sector: Commodities

WEEKLY UPDATE: Gold remained under pressure this week as the dollar continues to surge. We have seen some potentially positive developments on the inflation front but those are simply seeds. The economy is weakening though and there is risk for some downside, gold is also vulnerable along with other commodities. The metal rose Wednesday on Fed-day but moved down sharply as a currency war is now on the table. We'll be watching the developments here but still believe gold is a good hedge against market risk.

1-Wk. Price Change: -1.8% 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.

United Rentals (URI) ; $263.37; 360 shares; 2.8%; Sector: Industrials

WEEKLY UPDATE: The Architecture Billings Index (ABI) score for the month ticked back up to 53.3 from 51.0 in July, as more firms reported an increase in billings. Inquiries into new projects also increased modestly in August from July. As the flow of funds related to the Biden Infrastructure Law accelerate, we expect tight equipment supply to translate into favorable demand and pricing dynamics for United Rentals. Next week's Investor Day for Vulcan Materials should offer some insight into the pace at which infrastructure spending should ramp.

1-Wk. Price Change: -2.8% Yield: 0.0%

INVESTMENT THESIS: United Rentals is the largest equipment rental company in the world, operates throughout the United States and Canada, and has a limited presence in Europe, Australia, and New Zealand. It serves the industrial and other non-construction; commercial (or private non-residential) construction; and residential construction. Industrial and other non-construction rentals represented approximately 50% of rental revenue, primarily reflecting rentals to manufacturers, energy companies, chemical companies, paper mills, railroads, shipbuilders, utilities, retailers and infrastructure entities; Commercial construction rentals represented approximately 46% of rental revenue, primarily reflecting rentals related to the construction and remodeling of facilities for office space, lodging, healthcare, entertainment and other commercial purposes; and residential rentals ~4% of revenue. We see the company benefitting on three fronts - the seasonal uptick in construction spending; the release of funds and projects associated with the five-year Biden Infrastructure Bill; and the company's nip and tuck acquisition strategy that should further enhance its geographic footprint. In January, the company announced a fresh $1 billion buyback authorization following the completion of $4 billion in share repurchases over the 2012-2021 period.

Target Price: Reiterate $380; Rating: One

RISKS: Industry and economic risk, competition and competitive pressures, acquisition risk.

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) ; $39.52; 2,335 shares; 2.8%; Sector: Communication Services

WEEKLY UPDATE: Verizon Business expanded its partnership with U.K. health technology company Visionable in a deal that will allow both companies to work on a range of connected healthcare solutions, via Visionable's patented technology powered by Verizon's 5G Ultra-Wideband and 5G Edge network. We like the nature of this effort as it speaks to another aspect to the growing influence of connectivity. We also like the far stickier nature compared to consumer wireless. The pullback in VZ shares this week paired with the recent dividend increase have the shares trading at an enviable 6.5% dividend yield. Given the volatile nature of the market, that yield offers a safe haven and are looking to bulk up on the shares, thereby upping the portfolio's dividend exposure. As a reminder, 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: -4.2% Yield: 6.6%

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) ; $67.96; 1,160 shares; 2.4%; Sector: Info. Tech.

WEEKLY UPDATE: During Nvidia's investor event, it revealed that the graphics card market is now in oversupply and it is resorting to discounts to bring down inventory levels. That paired with the weakening PC market is leading us to not only re-think earnings expectations for AMD but also our price target and the portfolio's position in the shares. We aren't the only ones doing this given estimate cuts at Bank of America this week given the issues we mentioned above but like us Morgan Stanley is concerned AMD could miss expectations for the current quarter. As we review the fundamentals, we'll revisit the technical as well as we plot our next move with AMD shares.

1-Wk. Price Change: -11.2% 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) ; $113.78; 710 shares; 2.4%; Sector: Consumer Discretionary

WEEKLY UPDATE: Coming into this week, MasterCard's SpendingPulse survey forecast U.S. retail sales for the upcoming holiday season will rise 7.1% year over year across in-store and digital formats. For those keeping score, that's slower than the 8.5% post re-opening resurgence reported for 2021 but the report calls for continued gains by digital shopping. That matches our thought that consumers looking to stretch disposable spending dollars will re-embrace digital shopping, a positive for Amazon. This has us keeping close watch on the shares with an eye to adding to the portfolio's position size. During the week, Amazon unveiled several new tablet models, including a starting price of $99 but we see this as nice to have than need to have for the company. Given inflation concerns, we'd remind members of private label brands for apparel, grocery, personal care and beauty, and other areas inside of Amazon given fresh data from Numerator that those are some of the fastest growing private label brands. Early in the week, Amazon's planned purchase of iRobot (IRBT) received a second FTC request for additional information and materials. As we have in the past when this has happened, we will continue to keep close tabs on developments noting that we have yet to adjust our expectations for the successful completion of any such acquisition.

1-Wk. Price Change: -7.9%; 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) ; $140.91; 705 shares; 3.0%; Sector: Utilities

WEEKLY UPDATE: This largest publicly traded water utility announced its two latest nip-tuck acquisition as its Illinois unit acquired Villa Grove Water and Wastewater Systems for $11 million while its California American Water acquired privately held Warring Water Services for $4.6 million. We expect the typical American Water Works playbook to be put to work, including infrastructure improvements and petitioning utility regulators for rate hikes. With AWK shares below the portfolio's cost basis and the company's inelastic business model, we are once again eyeing adding to this position.

1-Wk. Price Change: -5%; Yield: 1.7%

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) ; $150.43; 750 shares; 3.4%; Sector: Technology

WEEKLY UPDATE: Bank of America said Apple is likely benefitting from iPhone promotions, particularly in the U.S., that are designed for older iPhone users to upgrade to newer models. We see that helping carriers move subscribers to 5G networks at a faster pace, allowing them to capture more data rich pricing plans. Helping drive appeal, some plans are pricing iPhone 14 models over 36 months vs. 24 months in the past. Early indications are lead times for the new iPhone line up are expanding and that demand is skewing toward the higher priced Pro models, something that should benefit Apple's revenue in the December and following quarters. Reports indicate Apple has asked suppliers to pivot production toward the Pro models. Also helping its revenue, Apple announced it will raise prices of its apps and in-app purchases in October across the Eurozone and some countries in Asia and South America most likely due to currency and dollar related headwinds. We see the above setting up for success in the coming quarters, and we continue to wait for another Apple event geared toward iPads and Macs, something chatter suggests could come in early October. Given our concerns over the speed of the economy, we will keep our Two rating intact for now, but should the shares fall further we may look to revisit that decision.

1-Wk. Price Change: -0.2% 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) ; $14.75; 8,040 shares; 3.6%; Sector: Electrical Components & Equipment

1-Wk. Price Change: -17.90% Yield: 0.00%

WEEKLY UPDATE: After a strong move higher last week, CHPT shares gave those gains and then some back this week amid the market sell off. Admittedly, CHPT shares can be volatile in a challenging market given their beta of 1.81, but we continue to focus on the longer-term opportunity in the EV charging market. Our comfort in that market stems from the continued adoption of EVs and spending for EV charging stations contained in the Biden Infrastructure Bill. Meanwhile, in the U.K., consumer watchdog Which? outlined the need for "urgent improvements" to the U.K.'s electric car charging infrastructure. We see this boding well for ChargePoint's non-U.S. business. Also, this week, the IEA expects to "see another all-time high for electric vehicle sales [in 2022], lifting them to 13% of total light duty vehicle sales globally" vs. almost 9% of the car market in 2021. By 2030, IEA sees EVs accounting for 60% of new car sales. Those factors keep us bullish on CHPT shares and given the pullback CHPT shares, we are reconsidering the current 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 U.S. Department of Energy, the U.S. 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) ; $1,557.52; 70 shares; 3.3%; Sector: Restaurants

1-Wk. Price Change: -8% Yield: 0.00%

WEEKLY UPDATE: During the week, we taste-tested the company's latest limited-time menu item, Garlic Guajillo Steak, and can confirm it is a winner. We continue to like Chipotle's limited-time menu strategy as it spurs repeat traffic while also improving ticket size. Cowen raised its price target on CMG shares to $1,950 from $1,850 and reiterated its "Outperform" rating following an upbeat meeting the company. Also, this week, Stephens initiated coverage on CMG shares with a $1,900 target calling the company a "best in class operator" within the fast casual dining segment.

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) ; $38.59; 2,590 shares; 3%; Sector: Cybersecurity

WEEKLY UPDATE: CIBR shares traded off with the tech market despite headlines continuing to alert investors to the latest round of ransomware and other cyberattacks. Alongside a grouping of those headlines, we share our conversation with Netography CEO Martin Roesch, a cybersecurity company focused on the Atomized Network. We would encourage members to listen to that conversation as it underscores our bullish stance on cybersecurity both near and longer-term. We have ample room to build out the portfolio's position and CIBR shares are on our shopping list.

1-Wk. Price Change: -5.4% 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

Elevance Health Inc. (ELV) ; $453.85; 90 shares; 1.2%; Sector: Health care

WEEKLY UPDATE: We used the proceeds of the portfolio's exit in Morgan Stanley shares to begin a starter position in HMO company Elevance Health with a $550 price target. In keeping with the "Two" rating as well as the overall market mood, we will look to build this new position out over time as the opportunity presents itself.

1-Wk. Price Change: -4.7%; Yield: 1.1%

INVESTMENT THESIS: Elevance, formerly Anthem/Blue Cross Health is a premiere health care brand that appears to be in the sweet spot for HMO companies. Mostly domestic, this company has wide reach and coverage across the US, serving more than 118 million people via medical, pharmacy, clinical and care solutions. Founded in 1944, Elevance offers a terrific business model that works in boom or bust economic times. The opportunity to find a company with reliable and dependable revenue and cash flows is right here with Elevance. Revenue growth for this company has surged in recent years, better than double digit growth since 2018 as the company thrived during the pandemic. Earnings grew more than 30% in 2021.

Target Price: Initiation at $550; Rating: Two

RISKS: With any insurance business the risk is high for changes in regulation and government programs. Since the onset of Obamacare more than 10 years ago, companies like Elevance have changed their model to be more in line with a better cost/benefit analysis, reducing waste and squeezing out excesses (as was outlined and suggested in Obamacare). Separately, as the population increases and ages there is more opportunity for Elevance to grow, but if those changes there is risk. Lastly, competition is brisk with some very strong opponents who keep their costs low (Humana, Cigna, UNH, CVS/Healthnet).

ACTIONS, ANALYSIS & MORE: 2021 Annual Report, 2Q 2022 Earnings Report, Investor Relations.

Ford Motor (F) ; $12.32; 7,850 shares; 2.9%; Sector: Industrials

WEEKLY UPDATE: Shares of Ford came under pressure this week after the company disclosed its inflation-related supplier costs will run around $1 billion higher than expected in the current quarter. The Ford news comes on the heels of the Port of Los Angeles handling 15% fewer cargo containers in August than it did a year ago and rail companies are in the process of clearing some 28,000 containers that built up at the port ahead of the potential rail strike that was averted. This led Ford to share it expects to have 40,000-45,000 vehicles in inventory exiting the current quarter that lack certain supply constrained components. Ford also reiterated its full-year 2022 expectation for adjusted EBIT between $11.5 billion -$12.5 billion, which implies we are seeing a shift in deliveries toward the December quarter resulting in a lump second half of 2022. In the coming weeks and months, this latest supply chain hurdle should be cleared, and others should continue to improve as well, reducing some of the margin pressure being felt by Ford and others. While somewhat of a surprise, we'll continue to focus on the longer-term opportunity generally speaking but especially with Ford as it continues to transform its business and reap the benefits of related cost reduction efforts. We will keep our Two rating intact given concerns over higher interest rates and therefore incrementally more expensive auto loans even though we acknowledge some of that will be offset by EV subsidies. As a reminder, The Inflation Reduction Act signed by President Biden extended the existing $7,500 tax credit for EV vehicle purchases. This week the IEA said it sees "another all-time high for electric vehicle sales [in 2022], lifting them to 13% of total light duty vehicle sales globally" vs. almost 9% of the car market in 2021. By 2030, IEA sees EVs accounting for 60% of new car sales. With that in mind, 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.

1-Wk. Price Change: -16.3% Yield: 3.2%

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.

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

Alphabet (GOOGL) ; $98.74; 1,000 shares; 3.0%; Sector: Communication Services

WEEKLY UPDATE: YouTube confirmed it is bringing advertising to its YouTube Shorts videos as it looks to more aggressively monetize the platform with creators keeping 45% of the revenue, distributed based on their share of total Shorts views. We see this as a positive for Alphabet and one that could see it win share from rivals including Meta's Instagram and TikTok. Midweek we learned U.K. digital regulator Ofcom plans to conduct a range of investigations into competition in digital markets, including internet messaging, smart devices and cloud computing to see if they are limiting innovation and growth. We will add this to the growing list of regulatory matters we are watching. Following comments that Meta is looking to cut expenses by at least 10%, we will continue to keep close tabs on Alphabet, which has already signaled some belt tightening. We continue to like the company's positions in Search and YouTube, and see it as a beneficiary of political ad spend leading up to the mid-term elections in the U.S. On Oct. 6, 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: -3.9%; Yield: 0.00%

INVESTMENT THESIS: We believe that while search and digital ad dominance are what will carry shares in the near- to- midterm, longer-term it is the company's artificial intelligence "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)

Mastercard (MA) ; $293.58; 275 shares; 2.4%; Sector: Info. Tech

1-Wk. Price Change: -6.8% Yield: 0.8%

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) ; $237.92; 420 shares; 3.0%; Sector: Technology

WEEKLY UPDATE: Year-to-date Microsoft shares have fallen close to 30%, but after meeting with company executives Morgan Stanley revealed its view its view they have an attractive risk-reward profile, arguing in favor of its expanded solutions portfolio. We agree Microsoft could see incremental market share wins as companies look to rein in costs and pare back the number of suppliers they are using, but with the PC market continuing to weaken, renewed dollar headwinds and slowing enterprise spending, we're inclined to stay on the sidelines with the shares for now. In an interview with Bloomberg this week, CDO Satya Nadella shared he remains confident about the pending acquisition of Activision Blizzard. Also, this week, Microsoft declared a 10% increase with its next quarterly dividend of $0.68 per share. This new dividend will be paid on December 8 to shareholders of record on Nov. 17. Given the current share price, the new forward yield on MSFT shares is roughly 1.1%.

1-Wk. Price Change: -2.8% 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) ; $76.03; 1,415 shares; 3.2%; Sector: Food; Consumer Non-Durables

WEEKLY UPDATE: Following the market's continued move lower this week, we continue to watch the $74-$75 level in the shares. When McCormick reports its quarterly results on Oct. 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 based on 2022 revenue of $6.32-$6.44 billion. As we've said previously, 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.

1-Wk. Price Change: -3.9% 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) ; $105.87; 325 shares; 1%; Sector: Materials

WEEKLY UPDATE: Nucor recently 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. Soon thereafter United States Steel Corp. also said it sees weaker than expected September quarter results. That combination hit NUE shares this week, leading to roundtrip back to their late June levels. We were skeptical of the sharp rally in the shares during July and the first half of August, opting to stay on the sidelines, a move that proved to be rather prudent. We will continue to monitor steel capacity and plant closings, which could lead to firmer steel prices as infrastructure spending ramps. Given the uncertainty associated with the weakness in its steel mill business and the relatively small position size for NUE shares, they could be a source of funds as we look to take advantage in more defensively positioned holdings within the portfolio.

1-Wk. Price Change: -9.6% Yield: 1.8%

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) ; $168.52; 650 shares; 3.3%; Sector: Consumer Defensive

WEEKLY UPDATE: While there were no company specific developments to be had this week, data from Nielsen confirmed U.S liquid refreshment beverage (carbonated soft drinks, bottled water, ready-to-drink coffee and tea, fruit beverages, energy drinks, and sports beverages) trends remained positive through early September and were up 10.9% for the 12 weeks ending September 10. The data indicates recent share gains by PepsiCo's portfolio vs. Coca-Cola (KO), Keurig Dr Pepper (KDP) and National Beverage Corp. (FIZZ). PepsiCo will report its results for the current quarter on Oct. 12 and given the pullback in the shares, we are looking to revisit the current Two rating given the company's defensive and inelastic business model as well as its focus on returning capital to shareholders.

1-Wk. Price Change: .9%; 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) ; $164.33; 565 shares; 2.8%; Sector: Industrials

WEEKLY UPDATE: Building on last week's downside guidance and cautionary comments from FedEx (FDX) last week, the fallout from the Fed's September monetary policy meeting and renewed concerns those efforts will torpedo the economy put UPS shares under pressure. When FedEx reported its quarterly results on Thursday night it revealed it's losing share in Europe to UPS and others amid data that points to solid online shopping trends during the quarter. As part of that earnings report, FedEx announced it will boost its shipping rates by 6.9% across the board in January, and we are likely to see UPS follow those steps to some degree. With that in mind, UPS rolled out a pricing program that offers shippers one all-in rate while waiving almost all delivery surcharge, but we expect there to be some lift in its overall shipping rates. That should help combat margin pressure even as consumers once again flock to digital shopping this holiday season. We expect to learn more on that pricing move when the company reports its quarterly results on Oct. 25. At that time, we'll look to revisit our current price target, likely with a downside bias.

1-Wk. Price Change: -7% Yield: 3.1%

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), Investor Relations

Vulcan Materials Company (VMC) ; $155.63; 305 shares; 1.4%; Sector: Building Materials

WEEKLY UPDATE: The Architecture Billings Index (ABI) score for the month ticked back up to 53.3 from 51.0 in July, as more firms reported an increase in billings. Inquiries into new projects also increased modestly in August from July. As the flow of funds related to the Biden Infrastructure Law accelerate, we expect demand for the company's concrete and aggregates to accelerate. Next Thursday, September 29, Vulcan will hold its 2022 Investor Day and we expect the company will add some color and context for how its business will benefit from the Biden Infrastructure Law.

1-Wk. Price Change: -2.4% Yield: 1%

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) ; $70.48; 735 shares; 1.6%; Sector: Energy

WEEKLY UPDATE: The renewed concern over recession and dollar strength led oil prices to tumble late in the week, bringing our shares of XLE with them. Once again, the focus is on the demand side even though supply issues remain and are poised to become a renewed issue in the coming months. During the week, Russian President Vladimir Putin announced a "partial mobilization" of the population to bolster flagging manpower for Russia's "special military operation" in Ukraine. This along with another round of sanctions being bandied about the Eurozone could lead to further supply concerns ahead of the winter months. European Union sanctions banning seaborne imports of Russian crude will come into force on Dec. 5 and OPEC continues to deliver below its stated production targets, contributing to the tight oil supply. Meanwhile, the U.S.'s Strategic Petroleum Reserve is 30% lower levels it was at some two years ago, putting it at the lowest level since 1984. Yet, the White House announced plans to release another additional 10 million barrels from the SPR in early November.

1-Wk. Price Change: -10.1; Yield: 4%

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.

Market-Hedging Positions

ProShares Short QQQ ETF (PSQ) ; $14.47; 4,070 shares; 1.8%

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. We continue to see signs of slowing enterprise spending, dollar headwinds and continued supply chain issues that are likely to lead to further downward revisions to GDP and earnings expectations. Our suspicion is we will continue to see companies trimming back expectations, offer conservative guidance or both. That concern keeps PSQ shares in play as we now navigate the path to the September quarter earnings season and the Fed's next monetary policy to be held in November.

1-Wk. Price Change: 4.8%; 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) ; $16.79; 3,310 shares; 1.7%

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. We continue to see signs of slowing enterprise spending, dollar headwinds and continued supply chain issues that are likely to lead to further downward revisions to GDP and earnings expectations. Our suspicion is we will continue to see companies trimming back expectations, offer conservative guidance or both. That concern keeps SH shares in play as we now navigate the path to the September quarter earnings season and the Fed's next monetary policy to be held in November.

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