By Monday morning, we knew this was likely to be a volatile week. We knew Fed Chair Powell -- during his back-to-back testimonies in Washington -- and the February jobs report could stir the pot.
But we got a little more than we bargained for by the end of the week: Silicon Valley Bank, a part of SVB Financial Group, became the first bank failure since the 2008 financial crisis and the second largest to date. SVB bandied itself a financial partner to the innovation economy as it banks nearly half of U.S. venture-backed technology and life science companies. Its shares were crushed this week after it moved to shore up its balance sheet following expected losses in investment portfolio. SVB was unable to complete a deal and as a panic ensued, regulators shut SVB on Friday.
But SVB doesn't represent all banks, especially the more broad-based businesses at JPMorgan Chase, Goldman Sachs, Citibank, Wells Fargo and others. However, what we saw emerge was a "shoot first, ask questions later" mindset with folks speculating which company could be the next SVB.
Let's not forget what else happened this week. Powell, for example, told Congress the Fed would need to do more than previously expected to tame inflation. In other words, the Fed Funds rate was likely to move higher than what the market was looking for and sure enough that sent the market on a downward slide this week. We had recognized the risk of this happening and purposely kept our inverse ETFs in play and kept our cash levels high.
Then, Friday's February employment report, which delivered a month-ove-month decline in the number of jobs created, but still showed a substantially stronger jobs market than the consensus forecast. All told, 311,000 jobs were created during the month vs. the expected 205,000. And while wage inflation was slightly softer than expected in February, coming in at +4.6 year-over-year vs. the expected 4.7%, it was in the wrong direction vs. January's 4.4% reading and December's 4.6%. Granted the unemployment rate ticked higher month over month, but the Fed is more apt to focus on the February wage inflation data, especially since it largely mimicked what we saw in other recent inflation data.
All this news added up to the worst week for stocks since June 2022. The S&P 500 shed 4.5%, the Nasdaq fell 4.7% and the small-cap heavy Russell 2000 dropped just over 8%. The big winner won't be a surprise -- the Cboe Volatility Index (VIX), which closed the week 34% higher, landing at 24.8. In last week's Roundup, we shared the VIX had closed at a level seen only a few times in recent quarters, but even we didn't expect to see all of the week's events unfold as they did. Only the ones with Powell and the February employment report, but as we saw late this week it was the SVB "situation" that gripped the markets. Until the question over whether there is another to follow is answered, we expect the market to be in a spooked mood near-term.
We are also hearing fresh questions as to how the SVB debacle could influence the Fed's monetary policy decision. Some are saying it could force the Fed to only hike rates by a quarter percentage point later this month, while others suggest it may take a pause.
Candidly, we suspect we will have better sense as to whether there is a next SVB in the next few days. Typically, the weekend when markets are shut, is when some of these deals get hammered out. It's part of the reason why we tend to see so many "Merger Mondays." We will join a litany of others in watching the news over the weekend and early Monday morning as those developments are likely to shape Monday's market open.
We also recognize we have the February consumer price index and producer price index coming next Tuesday and Wednesday. Our thought is what they say about inflation will sharpen expectations for what the Fed is likely to do, especially if there appears to be no other SVB situations. In other words, we expect the market will continue to trade day to day, week to week as we approach the midpoint of March.
As we discuss in The AAP Portfolio section below, several portfolio holdings have fallen to levels that make them appealing if not appetizing. If would be arguably reckless to simply jump in and buying on Monday. Rather, we will see what develops between now and Monday's market open and proceed carefully. We could see some great opportunities but only if we are reasonably sure the worst relating to the SVB fallout is behind us and the risk of another, similar event is low.
We will have an updated technical look at the market as measured by the S&P 500 to share with you as we start next week.
See you bright and early on Monday!
The AAP Portfolio
The market's reaction to the three items we discussed above hit the overall AAP portfolio. Higher beta holdings reacted more strongly than others, but our cash position and the inverse ETFs helped blunt the market fall. We also had a number of relative outperformers this week including Costco, Elevance Health, SPDR Gold Shares, Lockheed Martin, and PepsiCo shares.
Early in the week we continued to whittle our way out of "Four"-rated McCormick & Co. shares, using the proceeds to take advantage of the recent weakness in Verizon shares, a move that captured more of their impressive dividend yield. We also tidied the Bullpen and shared more behind our thinking for adding Marvell shares late last week to the portfolio.
Midweek, we used the March Members Only Call to really dig into the AAP rating system, walking our way through representative holdings for each rating. We hope that helped clarify not only the rating systems but also answer some questions on price targets for portfolio residents. If not, be sure to keep those questions coming.
As we get ready to move into next week, the late week sell off in the market weighed on several portfolio positions, bringing them to levels that look more than interesting to us. Examples include Amazon, ChargePoint, Deere & Co., Elevance, Marvell, Vulcan Materials, and Clear Secure. We do not anticipate adding all of them at once, especially given the data coming at us next week. More than likely, we will have concluded our exit of MKC shares, which means we will soon be putting the portfolio's cash position to work. Our plan will be to move prudently and carefully, especially as we wait for any additional fallout from what developed late this week in the form of SVB Financial Group and Silicon Valley Bank.
For members, we would also add the shares of PepsiCo to that list as well as United Rentals. As we've shared before, with those two holdings given their position sizes in the portfolio, we aren't likely to add further. However, members that are underweight the shares should see the current shares prices as a favorable risk to reward point.
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: Banking ETF Has Seen Better Days
With the negative news surrounding Silicon Valley Bank (halted today) and the potential for liquidation, the bank ETFs have been taking it on the chin. The KBE (S&P Bank ETF) has been hammered this week, a move we have not seen since a sharp drop at the start of the pandemic. Yesterday's heavy volume selling was all about institutions dumping shares. More than 14-times average volume and 95% of it was on the downside.
To see the chart in detail click here.
This ETF is going to have trouble getting back into the mid-40s. Notice the bearish indicators on this longer-term weekly chart, with a Moving Average Convergence Divergence (MACD) oscillator sell signal just appearing, first time the crossover happened since 2021. Relative Strength Index and the ultimate oscillator are weak, the Oscillator shows a break of the uptrend line, that is bearish. The big standout on this chart if the volume bar this week. It tells us all about the problems right now and the uncertainty/fear with mid-level banks. While other big names were being sold off like JPM, MS, WFC and BAC, it's quite possible these names have little to no exposure, so these stocks may be a nice buying opportunity. But the KBE? Stay away from it.
The Coming Week
We have another big week on the economic data front, and what we get will have a material impact on expectations for the upcoming Fed monetary policy meeting and GDP expectations for the current quarter. As we close the week, the latest readings from the CME FedWatch Tool calls for the fed funds rate to peak at 525-550 basis points by the Fed's June meeting and the Atlanta Fed GDPNow Model still sees a reading of 2.6% for the current quarter. The next update, which will include the February Employment Report and several pieces of next week's data, will be on Wednesday, March 15.
With that setting the stage, the key data next week will include the February Consumer Price Index as well as the Producer Price Index. We and other market watchers will be looking to see if this batch of data repeats what we saw in the January data -- slow progress on the Fed's inflation fight. Ahead of those reports, the Cleveland Fed Inflation Nowcasting model sees core CPI coming in at 5.54% year over year in February and a hotter 5.66% in March vs. January's 5.6% increase.
In between those two reports, we also have the February Retail Sales report, which we will once again be parsing for what it will tell us for several of our portfolio holdings. We'll be matching that against what we see in February SpendingPulse report from Mastercard.
And, of course, we will be watching weekend developments and those early next week about the fallout from the collapse of SVB Financial Group (SIVB) . We will also be on watch to see if any other institutions are having similar issues with their portfolios and need to shore up their balance sheets. While we could see the market try to recover some on Monday, its ability to do so will hinge on any weekend developments as well as those before trading begins on Monday. This week we shared our view that the market will trade day to day, data point to data point and we expect that will be the case at least through this coming Wednesday.
Here's a closer look at the economic data coming at us next week:
U.S.
Tuesday, March 14
- OPEC Monthly Report - (6:00 AM ET)
- Consumer Price Index - February (8:30 AM ET)
Wednesday, March 15
- Weekly MBA Mortgage Applications (7:00 AM ET)
- Empire State Manufacturing Index - March (8:30 AM ET)
- Retail Sales - February (8:30 AM ET)
- Producer Price Index - February (8:30 AM ET)
- Business Inventories - January (10:00 AM ET)
- NAHB Housing Market Index - March (10:00 AM ET)
- Weekly EIA Crude Oil Inventories (10:30 AM ET)
Thursday, March 16
- Weekly Initial & Continuing Jobless Claims (8:30 AM ET)
- Housing Starts & Building Permits - February (8:30 AM ET)
- Philadelphia Fed Index - March (8:30 AM ET)
- Import/Export Prices - February (8:30 AM ET)
- Weekly EIA Natural Gas Inventories (10:30 AM ET)
Friday, March 17
- Industrial Production & Capacity Utilization - February (9:15 AM ET)
- Leading Indicators - February (10:00 AM ET)
- University of Michigan Consumer Sentiment Index (Preliminary) - March (10:00 AM ET)
International
Tuesday, March 14
- UK: Employment Change, Average Earnings - January
Wednesday, March 15
- China: Industrial Production, Retail Sales - February
- Eurozone: Industrial Production - January
Thursday, March 16
- Japan: Core Machinery Orders, Industrial Production & Capacity Utilization - January
- Eurozone: European Central Bank Interest Rate Decision
Friday, March 17
- Eurozone: Consumer Price Index - February
- Eurozone: Labor Cost Index - 4Q 2022
We see another step down in number of companies reporting but there will still be a handful of reports that we'll be chewing through. Those include Adobe (ADBE) to see what it says about cloud, FedEx's (FDX) comments on the global economy, and guidance from several retailers that we'll factor into our thinking about the consumer.
Here's a closer look at the earnings reports coming at us next week:
Tuesday, March 14
- Close: Lennar (LEN), SentinelOne (S)
Wednesday, March 15
- Open: Oatly (OTLY)
- Close: Adobe (ADBE), Five Below (FIVE), Guess (GES), Williams-Sonoma (WSM)
Thursday, March 16
- Open: Designer Brands (DBI), Dollar General (DG), Signet Jewelers (SIG)
- Close: FedEx (FDX), GameStop (GME), G-III Apparel (GIII), Groupon (GRPN)
Friday, March 17
- Open: Ballard Power (BLDP)
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) ; $87.56; 1,460 shares; 3.72%; Sector: Health Care Services
WEEKLY UPDATE: The January Job Openings and Labor Turnover Survey (JOLTS) report showed health care and social assistance remained one of the largest job opening categories, which was unchanged at 1.89 million job openings exiting January vs. December. In January that category the category had the fourth highest job opening percentage at 8.3% behind accommodation and food services (9.5%), leisure and hospitality (9.2%), and professional and business services (8.7%). With that report in hand, we added to portfolio's position putting the multi-month retreat in AMN shares to use.
1-Wk. Price Change: -2.6%; 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) ; $133.65; 810 shares; 3.15%; Sector: Utilities
WEEKLY UPDATE: Following our latest purchase of AWK shares last week, this week RBC Capital reiterated its $170 target on the shares vs. ours' at $160 and the $154 consensus. As we commented on this week's March Members Only call, we will soon be entering the seasonally stronger time of year for American Water's core business, and we should see some nice operating leverage come along with it. We will continue to look for updates on pending rate increase cases, 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.
1-Wk. Price Change: -4.3%; Yield: 2%
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.
Cboe Global Markets Inc. (CBOE) ; $118.66; 950 shares; 3.28%; Sector: Financials
WEEKLY UPDATE: The company published its February trading volume statistics, which continued year-over-year growth across its various offerings. Total volume in Cboe Volatility Index (VIX) options was 13.3 million contracts, with an average daily volume of 698,000 contracts, the highest monthly volume since March 2022. With the stock market once again rethinking expectations for the Fed funds rate following recent inflation data and Fed Chair Powell's comments earlier this week, the implications for the economy and corporate earnings are likely to keep the market volatile. For us, that means we continue to see investors using Cboe's basket of products to hedge their positions. We've been buyers of Cboe between $112-$120, and if we see the shares get down in that range, we may top off that position. Cboe will pay its next quarterly dividend of $0.50 per share next week on March 15 to shareholders as of Feb. 28.
1-Wk. Price Change: -6% Yield: 1.7%
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) ; $9.67; 10,930 shares; 3.08%; Sector: Electrical Components & Equipment
1-Wk. Price Change: -12.7% Yield: 0.00%
WEEKLY UPDATE: There were no new major developments regarding this position and we used the March Members Only Call to revisit our rationale behind holding CHPT shares in the portfolio something we also touched on during the week in the Daily Rundown. We continue to see a growing pain point between EV sales and EV charging stations, something the Biden Infrastructure Law looks to partly address with a network of EV charging stations. We have to remember that currently ChargePoint's business skews more commercial but recent wins with Mercedes and the U.S. Postal Service show they company can hold its own as the rising tide lifts EV stocks. Late in the week the shares sunk amid renewed concerns for growth stocks, however, we'd remind you the company had $369 million in cash on its balance sheet, funds that should carry the business into fiscal 2025. At that point infrastructure funding as well as other funding for the EV charging station build out should be in full swing. With the shares approaching the price level at which we've added them in the past, we would look to take advantage of this week's pain and scoop them up early next week.
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) ; $26.05; 3,250 shares; 2.47%; Sector: Technology
WEEKLY UPDATE: Mastercard's February SpendingPulse report showed retail sales for airlines rose 15.5% year over year in February. This along with continued year-over-year gains in TSA check point travel data keeps us bullish on YOU shares as the company targets expanded its footprint further in the coming quarters. Late in the week, Clear announced it partnered with Health Gorilla, a leading Health Information Network and interoperability provider, to launch Individual Access Services, which allows consumers to access their personal health information securely. We see this as a positive step that should help diversify Clear revenue stream and pave the way for other identity verification offerings. With YOU shares retreating this week, should they approach our $26.47 cost basis, we would be inclined to buy additional shares for the portfolio.
1-Wk. Price Change: -10%; 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) ; $471.14; 262 shares; 3.60%; Sector: Consumer Staples
WEEKLY UPDATE: Northcoast Research upgraded COST shares to Buy from Neutral with a fresh $560 target. The catalyst for that move stems from continued share gains, a key part of our own thesis on the shares, and the potential Northcoast sees for a special dividend during 2023. Costco has a history of paying a special dividend every few years with the most recent ones being $7 per share in both 2017 and 2012. Once we have the February Retail Sales report in hand, we will be sizing it up against Costco's February comp sales. With the shares near our last bite, we will continue to evaluate adding to position, especially since it would incrementally reduce our cost basis for the overall position.
1-Wk. Price Change: -0.9% 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) ; $36.68; 3,295 shares; 3.52%; Sector: Communication Services
WEEKLY UPDATE: Last week Verizon declared its next $0.6525 per share quarterly dividend will be paid on May 1 to shareholders of record on April 10. This week we waded further into the shares to capture even more of that dividend stream in the portfolio cost. Given what we see ahead as rising worries over the speed of the economy and earnings expectations as the Fed continues to boost interest rates, the inelastic nature of Verizon's business paired with the enviable dividend yield are likely to emerge as a safe haven for investors, driving demand for the shares.
1-Wk. Price Change: -4.1% Yield: 7.1%
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) ; $169.29; 675 shares; 3.33%; Sector: Building Materials
WEEKLY UPDATE: None. We will continue to look for signs of rising nonresidential construction as part of the Biden Infrastructure Law, the CHIPS Act and the Inflation Reduction Act. We recently added to the position near $178 and with the shares finishing this week below that level as well as our average cost basis of $178.14, we are inclined to add additional shares in the coming days.
1-Wk. Price Change: -7.3% 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
Axon Enterprise Inc. (AXON) ; $213.00; 380 shares; 2.36%; Sector: Aerospace & Defense
1-Wk. Price Change: -3.6% Yield: 0.00%
WEEKLY UPDATE: In last week's Roundup we shared that if AXON shares added further to their recent gains, we would be inclined to downgrade them to a "Two" rating. We did that earlier this week, and said we would be inclined to revisit that rating closer to $205-$210 or on word of new program wins that would lead us to revisit our $240 target. Later in the week, Goldman Sachs initiated coverage on AXON shares with a Buy rating and a $263 target, well above our target and the current Wall Street consensus target of $237.
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: Two
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.
Chipotle Mexican Grill (CMG) ; $1,550.71; 75 shares; 3.39%; Sector: Restaurants
1-Wk. Price Change: 2.7% Yield: 0.00%
WEEKLY UPDATE: This week Calavo Growers and Mission Produce, two producers of avocados, said that production volumes will continue to move higher on year-over-year basis, driving prices lower 20%-30% on a year over year basis. This along with declines in protein costs over the last several months bodes well for Chipotles 2022 menu price increases becoming margin drivers in the coming quarters. From a demand perspective, Mastercard's SpendingPulse report found U.S retail sales on restaurants rose 8.8% year-over-year. We'll corroborate that with next week's February Retail Sales report. Given our two rating, we would look to scoop up additional CMG shares closer to $1,500 or on signs the company's input inflation is easing quicker than expected.
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) ; $10.72; 5,500 shares; 1.72%; Sector: Consumer Discretionary
WEEKLY UPDATE: There were no company specific developments this week, but quarterly results from Ulta Beauty confirmed our thoughts on COTY shares. Same-store sales growth for Ulta was 15.6% year-over-year for its January quarter, suggesting a strong start to the year, one that skews into Coty's wheelhouse that is prestige beauty care. Ulta sees its same-store comps rising another 4%-5% this year after posting 15.6% last year. That supports Coty's domestic business, while China's re-opening, its expansion into clean products and skincare should also boost its top line. When the management team presents next week at the Bank of America Consumer & Retail Conference on March 15, we'll be looking for an update on efforts to drive margin improvement at its Consumer Beauty business. Based on what we learn we may revisit our $12 target for the shares.
1-Wk. Price Change: -7.4%; 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) ; $40.04; 2,900 shares; 3.38%; Sector: Cybersecurity
WEEKLY UPDATE: This week CrowdStrike, a 3.2% position for this ETF, reported strong quarterly results and guidance, building on similar results from other holdings over the last few weeks. Despite those favorable fundamentals, CIBR shares were pulled lower this week with the market sell off. Should the shares remain below the $41 level as we enter next week, we would be inclined to top off the portfolio's position.
1-Wk. Price Change: -5.4% Yield: 0%
INVESTMENT THESIS: The First Trust Nasdaq Cybersecurity ETF is an exchange-traded fund. The fund seeks investment results that correspond generally to the price and yield (before the fund's fees and expenses) of an equity index called the Nasdaq CTA Cybersecurity Index. The Nasdaq CTA Cybersecurity Index is designed to track the performance of companies engaged in the cybersecurity segment of the technology and 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) ; $395.93; 310 shares; 3.57%; Sector: Farm Machinery & Equipment
WEEKLY UPDATE: Following a meeting with Deere management, Oppenheimer reiterated its Outperform rating and $492 price target. While the note reaffirmed our thoughts on farmer income and the tailwind for its construction business that is the Biden Infrastructure Law, CHIPS Act, and the Inflation Reduction Act, what caught our eye most was how Deere will continue to focus on technology to drive equipment pricing, while enhancing productivity to its customers. Deere reportedly shared market visibility remains greater than usual and supply chains have continued to improve. And as AAP team member Carly Garner discussed during Friday's Rundown that despite recent moves lower, corn and soybean prices remain at historically high levels compared to what we saw before the pandemic, which supports the current equipment upgrade cycle. As we exit the week, DE shares are below the $410 level, and this may lead us to revisit our current Two rating sooner than later.
1-Wk. Price Change: -8% Yield: 1.2%
INVESTMENT THESIS: The global agriculture equipment market size is expected to reach $166.5 billion in 2027, growing at 6% CAGR over the 2020-2027 period. The favorable outlook for equipment purchases in the coming quarters reflects rising farmer income that historically drives new equipment purchases. At the same time, Deere continues to lean into the sustainability movement with its precision ag offering. That technology is helping farmers drive crop yields higher while also realizing cost savings, which makes the new technology a productivity upgrade compared to older equipment. 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) ; $454.56; 145 shares; 1.92%; Sector: Health care
WEEKLY UPDATE: While we continue to wait for the "final notice" for Medicare Advantage payment rates that should arrive in early April, this week Deutsche Bank lowered its price target on ELV shares to $571 from $581, which is well above our $550 target. With the shares hovering near levels at which we last nibbled on them, we are inclined to do so again in the coming days, especially given the more defensive nature of the business as well as the lower beta of 0.73 vs. the S&P 500.
1-Wk. Price Change: -3.3%; 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) ; $173.87; 312 shares; 1.58%; Sector: Commodities
WEEKLY UPDATE: Gold was under pressure this week as the hawkish comments from Fed Chair Powell put in a strong bid under the dollar. Remember, gold often (not always) moves inverse to the U.S. dollar. When rates are rising and the Fed is engaged in a hiking cycle, that often means inflation is raging and the committee is responding to the excesses. If they do not respond with a solution, gold is a beneficiary, a hard asset with a store of value, unlike the dollar or other currencies. Yet, this week saw volatile action with the metal but the 1800 per ounce level held firm. The recent correction simply wiped away gains from 2023. While that is a bit distressing, we always like the diversification with precious metals vs the overall market risk. We rank GLD ETF as a "Two," or "stockpile." This recent pullback would be an ideal spot to add more shares if you are light or need more exposure.
1-Wk. Price Change: 0.8% Yield: 0%
INVESTMENT THESIS: The GLD ETF is a proxy for gold. This "trust" buys and sells gold futures each day in an attempt to mimic the daily moves in the underlying asset, in this case, gold. We see gold as an ideal hedge against a weaker dollar, strong inflation (which tends to weaken the dollar) alternative, and in uncertain times (worry over war and battles). For the past 15 years, gold has been a strong asset class held by fund managers, countries, and banks. The metal is not correlated with markets and will move based on the demand/supply dynamic in the marketplace. Other precious metals such as silver and platinum are good proxies for the criteria stated earlier, however, gold is far more liquid and offers better upside opportunities.
Target Price: Reiterate $200; Rating: Two
RISKS: Weak inflation data, interest rate risk, dollar strength relative to other currencies, geographic risk.
Lockheed Martin Corp. (LMT) ; $475.50; 155 shares; 2.15%; Sector: Aerospace & Defense
WEEKLY UPDATE: President Biden's proposed fiscal 2024 budget includes a 3.2% increase in defense spending to $842 billion. We'd remind you that Biden's 2023 budget requested $773 billion for defense, but Congress approved $816 billion. We'd note the 2024 budget includes $170 billion for Pentagon weapons procurement. Included in that new budget is $13.5 billion for Lockheed's F-35, fighter jets for 83 units for the Air Force, Navy and Marine Corp. We'd call out that 83 unit request compares to 80 this year. We will see how the 2024 budget moves through Congress but given the continued war in Ukraine and rising tension in the Pacific we may not see any large cuts emerge. If that is the case, we would see Lockheed's already impressive backlog grow even further, offering greater visibility ahead. 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. Lockheed's CFO Jay Malave will present on March 16 at the JP Morgan Industrials Conference.
1-Wk. Price Change: -0.5% 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) ; $38.68; 410 shares; .46%; Sector: Technology
WEEKLY UPDATE: Late last week we started a small position in the shares of Marvell and this week we further explained our rationale behind that decision. As we've noted, 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. Given where the shares closed the week, we may be inclined to not only revisit our current rating on the shares, but do so as we scoop up another layer of them. Exiting this week, Taiwan Semiconductor reported its February revenue rose 11.1% year-over-year leaving its revenue for the first two months of 2023 to climb 13.8% vs. year-ago levels. In 2022, TSM's two largest end markets were High Performance Computing (Data Center) and Smartphone at 41% of 39% of total revenue. And data center is Marvell's largest end market as well.
1-Wk. Price Change: -12.2%; Yield: 0.6%
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 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) ; $347.11; 275 shares; 2.78%; 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 portfolio's position when the risk to reward inside that range skews favorable, which means closer to the $320 level. This week we received the company's February SpendingPulse Survey, which showed U.S. retail sales ex-auto rose 6.9% year-over-year, a slower pace than January's 8.8% gain. 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. We'll look to see what Mastercard says about its non-U.S. business next week when Chief Product Officer Craig Vosburg presenting at the Wolfe FinTech Forum on Tuesday, March 14.
1-Wk. Price Change: -4% Yield: 0.7%
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) ; $13.63; 4,070 shares; 1.62%
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. That is being spurred on by Fed Chair Powell's comments this week that interest rates will likely move to higher levels than were previously expected. Also this week, Silicon Valley Bank (SIVB), a bank with meaningful exposure to U.S. venture back technology and life science companies moved to shore up its balance sheet after losses in its securities portfolio. Per Silicon Valley Bank, it took those steps because it expects "continued higher rates, pressured public and private markets, and elevated cash-burn levels from our clients as they invest in their businesses." 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: 3.8%; Yield: 0.00%
INVESTMENT THESIS: ProShares Short QQQ seeks daily investment results, before fees and expenses, that correspond to the inverse (-1x) of the daily performance of the Nasdaq 100 Index. The Nasdaq 100 Index includes 100 of the largest domestic and international non-financial companies listed on The Nasdaq Stock Market based on market capitalization.
Target Price: N/A; 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) ; $16.03; 3,310 shares; 1.55%
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 along with Fed Chair's comments this week that interest rates will likely move to higher levels than were previously expected is leading us to continue holding SH shares in the portfolio. 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: 4.8%; Yield: 0.00%
INVESTMENT THESIS: The ProShares Short S&P 500 ETF seeks daily investment results, before fees and expenses, that correspond to the inverse (-1x) of the daily performance of the S&P 500. We are using SH shares to blunt market volatility and hedge the portfolio's performance against its benchmark, the S&P 500. Given the tactical nature of this position, we do not expect to hold SH shares for the same length of time as we do the portfolio's long positions.
Target Price: 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) ; $181.54; 640 shares; 3.38%; Sector: Industrials
WEEKLY UPDATE: Appearing at the Raymond James 44th Annual Institutional Investors Conference, UPS reiterated its guidance for $97-$99.4 billion this year with adjusted operating margins in the 12.85-13.6% range. The Mastercard Spending Pulse report for February showed e-commerce sales rose +13.2% year over year, up from 8.4% year over year in January. We see that data as a positive for UPS's business and our shares. As we move forward, we are still watching negotiations between UPS and 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 and 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.
1-Wk. Price Change: -2.2% Yield: 3.6%
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) ; $82.63; 1,130 shares; 2.72%; Sector: Energy
WEEKLY UPDATE: XLE shares ended the week below the $85 price level, and the last time they crossed below it we picked up some additional shares for the portfolio. Renewed concerns over the path of interest rates ahead here in the U.S. and in Europe weighed on oil this week. On the supply side, we and the market are monitoring export cuts from Russia, which decided to trim oil output by 500,000 barrels per day in March. When discussing the topic of oil on Friday's Rundown, AAP team member Carley Garner shared that we have likely moved into a buy the dip regime. Next Tuesday brings the next edition of OPEC's Monthly Oil Market Report, and we will likely hold off adding to XLE shares at least until we've had the opportunity to digest it.
1-Wk. Price Change: -5.3%; Yield: 3.4%
INVESTMENT THESIS: Energy Select Sector SPDR Fund is an exchange-traded fund (ETF) that tracks the performance of the Energy Select Sector Index. The ETF holds large-cap U.S. energy stocks. It invests in companies that develop & produce crude oil & natural gas 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) ; $90.73; 835 shares; 2.21%; Sector: Consumer Discretionary
WEEKLY UPDATE: The Mastercard Spending Pulse report for February showed e-commerce sales rose +13.2% year over year, up from 8.4% year over year in January. With consumer credit rising and consumers feeling the pain of higher debt servicing costs, consumers are likely to lean further into digital shopping, especially as brick & mortar retailer inventories return to more normalized levels, removing the need for aggressive sales and discounting. We see that as a positive for Amazon's business and our shares. During the week, AMZN shares were named a top pick at Goldman Sachs. With strong support for the shares near $90, we are seeing a more favorable risk to reward tradeoff in the shares emerge. Next week brings the February Retail Sales report, a potential catalyst for the shares if it confirms the consumer shift back to digital shopping.
1-Wk. Price Change: -4.4%; 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) ; $148.50; 750 shares; 3.24%; Sector: Technology
WEEKLY UPDATE: It was busy week for Apple on several fronts. The company unveiled a new yellow iPhone color, expanded its SOS emergency service to more companies, and opened preorders for its Apple Music Classical app that will launch on March 28. Goldman Sachs started AAPL shares with a fresh Buy rating and a $199 target sharing that it sees the size of Apple's 1.8 billion device install base and strong brand loyalty offsetting "cyclical headwinds to product revenue (e.g., longer replacement cycles, slowing industry growth for PCs & tablets)." Others reported improving demand for iPhone as China's reopening unfolds, but late in the week LightShed downgraded AAPL shares to a rare Sell rating. That contrarian view reflected a "more conservative" outlook for iPhone and slowing Services growth. We've noted strong support for AAPL shares in the $141-$143 range and 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: -1.7% 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) ; $12.10; 7,850 shares; 2.77; Sector: Industrials
WEEKLY UPDATE: 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. That April data will tell us if consumers are flocking to Ford's EV lineup, and to what degree EV tax credits are accelerating that uptake. Late this week, Ford shared it is planning to reduce overall headcount at its Valencia, Spain plant by ~1,100 positions, roughly 18% of the total work force. Previously Ford shared it would look to resize that workforce given the discontinuation of certain vehicle models. We see this as another step in Ford becoming a more profitable company over the medium to longer-term.
1-Wk. Price Change: -7.5% Yield: 5%
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) ; $90.63; 1,000 shares; 2.64%; Sector: Communication Services
WEEKLY UPDATE: 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, we are see a far more favorable risk to reward tradeoff in the shares near $90.
1-Wk. Price Change: -3.2%; 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) ; $248.59; 420 shares; 3.04%; Sector: Technology
WEEKLY UPDATE: Reports out this week indicated Microsoft's Bing crossed 100 million daily active users for the first time, which the company attributes to Bing Chat. We would tread carefully with this data point - just because folks have installed it, doesn't guarantee they are using it in place of other search engines, particularly Alphabet's. For that we will want to see search engine market share data for February, March, and a few months thereafter. Meanwhile, we continued to see pushback from Sony on Microsoft's pending acquisition of Activision this week. As part of the formal response process to the UK's anitrust probe, Sony shared any access commitment on the part of Microsoft "would be inadequate." Sony goes on to agree that blocking the deal or "divesting parts of Activision's business could also address the CMA's competition concerns." The UK's CMA is set to rule on the deal April 22. During the week, Microsoft presented at the Morgan Stanley Technology, Media & Telecom Conference sharing its intentions to embed AI into "every single app and experience." 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: -2.6% 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) ; $172.03; 790 shares; 3.96%; Sector: Consumer Defensive
WEEKLY UPDATE: None. Next week brings the February retail sales report, which will give us another look at grocery sales, fleshing out that market's performance for the first two months of the current quarter. For members who are underweight PEP shares, the risk-to-reward tradeoff is rather favorable near $170.
1-Wk. Price Change: -0.6%; 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) ; $429.28; 290 shares; 3.63%; Sector: Industrials
WEEKLY UPDATE: None. We will continue to look for signs of rising nonresidential construction as part of the Biden Infrastructure Law, the CHIPS Act and the Inflation Reduction Act. We recently added to the position near $178 and with the shares finishing this week below that level as well as our average cost basis of $178.14, we are inclined to add additional shares in the coming days. 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 3.9% of its assets, we are not inclined to further add to its URI holdings. Members that are underweight URI shares should look to add them closer to $420.
1-Wk. Price Change: -10.5% Yield: 1.4%
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) ; $70.95; 120 shares; .25%; Sector: Food; Consumer Non-Durables
WEEKLY UPDATE: We continued to use MKC shares as a source of funds this week as part of our plan to fully unwind the portfolio's exposure. We expect MKC shares will remain a source of funds in the near-term.
1-Wk. Price Change: -2.7% Yield: 2.2%
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.