Well, at least the stock market didn't fall apart this week.
Yes, it closed the week lower, giving back a portion of last week's gains -- but not much relative to the quarter-to-date gains we saw. The S&P 500 is still up more than 10%, even after this week's move lower. The bulk of the collective chug higher in recent weeks was following the softer-than-expected October consumer price index that shifted expectations for forthcoming interest rate moves by the Fed. While the October producer price Index (PPI) was also softer than expected much like the October CPI report, it too remains a ways away from the Fed's 2% inflation target.
Despite what we learned about consumer debt levels exiting the September quarter, twin reports on October U.S. retail sales painted a stronger-than-expected picture. That data, the softer-than-expected PPI print and continued growth in the manufacturing economy vs. year-ago levels registered by the October Industrial Production report resulted in the Atlanta Fed's GDPNow model upping its outlook above 4% for the current quarter. Normally the prospect of such a GDP print would be welcomed news but with the Fed on the inflation warpath, such a forecast suggests the Fed's efforts to cool the economy are, so far, having little impact. It also gives them a window to be more aggressive with the reasoning being the economy is strong enough to take more inflation medicine. This reminds us of folks who have seriously strong strep throat infections that require a hefty course of action after the initial round of antibiotics didn't do the job.
This prompted the latest round of Fed officials to reiterate Fed Chair Powell's post-monetary policy comments the Fed still has much work to do and it won't quit until the job is done. San Francisco Fed President Mary Daly said a pause in rate hikes was "off the table", St Louis Fed President James Bullard issued very hawkish comments stating that Fed policy is not yet sufficiently restrictive and that rates may need to rise to 5%-7%, and Kansas City Fed President Esther George said a real slowing in labor markets and a contraction in the economy may be needed to reduce inflation. Rounding out the comments, Minneapolis Fed President Neel Kashkari said it was an "open question" how far the central bank has to go with rates to bring demand back into balance.
Even though the market expects the Fed to deliver a 50-basis point rate hike at its December meeting, target rate probabilities reported by the CME FedWatch Tool now see the Fed Funds rate at 5%-5.25% after the Fed's May 3 meeting. We also saw investment firms up their formal expectations for the Fed Funds rate with Goldman Sachs now calling for peak U.S. interest rates of 5.25%, up from its previous call of 5%.
Despite what GDP expectations are for the current quarter, the realization that interest rates will move higher in the coming months is leading to the re-think that we've been discussing with members regarding expectations for the economy and earnings in 2023. JPMorgan (JPM) now forecasts a "mild recession" in the U.S. in the back half of 2023 with the Fed only beginning to ease back on interest rates in 2Q 2024. Economically sensitive commodities, like copper, moved lower week over week as well, adding another layer of confirmation.
We see JPMorgan's call on Friday for a mid-2024 rate cut having more potential than ones for later this year. As that likelihood is realized it also means market watchers will have to factor in prospects for a slower-than-previously-expected economy and even lower 2023 EPS expectations. We've seen those expectations come down but think of it this way - if the Fed has more to go with interest rates and it plans to keep them at those elevated levels for some time, does it make sense that the 2023 EPS growth rate for the S&P 500 should be 5.0% given the expected growth rate for 2022 is 6.0%?
The AAP Portfolio
With the stock market giving back some of its prior week gains over the last few days, several of our holdings, including Amazon, ChargePoint, Ford Motor, and Microsoft shares, did the same. The portfolio also enjoyed several outsized moves in its shares of AMN Healthcare, Cboe Markets, Lockheed Martin, and Clear Secure. The "winner" this week was Clear Secure, which popped double-digits following the company's beat and raise September quarter, and the bonus of a special dividend being announced.
With one last leg of retail earnings to be had next week, the stock market remains moderately overbought as we close out the week. Our plan heading into next week remains the same -- look for opportunities to position the portfolio for the coming year. This could mean calling up a Bullpen company or two or adding a new position or two like we did the last few months with Axon, Lockheed Martin, Elevance Health, and Clear Secure.
As members have come to expect, we won't rush into a new position but rather make sure both the fundamentals and technicals give us a green light. We will continue to look for candidates with clearly defined revenue growth drivers in the coming quarters as we did with Lockheed, Axon, ChargePoint, Vulcan Materials, and others. That should help mitigate the risk of even a modest recession, but more than likely we will once again use history as a benchmark when evaluating new portfolio candidates.
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)
Chart of the Week: This ETF is Looking Pretty Healthy
One of the better areas of late include health care, and we can see from this chart of the Health Care Select Sector SPDR Fund (XLV) that is certainly the case. Notice the strong move on good volume from the lows in September and the double bottom that was made only days later.
The daily chart stalled at the August highs, but now we see a bullish cup/handle forming, and a bullish triangle as well. Bullish, indeed. The indicators below also support the bullish price action. Names in the ETF have been pushing higher and going into the end of 2022 we could see money flowing here as fund managers seek to find the best names to hold going into the new year.
Click here to see the chart in detail.
The Coming Week
We enter the year-end holiday season next week with the Thanksgiving holiday that gives way to Black Friday and Cyber Monday. Equity markets will be closed on Thursday, Nov. 24 for the holiday and close at 1 p.m. ET on Friday.
The way the calendar falls next week, we have another barn burner of day for retail earnings on Tuesday, November 23. Following comments this week from Ross Stores and Farfetch that they see a "very promotional period" ahead as well as Target's weaker-than-expected guidance, comments to be had next week will set the tone for Black Friday-Cyber Monday shopping. Given the data contained in the October Retail Sales report and the Mastercard SpendingPulse report for October, we expect Wall Street will be rather focused on results from Best Buy. We'll also be interested in what it sees ahead for the gaming markets and whether it's having a challenging time getting its hands on smartphones. Comments from Dell on PC inventory levels will also be one to key on as well. As we clear the decks of retailer earnings, we'll have another look at inventory levels for the group. The concern we've voiced about excess inventories entering 2023 remains.
The day before the Thanksgiving holiday is likely to see the usual fall in trading volume as folks hit the road for what is expected to be one of the most traveled holidays in the last few years. We, however, will be digging into quarterly results that morning from Deere and First Trust Nasdaq Cybersecurity ETF holding SentinelOne as well as the various Flash PMI reports from S&P Global. With the Atlanta Fed's GDP Now model calling for +4.2% growth in the current quarter, up from 2.6% on November 1, the flash data will give us a better sense as to how accurate that model is apt to be. Inside the Flash PMI reports we'll continue to pull out any insight on inflation during the month.
Here's a closer look at the economic data coming at us next week:
Tuesday, November 22
- Richmond Fed Manufacturing Index - November (10:00 AM ET)
Wednesday, November 23
- Weekly MBA Mortgage Applications (7:00 AM ET)
- Weekly Initial & Continuing Jobless Claims (8:30 AM ET)
- Durable Orders - October (8:30 AM ET)
- S&P Global Flash Manufacturing & Services PMIs - November (9:45 AM ET)
- New Home Sales - October (10:00 AM ET)
- University of Michigan Consumer Sentiment Index (Final) - November (10:00 AM ET)
- Weekly EIA Crude Oil and Natural Gas Inventories (10:30 AM ET)
Monday, November 21
- Germany: Producer Price Index - October
Tuesday, November 22
- Eurozone: Consumer Confidence - November
Wednesday, November 23
- Eurozone: Flash S&P Global Manufacturing & Services PMIs - November
Thursday, November 24
- Germany: Business Expectations - November
Friday, November 25
- Japan: Tokyo Core CPI - November
- Germany: 3Q 2022 GDP
Here's a closer look at the earnings reports coming at us next week:
Monday, November 21
- Open: JM Smucker (SJM)
- Close: Dell (DELL), Urban Outfitters (URBN), Zoom Video (ZM)
Tuesday, November 22
- Open: Abercrombie & Fitch (ANF), American Eagle (AEO), Analog Devices (ADI), Best Buy (BBY), Dick's Sporting Goods (DKS), Dollar Tree (DLTR), Dycom (DY), Jack in the Box (JACK), Warner Music Group (WMG).
- Close: Guess? (GES), HP (HP), Nordstrom (JWN)
Wednesday, November 23
- Open: Deere (DE)
- Close: SentinelOne (S)
AMN Healthcare Services, Inc. (AMN) ; $120.94; 1,060 shares; 3.7%; Sector: Health Care Services
WEEKLY UPDATE: Bloomberg Intelligence found postings for nursing jobs in October averaged 58 basis points above the prior quarter and continues to see nursing demand staying elevated relative to pre-pandemic levels. We'll look for confirmation in the October JOLTs job openings report in the coming weeks.
1-Wk. Price Change: 7.1%; Yield: 0.0%
INVESTMENT THESIS: AMN Healthcare's business centers on talent solutions for the healthcare 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 around 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 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 $138 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) ; $121.75; 950 shares; 3.3%; Sector: Financials
WEEKLY UPDATE: The company's board declared a quarterly cash dividend of $0.50 per share payable on Dec. 15 to stockholders of record as of Nov. 30. With market volatility likely to extend well into 2023, we see that fostering continued use of Cboe's solutions. We'll look for confirmation of that in Cboe's monthly trading volume reports, while the technicals find support on improving volume trends.
1-Wk. Price Change: 5.3% Yield: 1.6%
INVESTMENT THESIS: Cboe's business 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 $145; Rating: One.
RISKS: IT spending, competition, supply chain challenges
ChargePoint Holdings Inc. (CHPT) ; $12.45; 8,710 shares; 3.13%; Sector: Electrical Components & Equipment
1-Wk. Price Change: -7% Yield: 0.00%
WEEKLY UPDATE: There were several positive developments for CHPT shares this week, including the bullish multi-year forecast from Jefferies for electric vehicle adoption. Following on that forecast, at its 2022 Investor Day, General Motors CEO Mary Barra pointed to strong demand for EVs in both retail and fleet segments. Barra said electric vans alone should be a $1 billion business by 2025 and the company's overall EV efforts should have two million vehicle capacity by 2025, competing in 70% of industry segments. Overall revenue from EVs at GM is expected to be more than $50 billion in 2025, more than 20% of its overall 2025 revenue target of $225 billion. Later in the week, California shared it plans to spend an additional $1 billion to bolster its vehicle-charging network as it races to build the infrastructure needed to phase out gas-powered trucks and cars. As a reminder, the state looks to cease the sale of gas-powered vehicles by 2035. And an updated version of Alphabet's Google Maps for Android and iPhone is rolling out with several new features, including the option to search for electric vehicle stations with fast chargers. We see that as a positive sign of demand and usage.
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. NEVI aims 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 $21; 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.
Costco Wholesale (COST) ; $523.67; 245 shares; 3.71%; Sector: Consumer Staples
WEEKLY UPDATE: Competitor BJ's Wholesale topped Wall Street expectations with comp sales for the quarter rising 5.3% vs. the expected 2.6% gain. BJ's also boosted guidance for the current quarter as well. We see that confirming our cash-strapped consumer thesis for COST shares. We'd also note Costco continues to outpace BJ's in recent weeks with its U.S. comp up 6.1% for October and 9.1% for the nine weeks ending Oct. 30. On a market pullback, we would look to round out the portfolio's position in COST shares.
1-Wk. Price Change: 1.6% 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 incredibly loyal customer base with low churn and continued share gains in both bricks-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 in 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, and membership churn.
ACTIONS, ANALYSIS & MORE: FY4Q21 Earnings Analysis (9/23/21), FY2Q21 Earnings Analysis (3/4/21), Upgrading Costco to a One (2/25/21), $10 Per Share Special Dividend (11/16/20), Recent Buy Alert (2/28/20), Initiation (1/27/20), Investor Relations
WEEKLY UPDATE: Bullish quarterly results from CNH Industrial and AGCO Corp. set the stage for Deere's quarterly earnings report next week on Wednesday, Nov. 23. Consensus expectations have the ag equipment company harvesting EPS of $7.12 on revenue of $13.39 billion and guide its January quarter to EPS of $5.48 on revenue of $10.7 billion.
1-Wk. Price Change: 2% Yield: 1.1%
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.
SPDR Gold Shares ETF (GLD) ; $162.79; 312 shares; 1.47%; Sector: Commodities
WEEKLY UPDATE: Gold remains very well bid after shooting higher amid a drop in the U.S. dollar. The buck started a steep decline in early November and has been sold daily ever since. That was an opening for gold, which has rallied about 8% since the start of the month. As investors/traders move away from dollar assets they will continue to find refuge in hard assets like gold and silver. We recently saw GLD hit overbought levels and retreated a bit, but we believe a move on the 200 ma at $168 is imminent. Further, as the rest of the world continues to hurt from high price inflation, currency will become less valuable while gold will become once again a store of value.
1-Wk. Price Change: -1.1% 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) ; $345.70; 360 shares; 3.6%; Sector: Industrials
WEEKLY UPDATE: United Rentals agreed to acquire family-owned Ahern Rentals, the eighth largest equipment rental company in North America, for around $2 billion in cash. Ahern has 106 locations in 30 states serving approximately 44,000 customers in the construction and industrial sectors. The transaction is expected to close before year-end 2022. We see this confirming United's role as a consolidator in the equipment rental business, a move that also expands its footprint as the Biden Infrastructure Law spigot opens. The acquisition is expected to be accretive to United's adjusted EPS and free cash flow generation in its first-year post-close. Additionally, the combination is expected to generate around $40 million of annualized cost synergies within the first 12 to 18 months of closing. As a result of the transaction, United shared plans to pause its $1.25 billion share repurchase program through the initial phase of integrating Ahern. For now, we've maintained our $380 price target but this week URI shares received several price target increases to $360-$415 from the likes of Jefferies, Bank of America Global Research, and UBS.
1-Wk. Price Change: -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 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, and acquisition risk.
Verizon Communications (VZ) ; $38.55; 2,560 shares; 2.85%; Sector: Communication Services
WEEKLY UPDATE: At the 2022 Morgan Stanley European Technology, Media & Telecom Conference, Verizon shared expectations for continued growth of its business-to-business wireless business fueled in part by companies moving away from "bring your own device" due to cybersecurity concerns. Regarding its consumer wireless business, Verizon's customer base skews toward higher quality customers as measured by FICO scores, but it will continue to expand its segment offerings. The company also shared that in prior downturns, customers have prioritized their phone bill over other bills they have to pay, including car loans and mortgages. This speaks to inelastic nature of Verizon's service in an increasingly wirelessly connected world. With the stock market likely to remain volatile into 2023, we like the consistency of Verizon's business, and the current dividend yield offers a compelling return in its own right. With the dividend yield near levels last seen in 2008-2009, we are inclined to be patient with the shares and see them gaining favor in a slowing economic environment.
1-Wk. Price Change: 0.7% Yield: 6.7%
INVESTMENT THESIS: Verizon Communications is one of the largest communication companies in the U.S. Its Consumer business, which 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 $45; Rating: One
RISKS: Industry and economic risk, competition and competitive pressures, acquisition risk, labor relations, and the regulatory environment.
ACTIONS, ANALYSIS & MORE: Here's Why We're Attracted to This Telecom, Exiting 2 Positions, Initiating 1, and Adding to 3, Investor Relations
WEEKLY UPDATE: This week as expected items this week when it came to Amazon. First, digital shopping in the U.S. rose sharply, outperforming overall retail spending per both the monthly retail sales report and Mastercard's October SpendingPulse report. No surprise given Amazon's Prime member event early in the month. In the coming days that span Black Friday to Cyber Monday expectations for the holiday shopping season will start to gel. Comments from retailers this week that a "very promotional" period is coming, in our view, bodes rather well for Amazon's shopping revenue. Also, this week, Amazon announced the start of layoffs, beginning at its Devices and Books businesses. CEO Andy Jassy shared the company's annual planning process extends into 2023, which means there will likely be more role reductions in early 2023 once the company has passed the holiday shopping season. One area that, at least for now, is off the headcount chopping block is Amazon Web Services, but the hiring freeze at that business has been stretched to 1Q 2023.
1-Wk. Price Change: -6.6%; Yield: 0.00%
INVESTMENT THESIS: We believe upside will result from Amazon's continued eCommerce 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, and competition, management is not afraid to invest heavily, potential headwinds resulting from new eCommerce regulation in India, and management is not scared to invest aggressively for growth, which can at times cause volatile reactions as near-term concerns arise relating to the impact on margins.
American Water Works (AWK) ; $146.71; 705 shares; 2.99%; Sector: Utilities
WEEKLY UPDATE: Given what we see ahead for the economy vs. the year-to-date move in AWK shares and our price target, we are revisiting our current "Two" rating on the shares. As we do that, we will balance it with knowing we are heading into one of the seasonally slowest times of the year for the company's water business.
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.
Target Price: Reiterate $165; Rating: Two
RISKS: Regulatory oversight risks, environmental safety laws, and regulations, weather-related service disruptions.
WEEKLY UPDATE: We continued to learn of escalating coronavirus cases in China this week, including cases in key manufacturing cities. We've shared our concerns that recent Covid outbreaks in China would likely hamper iPhone production. This week, UBS reported wait times for iPhone continued to climb, reaching 36 days. That led JPMorgan Chase to trim its iPhone estimates for the current quarter. If coronavirus cases continue to climb in China, we are likely to see further cuts in the coming days. We see this bolstering Apple's move to diversify if supply chain outside of China. This week CEO Tim Cook gave that view a shot in the arm commenting the company expects to source chips from a plant in Arizona in 2024. Cook also shared Apple is being far more thoughtful with its hiring in the near-term. Until we have a better sense for when Apple's iPhone will improve, we're inclined to stay on the sidelines with this holding. As we approach 2023, we expect renewed chatter over Apple's AR/VR product to begin anew.
1-Wk. Price Change: 1.1% 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 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.
Axon Enterprise Inc. (AXON) ; $185.22; 230 shares; 1.23%; Sector: Aerospace & Defense
1-Wk. Price Change: 1.2% Yield: 0.00%
WEEKLY UPDATE: There was no company specific developments this week. We see further upside ahead in AXON shares, especially as its software and recurring revenue streams continue to account for a greater portion of its overall revenue stream. That has us keeping exposure to them but given the sharp move in the last few weeks, the shares are entering "show me" territory, which means waiting for the next round of program wins.
INVESTMENT THESIS: Axon Enterprise Inc develops, manufactures, and sells conducted energy devices and cloud-based digital evidence management software designed for use by law enforcement, corrections, military forces, private security personnel, and private individuals for personal defense. The company operates in two segments: Taser and software & sensors. Taser develops and sells CEDs used for protecting users and virtual reality training. Software and sensors manufacture fully integrated hardware and cloud-based software solutions such as body cameras, automated license plate reading, and digital evidence management systems. Axon delivers its products worldwide and gets most of its revenue from the United States. President Biden's fiscal year 2023 budget requests a fully paid-for new investment of approximately $35 billion to support law enforcement and crime prevention -- in addition to the President's $2 billion discretionary request for these same programs. According to Mordor Intelligence, the wearable, and body-worn cameras market on its own was valued at $1.62 billion in 2020 and is expected to reach $424.63 billion by 2026.
Target Price: Reiterate $185; Rating: Two
RISKS: Manufacturing and Supply Chain, Competitive Factors, Government Regulation, Technology Change.
Chipotle Mexican Grill (CMG) ; $1,502.48; 70 shares; 3.04%; Sector: Restaurants
1-Wk. Price Change: 0.3% Yield: 0.00%
WEEKLY UPDATE: On its recent quarterly earnings call, CFO Jack Hartung said Chipotle's same-stores in October are trending up by a mid-single-digit percentage. With the October retail sales report and Mastercard's October Spending Pulse rising 14%-16% year over year, we suspect Hartung's comment was conservative. Chipotle expects same-store sales to rise by a mid-to-high single-digit percentage for the current quarter. We continue to see Chipotle benefitting from consumers shifting to quick service restaurant as well as newer menu items.
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 the 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.
Clear Secure Inc. (YOU) ; $29.77; 1,350 shares; 1.16%; Sector: Technology
WEEKLY UPDATE: Following a beat and raise earnings report from Clear Secure as well as a special dividend of $0.25 per share, we added to the portfolio's YOU position. Later in the week, very positive airline travel data was found in the U.S. Mastercard SpendingPulse snapshot for October. Clear also announced that before the holiday travel sets in its identity solution is now available at five concourses at the Miami International Airport and at the Boise Airport. This follows the recent announcement that Clear launched at the Luis Muñoz Marín International Airport in Puerto Rico. Based on those developments and with AAA forecasting nearly 55 million people in the US traveling for the upcoming Thanksgiving holiday, making it one of the busiest for travel in the past two decades, we boosted our price target on YOU shares to $32 from $30.
1-Wk. Price Change: 16.9%; Yield: 0%
INVESTMENT THESIS: Clear Secure is involved in the creation of a frictionless travel experience while enhancing security. Its secure identity platform uses biometrics to automate the identity verification process through lanes in airports, which helps to make the travel experience safe and easy.
Target Price: Reiterate $32; Rating: Two
RISKS: membership growth, partnership retention, and growth, competitive dynamics, new product offerings.
First Trust Nasdaq Cybersecurity ETF (CIBR) ; $40.89; 2,590 shares; 3.02%; Sector: Cybersecurity
WEEKLY UPDATE: Palo Alto Networks, a top five holding of this ETF, reported October quarter results that topped consensus expectations and guided its fiscal 2023 above Wall Street expectations. On the earnings conference call, Palo Alto shared tighter enterprise spending controls are lengthening deal conversations. We suspect there could be some pricing pressure as companies look to consolidate vendors, which could lead to slower growth expectations in the near term. One of the next catalysts for CIBR shares will be when the ETF's second largest holding, Broadcom, reports its quarterly results in early December. To be clear, we continue to like the diverse exposure to cybersecurity the shares bring to the portfolio, especially as the outlook for cyber-attacks is a growth one.
1-Wk. Price Change: -1.2% 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 industrial 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 to protect 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) ; $495.32; 90 shares; 1.29%; Sector: Health care
WEEKLY UPDATE: Elevance presented at the 4th Annual Wolfe Research Healthcare Conference this week reviewing its September-quarter results, but also sharing it sees 2023 margins benefitting from its July 2022 price increase and the upcoming one in January. Elevance also touched on its recent acquisition of BioPlus, one of the largest independent specialty pharmacy that was out there with access to over 100 limited distribution drugs and a particular focus on oncology-type drugs. Roughly 85% of BioPlus's revenue stream is related to Medicare, but management shared it needs to scale up BioPlus's membership.
1-Wk. Price Change: 0.8%; Yield: 1.0%
INVESTMENT THESIS: Elevance, formerly Anthem/Blue Cross Health, is a premier health care brand that appears to be in the sweet spot for HMO companies. Mostly domestic, this company has a wide reach and coverage across the U.S., 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, with better than double-digit growth since 2018 as the company thrived during the pandemic. During the September quarter, the company repurchased 1.2 million shares of its common stock for $579 million, at a weighted average price of $476.70. That brought the company's share repurchase efforts for the first nine months of 2022 to 3.7 million shares or $1.7 billion, leaving ~$2.4 billion of Board-approved share repurchase authorization.
Target Price: Reiterate $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 with those changes, there is a risk. Lastly, competition is brisk with some very strong opponents who keep their costs low (Humana, Cigna, UNH, CVS/Healthnet).
Ford Motor (F) ; $13.99; 7,850 shares; 3.17%; Sector: Industrials
WEEKLY UPDATE: Ford Motor CEO Jim Farley commented that manufacturing electric vehicles will require 40% fewer workers than building combustion engine cars and trucks requires. While the comment may have raised some eyebrows, this wasn't the first word on likely job losses as the automotive industry makes the shift. Midweek, competitor General Motors pointed to strong demand for EVs in both retail and fleet segments. GM CEO May Barra said electric vans alone should be a $1 billion business by 2025 and the company's overall EV efforts should have 2 million vehicle capacity by 2025, competing in 70% of industry segments. Overall revenue from EVs at GM is expected to be more than $50 billion in 2025, more than 20% of its overall 2025 revenue target of $225 billion. We see this confirming both the auto industries pivot to EVs as well as that at Ford. The next catalyst for us and Ford shares will be how the upcoming EV tax credit is received. We see it as a positive as it will help offset higher auto loan costs, but we will need to see the data support that thought.
1-Wk. Price Change: -3.5% 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, which is best known for its customer delivery vehicles for Amazon. Recently, 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.
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
WEEKLY UPDATE: We continue to see Alphabet's Google and YouTube benefitting from advertisers fleeing Twitter, but we also recognize competition for weakening advertising dollars post midterm elections will increase. This helps explain why Google's YouTube is slated to bring shopping features to its YouTube Shorts video service. CEO Sundar Pichai previously said YouTube Shorts see more than 30 billion views every day from more than 1.5 billion viewers every month. With YouTube also testing new commission rates for people who sell products via links, this effort could be more than just an incremental positive to Alphabet's topline in the coming quarters. In the September 2022 quarter, YouTube accounted for 13.6% of Google's advertising revenue (11% of total company revenue).
1-Wk. Price Change: 1.1%; Yield: 0.00%
INVESTMENT THESIS: The continued fall in GOOGL shares has us caught our attention and we are revisiting levels at which we would be inclined to add shares to the portfolio. We've stayed on the sidelines with this name in recent weeks given revenue risks with shrinking adverting budgets and the fall off in political spending past the midterm elections. However, with advertisers seemingly shunning Twitter (TWTR) and reports FCC Commissioner Brendan Carr, the senior commissioner in the Republican minority on the commission, told the Council on Foreign Investment in the U.S. should ban TikTok, the fall in Alphabet's revenue may not be as feared.
Target Price: Reiterate $130; Rating: One
RISKS: Regulatory risk (data privacy), competition, macroeconomic slowdown impacting consumers and therefore ad buyer activity.
Lockheed Martin Corp. (LMT) ; $476.82; 85 shares; 1.17%; Sector: Aerospace & Defense
WEEKLY UPDATE: After meeting with Lockheed CFO Jay Malave, Jefferies boosted its price target on LMT shares to $500 from $450, which is largely a valuation argument at this point. Currently expectations are for Lockheed's revenue to be flattish in 2023 but ramp in 2024 as classified and announced program wins matriculate and F-35 deliveries (30% of total sales) ramp. With the shares sitting on top of our price target, we would need to see the shares pullback below $440, or the company pull forward program expectations in 2023 to warrant adding to the portfolio's holdings.
1-Wk. Price Change: 2.8% Yield: 2.3%
INVESTMENT THESIS: Lockheed Martin is the largest defense contractor globally and has dominated the Western market for high-end fighter aircraft since the F-35 program was awarded in 2001. Lockheed's largest segment is aeronautics, which is dominated by the massive F-35 program. Lockheed's remaining segments are rotary and mission systems, which is mainly the Sikorsky helicopter business; missiles and fire control, which creates missiles and missile defense systems; and space systems, which produces satellites and receives equity income from the United Launch Alliance joint venture. Historically, the stability of defense spending has been a haven during periods of economic uncertainty, and we see that repeating once again even as geopolitical conflicts are likely to lead to incremental demand for Lockheed's products. The company has increased its dividend consistently over the last 19 years and is widely expected to boost it again in the coming days. In October 2022, Lockheed announced its board authorized the purchase of up to an additional $14.0 billion of LMT stock under its share repurchase program. Lockheed also shared that it anticipates executing a $4.0 billion accelerated share repurchase program in the fourth quarter of 2022 bringing its total 2022 share repurchases to ~ $8.0 billion. Entering 2023, Lockheed should have ~ $10 billion in share repurchase to be used over the ensuing 11 quarters.
Target Price: Reiterate $470, Rating: Two
RISKS: Contracts and budget risk with the U.S. government and the Department of Defense, F-35 program funding and renewal, competition, subcontractor issues.
Mastercard (MA) ; $343.69; 275 shares; 2.73%; Sector: Info. Tech
WEEKLY UPDATE: MasterCard's Spending Pulse snapshot for October U.S. retail sales that found total retail sales climbed 9.5% (up 8.4% ex-auto and gas). E-commerce sales rose 12.7% while in-store rose 8.9% year-over-year. Here, too, we find restaurant spending was up strong year-over-year, at 16.6%, while grocery rose 7.2%. The real standouts, however, were U.S. travel with airlines sales, up 17.2% and lodging up 36.9% vs. October 2021 levels. Per Mastercard, furniture & furnishings retail sales fell 1.1% during October and department store sales rose a paltry 1.1%. In China, Retail Sales fell 0.5% year over year in October amid renewed coronavirus restrictions. In the coming weeks, we'll receive October retail sales data for the Eurozone. Once more retailers report their quarterly earnings next week, we'll have a far clearer sense as to how likely the NRF's 2022 holiday shopping season forecast will be. Longer-term we continue to favor the shares as a play on the structural shift to non-cash or check payment formats. With interest rates poised to move higher, we suspect consumers will shift to debit card usage vs. credit cards. No matter as both clear on Mastercard's network.
1-Wk. Price Change: 1.3% Yield: 0.6%
INVESTMENT THESIS: Mastercard is a card network company that benefits from the secular shift away from cash transactions and toward card-based and electronic payments. On Covid-19 dynamics, we view MA as a "reopening" play and an economic recovery play within technology because its cross-border volumes fell sharply during the pandemic but will rebound as mobility increases and travel restrictions ease. Mastercard has more international exposure relative to Visa, making its growth outlook more susceptible to new travel restrictions. However, we view MA as the better long-term play as we are betting on that inevitable recovery. Mastercard's next quarterly dividend of $0.49 per share will be paid on Nov. 9 to shareholders of record on Oct. 7.
Target Price: Reiterate $425 Rating: Two
RISKS: The recovery in cross-border transactions, regulation in payments market, competition from other fintechs, pricing pressures.
McCormick & Co. Inc. (MKC) ; $83.76; 1,415 shares; 3.4%; Sector: Food; Consumer Non-Durables
WEEKLY UPDATE: Both the October retail sales and Mastercard's SpendingPulse snapshot for October found grocery sales rising 7%-8% year-over-year. With roughly 70% of the company's revenue derived from the Americas that data kicks off a holiday filled, seasonally strong quarter for this extract and season company. During the week, Exane BNP rated MKC shares Outperform with a $94 target. Given the upside to our price target and that we are approaching the time of year when McCormick has historically announced its dividend increase, we are reviewing our current Two rating on MKC shares.
1-Wk. Price Change: 0% Yield: 1.8%
INVESTMENT THESIS: McCormick is a global leader in flavor that manufactures spices, seasoning mixes, condiments, and other flavorful products for the entire food industry-retailers, food manufacturers, and food service 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.
Microsoft Corp (MSFT) ; $241.22; 420 shares; 2.93%; Sector: Technology
WEEKLY UPDATE: As part of its quarterly earnings report this week, Nvidia said it sees gaming channel inventories normalizing as we exit its current quarter that ends in January, after the holiday season. Soon after the Thanksgiving holiday, Microsoft will be making the conference rounds with the Wells Fargo TMT Summit on November 29, the Credit Suisse Annual Technology Conference on Nov. 29, the UBS Global TMT Conference on Dec. 6, and the Barclays Global TMT Conference on Dec. 7. Across these management events, we suspect the company will update what it is seeing in the PC and gaming markets, discuss the tone of its cloud business and touch on how the dollar is impacting its business in the second half of the current quarter. We could also learn more about its efforts to right size its business for what it sees ahead in the global economy. We continue to wait to see what is next for the pending acquisition of Activision Blizzard. Our view that investors will continue to re-think how MSFT shares are valued as its quarterly results overcome the pressured PC market remains unchanged.
1-Wk. Price Change: -2.4% Yield: 1%
INVESTMENT THESIS: We believe the cloud to be a secular growth trend and that upside to shares will result from Microsoft's hybrid cloud leadership as the company grabs market share 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-premises 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, provide for greater transparency of future earnings. Microsoft recently declared a 10% increase in its next quarterly dividend of $0.68 per share. This new dividend will be paid on Dec. 8 to shareholders of record on Nov. 17.
Target Price: Reiterate $275; 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)
PepsiCo Inc. (PEP) ; $181.33; 745 shares; 3.9%; Sector: Consumer Defensive
WEEKLY UPDATE: Both the October retail sales and Mastercard's SpendingPulse snapshot for October found grocery sales rising 7%-8% year-over-year. With more than half of the company's revenue derived from the U.S. that data kicks off a holiday filled, seasonally strong quarter for this beverage and snacking company. Given our $190 price target, we would be interested in scooping up more shares of this dividend dynamo company below $170. Late in the week, PepsiCo shared its next quarterly dividend of $1.15 per share will be paid on Jan. 6 to shareholders of record on Dec. 2.
1-Wk. Price Change: 1.8%; Yield: 2.5%
INVESTMENT THESIS: PepsiCo is one of the largest food-and-beverage companies globally. It makes, markets, and sells a slew of brands across the beverage and snack categories, including Pepsi, Mountain Dew, Gatorade, Doritos, Lays, and Ruffles. The firm uses a largely integrated go-to-market model, though it does leverage third-party bottlers, contract manufacturers, and distributors in certain markets. In addition to company-owned trademarks, Pepsi manufactures and distributes other brands through partnerships and joint ventures with companies such as Starbucks. The combination of the consumable nature of those products along with PepsiCo's ability to realize price increases has led to consistent revenue, EPS, and dividend growth during both the Great Recession and the Covid pandemic. The company's most recent dividend increase marks its 50th consecutive one and that 7% bump moves the annualized dividend to $4.60 per share up from the prior $4.30.
Target Price: Reiterate $190; Rating: Two
RISKS: Economic conditions, supply chain constraints, raw material costs.
United Parcel Service (UPS) $178.97; 565 shares; 2.9%; Sector: Industrials
WEEKLY UPDATE: As expected the October retail sales and Mastercard October Spending Pulse showed consumers returned to digital shopping during the month, fueled in part by Amazon's latest Prime member event as well as competing ones. Ross Stores, digital luxury goods platform company FarFetch, and other retailers reporting quarterly earnings this week all shared expectations for a "very promotional environment" ahead. We see cash strapped consumers leaning into that, leveraging digital shopping, a positive for UPS's business and our shares this holiday season. However, should the aggregate holiday shopping comments to be collected between now and those following Cyber Monday point to a far weaker than expected holiday shopping season, especially for digital shopping, we will look to revisit the portfolio's stance on UPS shares. We also have to remember the forthcoming price increase to be had by UPS, which is being instilled to maximize the holiday shopping season. The company's next quarterly dividend of $1.52 will be paid on Dec. 1 to shareholders of record on Nov. 14.
1-Wk. Price Change: 0.4% Yield: 3.4%
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.
Target Price: Reiterate $230; Rating: Two
RISKS: Weakness in the broader economy, rising fuel prices, execution, cost management, pricing power.
Vulcan Materials Company (VMC) ; $178.89; 305 shares; 1.58%; Sector: Building Materials
WEEKLY UPDATE: JP Morgan reported cement and aggregate prices rose 13.8% and 10.8% year-overyear in October, suggesting the strong pricing environment in 2022 is poised to carry over into 2023. Combined with the pick-up in demand as the Biden Infrastructure Law spending ramps, and the consensus view that Vulcan's top line should rise just 6.4% is likely to prove overly conservative. We'd also remind members, Vulcan's next quarterly dividend of $0.40 per share will be paid on Dec. 5 to shareholders of record on Nov. 14. Given the upside to our price target and fundamental outlook, VMC shares are on our shopping list.
1-Wk. Price Change: 0% Yield: 0.9%
INVESTMENT THESIS: Vulcan Materials 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 used in 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 complemented its organic growth prospects by acquiring businesses 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.
Energy Select Sector SPDR Fund (XLE) ; $93.13; 855 shares; 2.26%; Sector: Energy
WEEKLY UPDATE: Renewed concern over China's ramping coronavirus case count and hawkish comments from Fed officials this week weighed on oil prices. Still to come is the EU's ban on Russian oil that should put the supply-demand dynamic back in the headlines come early December. Also on our calendar to watch is the Dec. 4 meeting of OPEC+, which began a new round of supply cuts in November.
1-Wk. Price Change: -1.6%; Yield: 3.1%
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 and 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.
ProShares Short QQQ ETF (PSQ) ; $13.83; 4,070 shares; 1.6%
WEEKLY UPDATE: With the Fed on a 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 central bank to overreach and scuttle the domestic economy. We continue to see signs of slowing enterprise spending, rising layoffs, concerns over associated with slower business and consumer spending, and renewed restrictions in China likely leading to further downward revisions to GDP and earnings expectations. Those concerns keep PSQ shares in play as we approach the end of the current earnings season.
1-Wk. Price Change: 1.2%; Yield: 0.00%
INVESTMENT THESIS: ProShares Short QQQ seeks daily investment results, before fees and expenses, that correspond to the inverse (-1x) of the daily performance of the Nasdaq 100 Index. The Nasdaq 100 Index includes 100 of the largest domestic and international non-financial companies listed on The Nasdaq Stock Market based on market capitalization.
Target Price: N/A
RISKS: Because PSQ shares track the inverse of the Nasdaq 100 Index, PSQ shares will move lower when the Nasdaq 100 Index moves higher.
ACTIONS, ANALYSIS & MORE: Selling Shares in 1 Position, Closing Another, Adding to 1, and Initiating 1
ProShares Short S&P 500 ETF (SH) ; $15.52; 3,310 shares; 1.48%
WEEKLY UPDATE: With the Fed on a 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 central bank to overreach and scuttle the domestic economy. We continue to see signs of slowing enterprise spending, rising layoffs, concerns over associated with slower business and consumer spending, and renewed restrictions in China likely leading to further downward revisions to GDP and earnings expectations.
1-Wk. Price Change: 0.6%; 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 shares will move lower when the S&P 500 moves higher.