After shedding just over 2.5% during February, the S&P 500 snapped back sharply this week rising nearly 2% for the first three days of March. The driver for that move up was the retreat in the 10-year Treasury yield, which finished the week below 4% vs. the week high of 4.085% on Thursday. That yield has been one the market has been closely watching, and we expect it will remain so until we have visibility on terminal level for the Fed Funds rate.
At least for now, the market is shrugging off what we learned in the week's February Manufacturing PMI data and the February Services PMI data: Inflation pressures were not abating during the month in either part of the economy. Part of that response was because of Atlanta Fed President Raphael Bostic's view the central bank can keep its interest rate hikes to quarter-percentage points rather than the half-point increase favored by other Fed heads. However, we would point out Bostic is not a voting member of the Federal Open Market Committee (FOMC) in 2023. What we found far more interesting were comments from Fed Governor and FOMC voting member Christopher Waller, who took a tougher stance and raised the possibility of a higher terminal rate if inflation numbers don't cool.
In our Friday alert discussing the February Services PMI data, we shared our view the ongoing debate for now will be whether the Fed does more in the form of a larger rate hike at its coming meeting or takes a greater number of more measured bites. We do not see that changing in the near-term. Given what we've seen thus far in the February data, it would appear that one way or another we are likely to see rate expectations move higher. Next week's February jobs report as well as the upcoming February consumer price index and producer price index reports have the potential to cement that view, which means we will have plenty of reading and thinking to do in the coming days.
As we fade into the weekend, we would share with you the biggest move this week wasn't in the Nasdaq, the Dow or the S&P 500. It wasn't in the Russell 2000, either. It was in the Cboe Volatility Index (VIX), which fell more than 10.5% to 18.49. In the below chart, we can see that is one of the lower levels of the last few months and suggests the market could be coming a tad too complacent. We, on the other hand, will continue to do the work, read the data, and revise our investment mosaic in real-time, sharing those thoughts with you. We'll have a more detailed look at the relationship between the S&P 500 and the VIX on Monday, but for now we will continue to keep our inverse ETFs in play.
The AAP Portfolio
With the stock market rebounding and delivering a positive move for all of the major market indexes, we saw a number of AAP holdings march higher this week. Notable performers included Axon Enterprises, which climbed more than 10%, a move that will have us revisiting our current rating on the shares when we return from the weekend. Ford Motor was another strong performer as it clawed back some of its recent gains, with the same being true for Alphabet, as well as shares of the Energy Select Sector SPDR Fund. Two of the larger laggards will come as no surprise given the market's move this week, but as we discussed above, we will continue to hang on to these inverse ETF positions as we march toward the Fed's next monetary policy meeting and technical resistance ahead at 4,100-4,200 on the S&P 500.
In terms of portfolio activity, we had far busier week than usual as we started winding down the position in McCormick & Co. shares, using the funds to flesh out our holdings in several positions including Vulcan Materials, Elevance Health, Chipotle and some others as well as fund our small starter position in "Two"- rated Marvell. Following its December quarter results, we boosted our price target on Clear Secure shares and lifted our rating to a One from Two as we picked off more shares. We also boosted our rating on the shares of American Water Works when we added to them this week.
While we made a number of moves over the last few days, we did so by taking advantage of more favorable risk to reward tradeoffs in the shares following moves lower over in the several days. As we lead up to the Fed's March meeting we may make a few more nibbles here and there, but with the likes of Costco, AMN Healthcare, and Verizon, but for now our plan will be preserve our overall cash balance and fund any additional buying by continuing to work our way out of MKC shares. We will also continue to look for opportunities to expand the Bullpen as well as call up one of those candidates when the time is right, much the way we did with MRVL shares late this week.
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: ABCs of the XLY
Higher inflation may make no difference to consumers, who continues to spend everywhere they can. Whether it's airlines, cruises, restaurants, travel or services the consumer is resilient. No doubt the strong job market and increase in wages are responsible here. The calls for the economy falling off the cliff this year are not under debate, but we should always be aware of the consumer -- they represent 70% of the economy. That said, we heard from some retailers lately that the consumer may be a bit more cautious going forward.
For a closer look at the chart, click here.
We recently saw the XLY, the consumer discretionary ETF pull back some, to a support zone from January. Thursday in fact we saw the XLY make a run to the 200-day moving average and is now bouncing back strong. That's a good sign for the bulls but a move back over the Volume-Weighted Average Price statistic would be even better (top arrow). That would change the game, but for now that is resistance.
The lower indicators are trying to turn upward as well. The Traders Dynamic Index at the bottom is a relative strength indicator, it is turning upward. The relative strength index is turning upward as well, volume trends are neutral, but we are seeing good money flow into this ETF. March could be the month this ETF makes a break, above $150 would be a bullish move. The AAP has plenty of names representing consumer discretion, including COST, CMG, AMZN and AAPL (among others).
The Coming Week
Following this week's jam-packed combination of economic data and quarterly earnings, we have a far breezier week ahead next week. We'll compensate for that with our March Members Only meeting on Wednesday, March 8.
On the economic data docket, we have a few reports we will be closely examining. They include the January Consumer Credit report, and in that we will continue to focus on consumer credit card levels, which have been steadily rising. Wednesday brings the ADP Employment Change Report for February, and we expect attention will be paid to the volume of jobs it shows were created during the month. Inside that latest edition of the report, we'll also be sizing up wage data vs. that found in ADPs reports of the last few months, looking to see if wage data is cooling or like other inflation data, remaining stickier than expected.
Wednesday also brings the January JOLTs report, a key one for us given our shares of AMN Healthcare, and the next iteration of the Fed Beige Book. We, along with most others we know, will be pouring over that anecdotal collection of data to see what the Fed heads will be thinking about at their upcoming monetary policy meeting.
Rounding out next week's jobs data, we have the latest Challenger Job Cuts Report on Thursday and then the February Employment Report. In that one, the focus will be on the number of jobs created during February vs. January and December; any movement in the Unemployment Rate, and of course, the wage data to see if wage inflation pressure has cooled... or not.
As we get all of that data, we would expect to see further refinements in what the CME FedWatch Tool shows for the Fed's March monetary policy meeting.
Here's a closer look at the economic data coming at us next week:
U.S.
Monday, March 6
- Factory Orders - January (10:00 AM ET)
Tuesday, March 7
- Consumer Credit - January (3 PM ET)
Wednesday, March 8
- Weekly MBA Mortgage Applications (7:00 AM ET)
- ADP Employment Change Report - February (8:15 AM ET)
- JOLTS Job Openings Report - January (10:00 AM ET)
- Weekly EIA Crude Oil Inventories (10:30 AM ET)
- Fed Beige Book - March (2 PM ET)
Thursday, March 9
- Challenger Job Cuts Report - February (7:30 AM ET)
- Weekly Initial & Continuing Jobless Claims (8:30 AM ET)
- Weekly EIA Natural Gas Inventories (10:30 AM ET)
Friday, March 10
- Employment Report - February (8:30 AM ET)
International
Monday, March 6
- Eurozone: Retail Sales - January
Tuesday, March 7
- China: Imports/Exports - February
- Germany: Factory Orders - January
Wednesday, March 8
- Japan - Leading Indicators - January
- Germany: Industrial Production, Retail Sales - January
- Eurozone: 4Q 2022 GDP
Thursday, March 9
- Japan: 4Q 2022 GDP
- China: Consumer & Producer Price Indices - February
Friday, March 10
- Japan: Producer Price Index - February
- UK: Industrial & Manufacturing Production - January
- Germany: Consumer Price Index - February
We see a noticeable move lower in the volume of companies reporting next week, and we're happy to share we have no portfolio companies on deck next week. However, we will continue to mine those that are reporting for fresh data points and other nuggets. For example, inside quarterly results from Calavo Growers (CVGW), we'll be zeroing in on avocado prices with our shares of Chipotle (CMG) in mind. With Campbell Soup (CPB), it will be pricing vs. volume expectations as we continue to watch shares of Kellogg (K) in the Bullpen. And results and comments from both BJ's Wholesale (BJ) and Ulta Beauty (ULTA) will be ones we dig into with Costco (COST) and Coty (COTY) in mind.
Here's a closer look at the earnings reports coming at us next week:
Monday, March 6
- Open: Ciena (CIEN)
- Close: AeroVironment (AVAV), Calavo Growers (CVGW), Groupon (GRPN), WW (WW).
Tuesday, March 7
- Open: Dick's Sporting Goods (DKS), Thor Industries (THO)
- Close: CrowdStrike (CRWD), Stitch Fix (SFIX)
Wednesday, March 8
- Open: Campbell Soup (CPB), United Natural Foods (UNFI)
- Close: Asana (ASAN)
Thursday, March 9
- Open: BJ's Wholesale (BJ)
- Close: El Pollo Loco (LOCO), Gap (GPS), Ulta Beauty (ULTA)
Friday, March 10
- Open: Buckle (BKE)
AAP Portfolio Ratings
1 - Buy Now (BN): Stocks that look compelling to buy right now.
2 - Stockpile (SP): Positions we would add to on pullbacks or a successful test of technical support levels.
3 - Holding Pattern (HP): Stocks we are holding as we wait for a fresh catalyst to make our next move.
4 - Sell (S): Positions we intend to exit.
AAP Portfolio Positions
ONEs
AMN Healthcare Services, Inc. (AMN) ; $89.93; 1,275 shares; 3.38%; Sector: Health Care Services
WEEKLY UPDATE: It was another challenging week for shares of AMN Healthcare and a rather frustrating one as well. In last week's Rundown, we noted strong support for the shares near $85, and the next catalyst for the shares will be the January JOLTS report that will be published on Wednesday, March 8. We believe the story is still very strong for AMN, especially in a very tight labor market, and would remind members that according to Bureau of Labor Statistics data, general medical and surgical hospitals only account for ~31% of nursing demand. The balance is spread across physician offices, nursing care facilities, home health care services, outpatient care centers, and other medical facilities. If the January JOLTS report supports our thesis, we would look to bring down the positions cost basis by adding additional AMN shares.
1-Wk. Price Change: -2.3%; 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
American Water Works (AWK) ; $139.70; 810 shares; 3.24%; Sector: Utilities
WEEKLY UPDATE: We used the recent pressure on AWK shares to add to our holdings this week near $138.60. We later learned that pressure was tied to the company shopping an unregistered offering of 11 million shares out of its shelf registration filing, which ultimately priced at $135.50. As we explained in an alert to you, the funds tied to this offering should allow the company to continue its business practice of upgrading and updating water infrastructure across its footprint, which allows it to then petition public utility commissions (PUCs) for water rate adjustment increases. This has been the well-worn path that has allowed American Water to drive both earnings growth and cash flow, in turn allowing American Water to continue boosting its annual dividend. In response to the ~6% increase in the outstanding AWK share count, we trimmed our price target to $160 from $165. Given the upside to that new target, the company's inelastic business model and dividend increasing nature, we upgraded the shares to a One rating from Two.
1-Wk. Price Change: -1.3%; Yield: 1.9%
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 $160; Rating: One
RISKS: Regulatory oversight risks, environmental safety laws, and regulations, 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.
Axon Enterprise Inc. (AXON) ; $220.95; 380 shares; 2.40%; Sector: Aerospace & Defense
1-Wk. Price Change: 14.2% Yield: 0.00%
WEEKLY UPDATE: Following Axon's simply stellar December quarter earnings report and better than consensus guidance, we lifted our price target on the shares to $240 from $220. The quarter confirmed the mix shift we have been talking about -- and as it continues, we should see further margin improvement. That paired with the rising percentage of recurring revenue should lead Wall Street to rethink how it values AXON compared to when its business was largely stand-alone sales of Taser weapons. Also impressive was Axon's total company future contracted revenue, which advanced 66% and ended the December 2022 quarter at $4.647 billion. Management expects to recognize 15%-25% of that revenue in 2023 with the balance to be recognized over the following 10 years. That offers solid footing for the company's 2023 top-line guidance of at least $1.43 billion vs. the $1.38 billion consensus and the $1.19 billion it delivered for 2022. As part of the quarterly results, Axon introduced a 2025 revenue target of $2 billion and adjusted EBITDA margins of 25% vs. the 20% targeted. That implies not only the continued shift in business mix toward the higher gross margin Software and Sensors segment, especially Axon Cloud, but continued efforts to improve the company' overall cost structure. Members that have yet to match the portfolio's position size for AXON could see more favorable prices in the coming days as the pop tied to the quarterly earnings beat and price target increases likely fades a bit. During the week Baird boosted its AXON target to $237 from $200, Craig Hallum upped its to $242 from $215, and JP Morgan raising its target to $224 from $182.
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 $240; Rating: One
RISKS: Manufacturing and Supply Chain, Competitive Factors, Government Regulation, Technology Change.
ACTIONS, ANALYSIS & MORE: Strong Demand Bodes Well for This Conducted Energy Devices Firm, Initiating a New Position in a Public Safety Technology Name, Investor Relations.
Cboe Global Markets Inc. (CBOE) ; $126.23; 950 shares; 3.44%; Sector: Financials
WEEKLY UPDATE: It was a rather quiet week for CBOE shares, but we expect that to change next week as it should bring not only the company's trading volume report for November, but management will be presenting at the Raymond James Institutional Investor Conference on Monday, March 6. As you mark your calendars for that, be sure to also note Cboe will pay its next quarterly dividend of $0.50 per share on March 15 to shareholders as of Feb. 28.
1-Wk. Price Change: -2.6% 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. Cboe operates four U.S. options exchanges - the Cboe Options, C2 Options, EDGX Options and BZX Options Exchanges - which together account for approximately 31% of all U.S. options trading volume. 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
ACTIONS, ANALYSIS & MORE: Addition to AAP Portfolio; Initial Technical Review, Addition to Bullpen, Investor Overview.
ChargePoint Holdings Inc. (CHPT) ; $11.08; 10,930 shares; 3.47%; Sector: Electrical Components & Equipment
1-Wk. Price Change: 6% Yield: 0.00%
WEEKLY UPDATE: In response to the company's very disappointing December quarter results and softer than expected revenue guidance for the current quarter, we cut our price target to $15 from $20. As we said in the corresponding note to you, we explained we are sticking with CHPT shares because we are in very early innings in the multi-year buildout of EV charging stations. And despite the soft guidance, ChargePoint continued to win customers during the quarter and shared it was one of the winners in the US Postal Service's 14,400 EV charging station deployment. From a technical perspective, there is solid support at $9, which is above the $8.28 level at which we last added shares in late December. And yes, we will keep our One rating intact, largely because of the added upside to our price target that will emerge today. As the shares settle out in the coming days, we may look to top off our position.
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 $15; 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.
Clear Secure Inc. (YOU) ; $28.95; 3,250 shares; 2.69%; Sector: Technology
WEEKLY UPDATE: Following what was a December quarter beat and forward guidance that topped consensus expectations, we boosted our price target to $37 from $34, upped our rating to "One" from "Two" and used post earnings pullback to add YOU shares to the portfolio. In a rather detailed note to members, we ran through the company's results and touched on several factors that not only point to continued growth ahead, but also rising deferred revenue that gives us confidence in management's guidance. Telsey Advisory Group reiterated its Outperform rating and $38 target for YOU shares, while JPMorgan boosted its target to $33 from $32.
1-Wk. Price Change: -5.2%; 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 $37; Rating: One
RISKS: membership growth, partnership retention, and growth, competitive dynamics, new product offerings.
ACTIONS, ANALYSIS & MORE: We're Initiating a Position in This Identity Platform Company, We're Securing This Company a Spot in the Bullpen, Investor Relations.
Costco Wholesale (COST) ; $475.26; 262 shares; 3.57%; Sector: Consumer Staples
WEEKLY UPDATE: Costco reported solid February quarter results with EPS of $3.30 that topped the $3.20 consensus forecast while its revenue rose 6.5% year-over-year to $55.27 billion, modestly below the $55.61 billion consensus. Comp sales metrics for quarter included shopping frequency up 5% worldwide and 3.7% in the U.S. with average transaction size up 0.2% worldwide and .9% in the U.S. As we see it those metrics confirm our rationale for owning COST shares in the portfolio - shoppers are frequenting Costco warehouses to stretch the spending the dollars they do have. We are also seeing more consumers become Costco members to do that. Exiting the quarter, the company had 68.1 million paid household members and 123.0 million cardholders, both up more than 7% vs. a year earlier. Costco also continues to target adding 24 net new warehouse locations this fiscal year, which implies 14 more to go after the 10 that were added during the last two quarters. We see that continued to drive membership fee revenue and its bottom line. Because we see Costco's differentiated membership business model allowing it to outperform more traditional retailers in the coming quarters, we are inclined to use the more recent pullback to round out the portfolio's exposure.
1-Wk. Price Change: -2.7% Yield: 0.8%
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 $575. 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
Verizon Communications (VZ) ; $38.26; 3,030 shares; 3.32%; Sector: Communication Services
WEEKLY UPDATE: Verizon declared its next $0.6525 per share quarterly dividend will be paid on May 1 to shareholders of record on April 10. With VZ shares back at levels where we lost bought them in late December, members should be scooping up shares, embracing the almost 6.8% dividend yield. That is something we aim to do in the coming days, stepping into the company's largely inelastic business model and falling capital spending plans that should free up cash flow.
1-Wk. Price Change: -1.2% Yield: 6.8%
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 around 75% of Verizon's revenue stream but around 90% of its operating income. From a revenue and operating profit contribution perspective, the Business segment accounts for around 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. Verizon's next quarterly dividend of $0.6525 per share will be paid on Feb.1 to shareholders of record on Jan. 10.
Target Price: Reiterate $48; 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
Vulcan Materials Company (VMC) ; $182.47; 675 shares; 3.53%; Sector: Building Materials
WEEKLY UPDATE: We added to our position in VMC shares this week following two pieces of data that increased our confidence in our underlying investment thesis. The first was the January Construction Spending report that found total nonresidential construction rose 15.9% year over year while residential construction fell 3.9% over the same time frame. Particularly strong areas of spending growth were manufacturing (+53.6% year over year), highway and street (+16.3%), and commercial (+22.1%), which together accounted for 40% of total non-residential construction spend during the month. The second piece of data was U.S. rail traffic for February from the Association of American Railroads (AAR). While the report showed overall U.S. carload and intermodal originations fell 5.2% year over year during the month, closer inspection of the data revealed February carloads of crushed stone, sand & gravel climbed just over 13% vs. year-ago levels. This builds on the strong start for those carloadings in January, which AAR reported soared 22.6% year over year.
1-Wk. Price Change: -0.6% 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 $220; Rating: One
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
TWOs
Chipotle Mexican Grill (CMG) ; $1,510.00; 75 shares; 3.24%; Sector: Restaurants
1-Wk. Price Change: 2.3% Yield: 0.00%
WEEKLY UPDATE: Following the sharp move lower in CMG shares over the last few weeks, this week we added to our holdings in a move that modestly improved the position's average price. Also this week, the company unveiled its latest limited time menu offerings that included the "Fajita Quesadilla Hack" and the "Keithadilla", both of which are TikTok inspired. Both dishes will only be digital only available items, indicating the company continues to lean into its digital platform. We see this as the latest step in helping drive traffic, a move that also typically carries favorable prices for these limited time offerings. The next known catalyst will be February restaurant sales traffic data from research firms like Black Box. Given renewed concerns over the consumer, we continue to like Chipotle position in the quick service space.
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.
ACTIONS, ANALYSIS & MORE: Initiating a New Position in Chipotle, We're Adding Chipotle to the (Bullpen) Menu
Coty Inc. (COTY) ; $11.58; 5,500 shares; 1.82%; Sector: Consumer Discretionary
WEEKLY UPDATE: Reports out this week suggested China may be getting increasingly ambitious with its 2023 growth target, aiming potentially as high as 6%. The final growth target is expected to be revealed on March 5, which marks the start of China's annual legislative meeting. Our thinking is that efforts to stimulate China's economy could accelerate the country's reopening, a positive for our Coty (COTY) shares. This could be a "buy the rumor, sell the news" event if China offers a 5%-5.5% target, but we would use any meaningfully related weakness in COTY shares to possibly add to the portfolio's position.
1-Wk. Price Change: 3.9%; Yield: 0%
INVESTMENT THESIS: Founded in Paris in 1904, Coty is one of the world's largest beauty companies with a portfolio of iconic brands across fragrance, color cosmetics, and skin and body care. Coty serves consumers around the world, selling luxury and mass market products in more than 130 countries and territories. The company derives almost 45% of its revenue from the Americas, 44% from Europe, Middle East and Africa, and the balance from Asia Pacific. By revenue category, Prestige drives 62% of Coty's revenue but more than 80% of its operating income with the balance derived from its Consumer Beauty segment. Management intends to further grow the Prestige business, expanding its prestige fragrance brands, through the ongoing expansion into prestige cosmetics, and the building of a comprehensive skincare portfolio leveraging existing brands. Management is also targeting margin improvement at its Consumer Beauty brands as well as expanding its presence in China across both of its reporting segments. China's beauty and personal care market is expected to grow at a quicker pace of 5.4% per annum through 2027, putting it at $70 billion-$75 billion by 2027.
Target Price: $12; Rating: Two
RISKS: Industry competition and consolidation, product efficacy and safety, currency, brand licensing.
ACTIONS, ANALYSIS & MORE: We're Making Our Portfolio a Little More Beautiful Today, We're Adding a Name to the Bullpen, Investor Relations.
First Trust Nasdaq Cybersecurity ETF (CIBR) ; $42.33; 2,900 shares; 3.52%; Sector: Cybersecurity
WEEKLY UPDATE: This ETF had several constituents report this week including Broadcom, Okta, Splunk, and Zscaler and the clear message among them was companies need to protect against cyberattacks even during a softening economic environment. We continue to look for opportunities near $41 to pick build the portfolio's exposure to CIBR shares.
1-Wk. Price Change: 2.9% 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. 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
Deere & Co. (DE) ; $430.28; 310 shares; 3.82%; Sector: Farm Machinery & Equipment
WEEKLY UPDATE: None. We would remind you that we would look to revisit our Two rating on DE shares near the $420-$425 level. With the shares near the upper end of that range exiting this week, we will continue to watch them closely.
1-Wk. Price Change: 3.1% 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. In February Deere announced a 4.2% in its quarterly dividend per share to $1.25 from $1.20. The first payment at this level will be had on May 8 to shareholders of record on March 31.
Price Target: Reiterate $500; Rating: Two.
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
Elevance Health Inc. (ELV) ; $470.24; 145 shares; 1.95%; Sector: Health care
WEEKLY UPDATE: We last added to that position in January at $472.40 and since then the shares have been relatively rangebound. We chalk that up to preliminary 2023 Medicare Advantage payment rates issued in February. The prevailing view, fueled by the "final notice" typically having improved rates over the Advance Notice, is the final rates expected by April 3 could more favorable rates by up to 50 - 100 basis points. The risk-reward tradeoff is favorable as the company continues to expand its footprint and we'd note adding to the position increases the portfolio's dividend exposure. Elevance recently boosted its quarterly dividend by 16% to $1.48 per share. That next dividend will be paid on March 24 to shareholders of record as of March 10. With all of that in mind, we added to the portfolio's position this week, scooping up this latest slug of shares at $471.46. Following the trade, we have further room to grow the portfolio's exposure to the share, something we will consider if the share remain little changed in the coming weeks. While our price target remains $550 the Wall Street consensus target has moved to $580 vs. $575 at the start of 2023.
1-Wk. Price Change: -1.6%; Yield: 1.3%
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.
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).
ACTIONS, ANALYSIS & MORE: 2021 Annual Report, 2Q 2022 Earnings Report, Investor Relations.
SPDR Gold Shares ETF (GLD) ; $172.49; 312 shares; 1.54%; Sector: Commodities
WEEKLY UPDATE: We continue seeing a correction in gold following that sharp runup in January. The 7% move higher that month was clearly unsustainable, so a pullback is not surprising. Gold has become much more correlated with markets over the past couple of months. We see very similar moves in gold as in the SPX 500, but that is highly unusual. The historical correlation between the two is not very strong, which is one reason we hold the metal. We expect to see this revert to the mean and 'unhook' from this strong correlation over time. With plenty of uncertainty in the world (SEE: China/Taiwan, Russia/Ukraine) and still elevated inflation, gold is still a good hedge against war and higher prices. As for price levels, there is good support for GLD around the 165-166 area. We would suggest waiting for that zone before adding more of the ETF, the 100 and 200 moving averages have historically been strong levels of support.
1-Wk. Price Change: 2.4% 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: Two
RISKS: Weak inflation data, interest rate risk, dollar strength relative to other currencies, geographic risk.
Lockheed Martin Corp. (LMT) ; $477.89; 155 shares; 2.12%; Sector: Aerospace & Defense
WEEKLY UPDATE: This week Lockheed shared it is planning on boosting production for its HIMARS mobile rocket launcher system after success on the battlefield in Ukraine has driven up demand from other nations. Also this week, the US State Department approved a $619 million sale of hundreds of missiles to Taiwan to arm new U.S.-made F-16 jet fighters the middle of the current decade. The main contractors for the latest planned package are Raytheon Technologies and our own Lockheed Martin, which is also building the F-16 jets. Exiting the week, the US is expected to announce additional aid to Ukraine, a package that is widely expected to consist of ammunitions and munitions, but as we have seen ample times, the devil will be in the details. We have room to add to our LMT exposure something we would look to do as the shares revisit the $442-$462 range at which we made our last two buys for the portfolio this past January.
1-Wk. Price Change: .5% Yield: 2.5%
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 said 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 around $8.0 billion. Entering 2023, Lockheed should have around $10 billion in share repurchase to be used over the ensuing 11 quarters.
Target Price: $520; 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.
Marvell Technology Inc. (MRVL) ; $44.04; 410 shares; .52%; Sector: Technology
WEEKLY UPDATE: Following Marvell's quarterly results that included softer than expected guidance for the current quarter, we used the corresponding move lower in the shares to begin a small starter position. Our intent with MRVL shares is to take a 12-24 month view. The crux of our thesis hinges on continued content creation and consumption that will drive network traffic growth, driving the need for incremental capacity and other solutions. Pointing to that rising demand that necessitate network densification and the further build out of digital infrastructure, Ericsson sees global monthly average usage per smartphone reaching 46 gigabytes by the end by the end of 2028 vs. 19 GB in 2023 and 15 GB in 2022. In keeping with the Two rating, we would look to build on the position on share price weakness or signs end market demand is picking up quicker than expected. From a technical perspective, MRVL shares have support at $40-$41 with even stronger support at $38, and we would look to get more aggressive in the shares closer to $38 should it come to pass.
1-Wk. Price Change: 2.8%; Yield: 2.6%
INVESTMENT THESIS: Marvell is a fabless supplier of high-performance standard and semi-custom infrastructure semiconductor solutions. These solutions power the data economy, enabling the data center, carrier infrastructure, enterprise networking, consumer, and automotive/industrial end markets. With roughly 75%-80% of Marvell's revenue stream tied to digital infrastructure, we see it continuing to benefit from rising content consumption and creation. Pointing to that rising demand that necessitate network densification and the build of digital infrastructure, Ericsson (ERIC) sees global monthly average usage per smartphone reach 46 gigabytes (GB) by the end of 2028 vs. 19 GB in 2023 and 15 GB in 2022.
Target Price: Reiterate $52; Rating: Two
RISKS: Technology risk, customer risk, competition risk, reliance on manufacturing partners and supply chain constraints.
ACTIONS, ANALYSIS & MORE: We're Watching These Three Names Set to Report Thursday, Why We Added This Chip Stock to the Bullpen, Investor Relations.
Mastercard (MA) ; $361.50; 275 shares; 2.85%; Sector: Info. Tech
WEEKLY UPDATE: For now, MA shares remain trapped in the $300-$380 range they have been in for some time amid concerns over consumer debt levels and spending levels in the coming months. In keeping with our Two rating, we would look to add to the portflio's position when the risk to reward inside that range skews favorable, which means closer to the $320 level. Next catalysts we will be watching will be the company's February SpendingPulse report and Chief Product Officer Craig Vosburg presenting at the Wolfe FinTech Forum on Tuesday, March 14. Favorable February services PMI data bodes well for Mastercard given its international presence and the ongoing shift to debit and credit card transactions as well as digital and mobile payments from cash and check.
1-Wk. Price Change: 2.4% 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.
Target Price: Reiterate $425 Rating: Two
RISKS: The recovery in cross-border transactions, regulation in payments market, competition from other fintechs, pricing pressures.
ProShares Short QQQ ETF (PSQ) ; $13.13; 4,070 shares; 1.53%
WEEKLY UPDATE: With the market once again re-thinking the forward pace of Federal reserve action to tame inflation, we will continue to hold this inverse ETF in the portfolio. Should the Fed become even more aggressive with its efforts, we are likely to see renewed concerns over the economy emerge, dollar headwinds re-kindled and worries over corporate earnings and consumer spending return. Because higher interest rates tend lure investors away from growth stock valuations and lead to a re-think on their valuations, we will continue to hold onto PSQ shares until we have a clearer sense for the fed funds terminal rate.
1-Wk. Price Change: -2.5%; 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; Rating Two
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) ; $15.30; 3,310 shares; 1.45%
WEEKLY UPDATE: The market is once again re-thinking the forward pace of Federal reserve action to tame inflation. The ISM February PMI data showing the manufacturing economy continued to contract suggesting further revenue downside for the basket of S&P 500 companies. That is leading us to continue holding SH shares in the portfolio. Should the Fed become even more aggressive with its efforts, we are likely to see renewed concerns over the economy emerge, dollar headwinds re-kindled and worries over corporate earnings and consumer spending return. Members that have yet to add any protection like SH, should look to do so on a market rally that puts the S&P 500 near technical resistance levels, currently between 4,100-4,200.
1-Wk. Price Change: -1.7%; 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: N/A; Rating Two
RISKS: Because SH shares track the inverse of the S&P 500, SH shares 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.
United Parcel Service (UPS) ; $185.68; 640 shares; 3.40%; Sector: Industrials
WEEKLY UPDATE: UPS is preparing for its next round of negotiations with the Teamsters union ahead of the current national contract that covers 350,000 drivers, loaders, package sorters and other workers expires on July 31. Those talks are expected to begin in April, but this week UPS shared it is taking steps to reduce its workforce in markets where demand has softened. Should negotiations between UPS and the union breakdown, it could have a large impact on both the company and the larger economy. The only other strike at UPS in 1997 lasted for 15 days and cost the company ~$850 million. While we continue to monitor digital shopping and other drivers of its business, we will be closely watching how things develop relating this negotiation and contract. We continue to see very strong price support at the $172 level. The next known catalysts will be Mastercard's February SpendingPulse report followed by the February Retail Sales report that will be published on March 15. Should UPS shares retreat to the $172 level we may be inclined to nibble, but we would prefer to do so on signs any potential strike is unlikely to happen.
1-Wk. Price Change: 3.1% Yield: 3.5%
INVESTMENT THESIS: We are fans of CEO Carol Tomé. Throughout her time at Home Depot, Tomé built an impressive reputation as a turnaround artist, and we think her fresh perspective and intense focus on efficiencies will create a better UPS. However, near-term global supply-chain issues paired with rising transportation costs could be a thorn in the company's side. We appreciate UPS's nearly 50 years of stability and growth in dividends, which management calls the "hallmark" of the company's financial strength.
Target Price: Reiterate $200; 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
Energy Select Sector SPDR Fund (XLE) ; $87.26; 1,130 shares; 2.83%; Sector: Energy
WEEKLY UPDATE: During the week we used the move below $85 to add to our XLE holdings. Subsequent to that move, strong Chinese economic data earlier in the week underpinned the weekly gain in oil prices as the country's re-opening drives oil demand growth. Over the weekend, China is expected to share its 2023 GDP growth target, and there are rumblings it could offer an ambitious 6% target vs. the more widely expected 5%-5.5% target. More stimulative efforts on China's economy are also likely to shore up energy demand, including oil, given China remains the largest net importer of petroleum. Barring any dramatic changes to the macroeconomic outlook, we will continue to monitor the $85 level for XLE shares with an eye to add more shares should they fall below it.
1-Wk. Price Change: 3.1%; Yield: 3.2%
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.
ACTIONS, ANALYSIS & MORE: Adding to 2 Positions on Market Weakness, We're Initiating a Position in the Energy Sector, State Street Global Advisors SPDR Fact Sheet for XLE.
THREEs
Amazon (AMZN) ; $94.90; 835 shares; 2.27%; Sector: Consumer Discretionary
WEEKLY UPDATE: We had a rather quiet week on the Amazon front with the only eye-catching news the company is slowing work on its second headquarters in Virginia as it assesses current needs amid the shifting macroeconomic climate and remote work backdrop. We see this speaking to the more thoughtful and disciplined view at the company. The next set of catalysts to watch will be monthly retail sales data for February as well as Mastercard's February SpendingPulse report. Our thought remains increasingly cash-strapped consumers will migrate back to digital shopping especially as bloated inventory levels at brick & mortar stores return to more normalized levels with the same being true for discounting. We continue to see strong support for AMZN shares at the $90 level, and if they returned there, we may be inclined to add to our holdings. We would also note we have seen the Wall Street consensus price target move down to $135 from $140-$145 earlier this year.
1-Wk. Price Change: 1.5%; 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 $145; Rating: Three
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.
ACTIONS, ANALYSIS & MORE: FY2Q21 Earnings Analysis (7/29/21), 2020 Letter to Shareholders (4/15/21), Initiation (2/2/18), Investor Relations
Apple (AAPL) ; $151.03; 750 shares; 3.4%; Sector: Technology
WEEKLY UPDATE: While there was little in the way of Apple issued new this week, there is speculation the company will hold a product briefing next week. Last year Apple introduced a new green color for the iPhone while in April 2021 it added the color purple. In our view, any such announcement would be a minor one. Comments late in the week from Jefferies say demand for Apple's products, including iPhone, are tracking above expectations. Morgan Stanley touched Apple's widely speculated iPhone subscription service sharing it could have a favorable impact on revenue and margins. If Apple were to introduce such a program, we would need to see uptake rate, but if successful it would be viewed much like Apple's Services business, one that brings predictable cash flow and visibility. Again, should it come to pass, we could see Wall Street making the argument for a higher multiple on its shares. Finally, this week, Qualcomm CEO Cristian Amon shared the company does not expect to continue providing Apple with modem chips after 2024. This suggest Apple is making progress on its own product as part of its Apple Silicon efforts. As that transition happens, we could see prospects for better iPhone margins ahead. We continue to watch the $141-$143 range, which has support associated with the 100-day and 50-day moving averages. As we shared in last week's Roundup, a pullback to that level could shake many out but it might offer an attractive entry point to pick up AAPL shares.
1-Wk. Price Change: 2.9% 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: Three
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
Ford Motor (F) ; $13.08; 7,850 shares; 2.94; Sector: Industrials
WEEKLY UPDATE: Ford Motor (F) reported February U.S. sales that rose 21.9% year-over-year to 157,606 vehicles. What we saw in the mix of vehicles pointed to Ford continuing to lean into EVs despite recent headlines, selling 3,523 units during the month, up 68% year-over-year. That lifted its EV sales for the first two months of 2023 by 87.9% to 8,770, roughly 3% of overall sales vs. 1.75 for the year-ago period. As we've shared previously, the catalyst we are looking for to add additional F shares to the portfolio is confirmation EV tax credits are accelerating EV adoption. Following Ford's halt of F-150 EV production during February, we will be watching data from other original equipment manufacturers, but the real tell will be with Ford's April US sales data out in early May. We say that because Ford expects to restart production of its electric F-150 Lightning pickup on March 13.
1-Wk. Price Change: 10.1% Yield: 4.6%
INVESTMENT THESIS: Our thesis on Ford is mainly predicated on the turnaround led by CEO Jim Farley and his 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, 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 evolving and starting to account for a greater portion of its sales mix. EVs comprised only about 10% of all U.S sales in 2022 but by 2030 EVs are expected to account for 50% of all new vehicle sales.
Target Price: Reiterate $17; Rating: Three
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) ; $93.65; 1,000 shares; 2.68%; Sector: Communication Services
WEEKLY UPDATE: Alphabet shares were defended at Barlcays this week, saying "it seems a long shot" that Microsoft's AI-assisted Bing search engine may "claw a few points" share for that channel. With indications companies are dialing back advertising spending, we will remain on the sidelines with GOOGL shares. In the meantime, we will continue to monitor regulatory developments in the Eurozone and as we've discussed of late, search engine market share data. With that data, we will be looking to see what if any share gains come from Microsoft's (MSFT) updated Bing search engine, and if they are coming out of Google's market share or other search engines, like DuckDuckGo, Naver, Ecosia or one of the smaller ones. With what looks to be strong support for the shares near $86, close to 10% below current price levels, a move closer to $90 would see us look to re-engage with them.
1-Wk. Price Change: 5.1%; Yield: 0.00%
INVESTMENT THESIS: We believe that while search and digital ad dominance are what will carry shares in the near- to- midterm, longer-term it is the company's artificial intelligence "moat" that will provide for new avenues of growth. AI is what has made the company's search, video and targeted ad capabilities best-in-class and is the driving force behind the company's success in voice (Google Home) and autonomous driving (Waymo). Furthermore, we believe it is this AI expertise that will also make the company more prevalent in other industries, including healthcare via subsidiary Verily, as AI and machine learning continue to disrupt operations across industries. 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 $130; Rating: Three
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)
Microsoft Corp (MSFT) ; $255.29; 420 shares; 3.07%; Sector: Technology
WEEKLY UPDATE: The two big topics of late with Microsoft have been AI and Activision (ATVI) and this week that continued. On the AI front, Microsoft shared it will look to integrate an AI powered Bing search engine into a Windows 11 update. This follows the roll out of desktop functionality to desktop users for Bing and reports indicate mobile downloads of Bing have been strong since the Feb. 7 announcement. In our view the real test isn't one of availability, but rather it is one of usage. Worldwide Search Engine Market Share data for February 2023 published by GlobalStats puts Bing's share at 2.8% vs. 93.4% for Google. We will continue to watch these metrics and monitor progress for Bing. On the Activision front, it seems Microsoft's move to license videogames to its competitors will help it clear a key hurdle with the European Commission. This could pave the way toward European Union antitrust approval for its $69 billion takeover of Activision. However, other roadblocks remain as the U.S. Federal Trade Commission is suing to block the deal. Also, the U.K.'s Competition and Markets Authority has said Microsoft's acquisition of Activision could "result in higher prices, fewer choices, or less innovation for U.K. gamers." More hurdles to clear, and we will only factor in synergies from a combined Microsoft-Activision once it clears all of them. Near-term, signs point to continued PC and related hardware inventories, keeping us looking for a fresh catalyst to revisit our price target and current Three rating on MSFT shares.
1-Wk. Price Change: 2.4% 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 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.
Target Price: Reiterate $265; Rating: Three.
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) ; $173.15; 790 shares; 3.92%; Sector: Consumer Defensive
WEEKLY UPDATE: None, however, we would remind members that Friday, March 3 was the record date associated with PepsiCo's next quarterly dividend of $1.15 per share that will be paid on March 31. For members who are underweight PEP shares, the risk-to-reward tradeoff is rather favorable below $170.
1-Wk. Price Change: -1.6%; Yield: 2.7%
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.
Target Price: Reiterate $190; Rating: Three
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 Rentals (URI) ; $479.57; 290 shares; 3.98%; Sector: Industrials
WEEKLY UPDATE: The January Construction Spending report that found total nonresidential construction rose 15.9% year over year while residential construction fell 3.9% over the same time frame. Particularly strong areas of spending growth were manufacturing (+53.6% year-over-year), highway and street (+16.3%), and commercial (+22.1%), which together accounted for 40% of total non-residential construction spend during the month. We see that pointing to demand for United's rental fleet, something that should continue to strengthen as spending associated with the Biden Infrastructure Bill, CHIPs Act, and the Inflation Reduction Act ramps in the coming quarters. As data confirming that is had, we will look to revisit our current $465 price target on URI shares. That said, with the portfolio's position near 4.0% of its assets, we are not inclined to further add to its URI holdings. With the shares sitting on top of our price target, we would suggest members, even those that are underweight URI shares, hold off from adding to their holdings near-term.
1-Wk. Price Change: 6.5% Yield: 1.2%
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 around 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 $465; Rating: Three
RISKS: Industry and economic risk, competition and competitive pressures, and 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
FOURs
McCormick & Co. Inc. (MKC) ; $72.90; 480 shares; 1%; Sector: Food; Consumer Non-Durables
WEEKLY UPDATE: Earlier this year we shared we would look to unwind the portfolio's position in MKC shares, using the proceeds to scale into a combination of existing portfolio positions and potentially new ones. We started that process this week, using the proceeds from downsizing MKC shares to add to Vulcan Materials, American Water Works, Chipotle, Elevance, Energy Select Sector SPDR Fund shares as well as our starter position in Marvell Technology. Late in the week we formally downgraded MKC shares to a Four rating from Three, and with that now at hand we are formally rescinding our MKC price target. We expect MKC shares will remain a source of funds as we move through the coming weeks.
1-Wk. Price Change: -2.8% Yield: 2.1%
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.
Target Price: None; Rating: Four
RISKS: Local economic and market conditions, input cost inflation, exchange rate fluctuations, and restrictions on investments, royalties, and dividends.