Call this an up and down market.
The S&P 500 and the Nasdaq Composite clawed back losses put in over the last four weeks. But both the Dow and the small-cap heavy Russel 2000 trailed behind -- modestly adding to their declines in recent weeks. With 10 trading days left in the current quarter, the S&P 500 is up 2% with the Nasdaq's strong January delivering most of its year-to-date gains that clock in around 11.5% thus far. Both the Dow and the Russell 2000 are in the red so far in 2023. The big winner, however, has been the Cboe Volatility Index, which is up more than 27% over the last month, which has it up more than 17.5% with two weeks to go in the quarter.
We see that along with the CNN Fear & Greed Index that has been in Extreme Fear territory all this week as indications of unease in the market and more likely than not overly emotional investing decisions. Like a good detective who "follow's the money," we will continue to follow the data and technicals, acting accordingly.
Similar to last week, despite the inflation data coming in, all eyes were on the fallout from recent bank closures and efforts to shore up other banks such as First Republic Bank, which saw a number of "bulge bracket" banks pull together, making a total of $30 billion in deposits. After Credit Suisse's largest shareholder, Saudi National Bank, said it wouldn't inject any additional capital into the bank, Swiss National Bank said it would step if necessary.
Given the ongoing developments of recent bank failures, as Real Money columnist Peter Tchir and Chris Versace discussed on this week's AAP Podcast, there are likely other shoes to drop. This has resulted in concern for other banks as well as the industries they touch as well as consumers and businesses retrenching amid this latest rash of uncertainty. That, along with the Fed reportedly considering tighter rules for midsize banks following what occurred with Silicon Valley bank, we could see more guarded banking activity in the near-term. That would be a fresh headwind for the economy, one that along with other factors has more folks saying it will increase the odds of a recession. As we discuss in The Coming Week section of this week's Roundup, the most recent reading for the Atlanta Fed GDPNow model suggests a 3.2% reading for the current quarter based on the data amassed thus far. However, if signs point to a recession, it would mean earnings expectations for the S&P 500 would have to be recast.
We're betting even more headlines land before the stock market opens on Monday. We'll be scouring the usual sources and publications and plan on sharing what we see as well what it means for the coming days. That includes the impact to the Fed's next monetary policy meeting that concludes on Wednesday and is followed by the rate decision at 2 p.m. ET, and Fed Chair Powell's press conference that begins around 2:30.
As we head into the weekend, the CME FedWatch Tools shows an almost 69% probability the Fed will boost interest rates by a quarter percentage point next week to 475-500 basis points. The current consensus sees that followed by a pause following its May meeting and a rate cut back to 450-475 basis points exiting its June one with another cut to 425-450 basis points by late July. Earlier this week we shared our view that is a rather unlikely course of events given the continued sequential uptick in core CPI data with the February report as well as the February PPI report showing far slower progress with the intermediate demand price index for services. Given the Fed's focus on the services aspect of the economy, this won't go unnoticed.
Fed Chair Powell's presser comments about the progress on inflation as well as how he and the Fed see recent bank closings and the ripple effects impacting their course of action will be the central focus this coming Wednesday afternoon. While the Fed can't ignore the bank related events of the last few days, given the data it could surprise the market given what the CME FedWatch Tool indicates it is expecting. As we shared earlier this week, it would be out of the ordinary for the Fed to boost rates next week only to begin cutting them in the ensuing four months, especially when the sequential core CPI data is moving in the wrong direction. As we have seen over the last 12-18 months, resetting the market narrative to match the Fed hasn't been an easy time for the market.
Much like the last few days, the road to the Fed's meeting could be volatile for the stock market. We will tread carefully, and look to opportunistically add to select positions, but we will also be keeping a sharp eye on the technical set up for the market but also those for our holdings. We started this week off sharing the 4,100 levels on the S&P 500 is a point of resistance for the market while 3,900 and then 3,800 are levels of sticky support/resistance.
The AAP Portfolio
Despite the volatility and slumping market, the AAP Portfolio had a number of outperformers this week, including Alphabet, Amazon, American Water Works, Cboe Global Markets, the SPDR Gold ETF, and Microsoft. Those gains were offset by declines at Clear Secure, Energy Select SPDR Fund and Ford Motor shares.
We had another rather busy week for the AAP portfolio. Not only did we start a new position in Bank of America shares, we also added to our holdings in Marvell as well as Vulcan Materials, United Rentals, Coty, and Clear Secure. With those trades, we closed out of the portfolio's position in McCormick & Co. and tried to make lemonade from some of the sharp price movements this past week. We also upgraded COTY shares to a "One" rating from "Two" after boosting our price target this week.
As we note below in the company specific write ups, there are several other portfolio positions we are closely watching including AMN Healthcare, ChargePoint, Deere, Elevance and Lockheed Martin -- using the week's weakness to scoop up some shares. The same goes for our ETF holdings in SPDR Energy and the First Trust Nasdaq Cybersecurity ETF shares. We understand the desire to pick up shares when they are moving lower, but as we've seen before it may be best to see if the shares test technical support or if data or other catalyst emerges. That said, we are watching those shares closely.
We would also share the portfolio's size has reached 30 positions, and in the coming weeks and months we may be faced with some tough choices to make room for any additional positions like the ones we've shared our thoughts on of late such as Universal Display or Kellogg. Given the current environment we will be watching key technical support levels very closely, much the way we did in late 2021 regarding Meta Platforms, Wynn Resorts, Salesforce and several other shares. Should a position violate its key support levels, we may need to move quickly to stem further losses. We recognize such decisions may not be popular, but the goal would be to avert further pain to the portfolio, your holdings, and your capital.
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: Crude Oil
Crude oil is now in a monster bear market. The commodity has sold off more than 20% in just a few weeks, the downtrend has been persistent and with some pretty strong turnover. With strong turnover the last few weeks and mostly to the downside, crude has been making lower highs, lower lows but maybe we have the makings of a bottom, it's hard to say. Chaikin money is turning bearish for the first time in weeks, and the oscillator is pointing downward.
Chaikin Money Flow (CMF) developed by Marc Chaikin is a volume-weighted average of accumulation and distribution over a specified period. The standard CMF period is 21 days. The principle behind the Chaikin Money Flow is the nearer the closing price is to the high, the more accumulation has taken place. This is a preferred tool for accumulation/distribution because it gives us a clearly-defined picture of the strength of buyers vs sellers, and vice versa. In particular, AAP team member Bob Lang uses the zero-line as the marker for changes in momentum.
For a closer look of the chart, click here.
We would not suggest catching a falling knife here, but crude is getting a little attractive from a value perspective. Let's wait to see if this can move up from these lows and make some higher lows on the chart.
The Coming Week
As we discussed in our opening comments for this week's Roundup, the stock market will be focused any new developments on the banking front before trading begins on Monday and the path to Wednesday's Fed monetary policy meeting. Those events will shape the next leg for the stock market but late next week we will get the March Flash PMI data from S&P Global (SPGI).
On Thursday, the Atlanta Fed updated its GDPNow model to +3.2% for the current quarter vs. its 2.3% view exiting February. For context, the second reading for GDP in 4Q 2022 came in at 2.7% and 3.2% in 3Q 2022. One way or another the data to be had from S&P Global will either solidify that view or call it into question. It will also give us another perspective on inflation pressures in the economic system as well as a first look on what the global economy is likely to resemble as we start of 2Q 2023.
Here's a closer look at the economic data coming at us next week:
Tuesday, March 21
- NFIB Small Business Index - Existing Home Sales - February (10:00 AM ET)
Wednesday, March 22
- Weekly MBA Mortgage Applications (7:00 AM ET)
- Weekly EIA Crude Oil Inventories (10:30 AM ET)
- FOMC Rate Decision - March (2 PM ET)
Thursday, March 23
- Weekly Initial & Continuing Jobless Claims (8:30 AM ET)
- New Home Sales - February (10:00 AM ET)
- Weekly EIA Natural Gas Inventories (10:30 AM ET)
Friday, March 24
- Durable Orders - February (8:30 AM ET)
- S&P Global Flash Manufacturing & Services PMIs - March (9:45 AM ET)
Monday, March 20
- Germany: Producer Price Index - February
Tuesday, March 21
- UK, Italy, Germany, France: Car Registrations - February
- Eurozone: ZEW Economic Sentiment - March
Wednesday, March 22
- UK: Consumer Price Index, Producer Price Index - February
Thursday, March 23
- UK: Bank of England Interest Rate Decision
Friday, March 24
- Japan: Flash Manufacturing PMI - March
- UK: Retail Sales - February
- Eurozone: Flash Manufacturing PMI - March
With a modicum of earnings report out next week, and none from our holdings, we will continue to focus on collecting data points to add to and update our investment mosaic. In particular, Nike (NKE) and EVgo (EVGO) reports will be ones we focus on as will ones from Darden (DRI) and General Mills (GIS). What we learn will shape our thinking on ChargePoint (CHPT), and Chipotle (CMG) as well as Kellogg (K) shares in the Bullpen. With Nike, what it sees on the inventory and consumer fronts as well as dollar headwinds will be our focus.
Here's a closer look at the earnings reports coming at us next week:
Monday, March 20
- Open: Coupa Software (COUP), Foot Locker (FL)
Tuesday, March 21
- Open: Canadian Solar (CSIQ)
- Close: GameStop (GME), Nike (NKE)
Wednesday, March 22
- Open: Cintas (CTAS), Ollie's Bargain Outlet (OLLI), Petco Health and Wellness (WOFF)
- Close: Chewy (CHWY), EVgo Inc. (EVGO), KB Home (KBH)
Thursday, March 23
- Open: Accenture (CAN), Darden Restaurants (DRI), General Mills (GIS)
AAP Portfolio Positions*
AMN Healthcare Services, Inc. (AMN) ; $83.46; 1,460 shares; 3.56%; Sector: Health Care Services
WEEKLY UPDATE: Amid a volatile week for the overall stock market, there was little fresh news on AMN and, yes, that brought another painful week to AMN shares. As we exit the week, we will look to round out the portfolio's position given the ongoing nursing shortage. A recent hearing of the Senate Health, Education, Labor, and Pensions committee called out the need for estimated 450,000 nursing slots in the next two years and more than 120,000 doctor positions over the next decade. While some may be focused on the expected declines in travel nursing data, that is only a piece of the larger nursing shortage puzzle.
1-Wk. Price Change: -4.7; 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) ; $141.81; 810 shares; 3.36%; Sector: Utilities
WEEKLY UPDATE: Following RBC Capital reiterating its $170 target on the shares last week, this week JPMorgan shared it continues think AWK shares should trade at a premium valuation given its above-average growth and favorable top-down characteristics. During the week, we spoke to those characteristics when we answered an AAP Forum question about AWK shares. 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: 6.1%; 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) ; $125.58; 950 shares; 3.49%; Sector: Financials
WEEKLY UPDATE: Primary exchanges in the four biggest European indexes have lost market share during continuous trading to pan-European multilateral trading facility Cboe Europe in February. All told, Cboe Europe increased its market share in the FTSE 100 by 6.6%. With the stock market remaining volatile, in part as it reassesses next steps by the Fed to tame inflation and also as it games out ripple effects from recent bank closures, 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. Also, this week, Cboe paid its latest quarterly dividend of $0.50 per share.
1-Wk. Price Change: 5.8% 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) ; $9.34; 10,930 shares; 2.98%; Sector: Electrical Components & Equipment
1-Wk. Price Change: -3.4% Yield: 0.00%
WEEKLY UPDATE: According to Jefferies, U.S. EV sales increased 52% year-over-year in February, while the number of EV charging stations rose just 2.2% during the month vs. January. That supports the growing pain point that we've discussed with members, something that adds to our long-term bullish stance on CHPT. We'd remind you the company had $369 million in cash on its balance sheet exiting 2022, 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 that said, this week, the U.S. Department of Transportation opened applications for the Charging and Fueling Infrastructure Discretionary Grant Program, a $2.5 billion, five-year program to support community and neighborhood electric vehicle charging infrastructure. The first round of funding will make $700million available from fiscal years 2022 and 2023 to cities, counties, local governments, and tribes. 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) ; $24.55; 3,885 shares; 2.79%; Sector: Technology
WEEKLY UPDATE: Following up from last week's Roundup, this week we added to our position in Clear Secure near $26. As we saw in the Mastercard SpendingPulse survey for February, retail spending on airline travel remains strong, and that was corroborated by the continued year over year strength in TSA passenger data. Last 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 as the company continues to expand its airport footprint. During the week, Clear Secure partner United Airlines (UAL) shared it continues to see a strong operating environment in the current quarter for both bookings, as well as revenues, and sees that continuing into the next one.
1-Wk. Price Change: -5.8%; 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) ; $487.05; 262 shares; 3.73%; Sector: Consumer Staples
WEEKLY UPDATE: As we pointed out in our note to members discussing the February retail sales report, no matter how we look at it, consumer spending slowed in February vs. January. With retailers reporting meaningful progress in working down bloated inventories from 2H 2022 during the post-holiday shopping season, consumers likely "shopped til they dropped" in January. We find support for this line of thinking in the sharp drop in clothing & clothing accessory retail sales (up 4.3% YoY in February vs. 8.8% in January), sporting goods, hobby, musical instrument & bookstores (up 3.9% vs. 7.9% the month before), and department stores (up 2.5% vs. 6.1% in January). That data adds some context to the continued increase in consumer credit during January, a factor that is likely took its toll on February spending and will continue to do so in the coming months as well. At the same time, we continue to think that as retailer inventories return to normalized levels, those companies will be far more selective in using discounting measures. We see this leading consumers to flock to Costco to once again stretch those spending dollars, while the company continues to grow its warehouse footprint, a harbinger for its higher margin membership fee income stream.
1-Wk. Price Change: 3.4% Yield: 0.7%
INVESTMENT THESIS: We like Costco's long-term prospects, driven by a club-based operating model that focuses on volumes, not margins, and therefore offers its customers a value proposition of everyday low prices. The strength of this model has created an 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
Coty Inc. (COTY) ; $10.87; 6,550 shares; 2.08%; Sector: Consumer Discretionary
WEEKLY UPDATE: Following an upbeat presentation at the Bank of America Consumer & Retail Conference, we increased our price target on COTY shares to $13 from $12, which led us to add to our position and upgrade the rating to One from Two. Management lifted its 2023 top-line target to the upper end of its previously stated 6%-8% core like-for-like revenue guidance. Management also reiterated its 2023 gross margin guidance of ~64% as it harvests gains to invest in its skincare business. A second catalyst came in the form of Walmart entering the clean beauty segment with Clean Beauty at Walmart. In our view, this is a positive for Coty's Consumer Beauty division (~40% of sales) as it leans that business into clean beauty with several brands including CoverGirl and Kylie by Kylie Jenner.
1-Wk. Price Change: 1.4%; 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: $13; Rating: One
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.
Verizon Communications (VZ) ; $36.79; 3,295 shares; 3.54%; Sector: Communication Services
WEEKLY UPDATE: None, however, 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: 0.3% 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) ; $161.02; 725 shares; 3.41%; Sector: Building Materials
WEEKLY UPDATE: We used the recent pullback in VMC shares, which is likely due to the ripple effect of the recent bank closures, to add to the portfolio's position, modestly improving the position's cost basis. Reviewing the latest rail traffic from the American Association of Railroads (AAR), we find rail traffic for crushed stone, sand and gravel was up 13.1% year over year in February after increasing 22.6% in January. AAR does not break out the weekly data to that level of detail, however, traffic data for the first few weeks of March points to continued year over year gains in "non-metallic minerals", the category that includes crushed, stone, sand, and gravel. Later in the week, Steel Dynamics issued upside EPS guidance citing strong demand and increased shipments, which reflects the pick-up in nonresidential construction being driven by spending out of Washington.
1-Wk. Price Change: -4.9% Yield: 1%
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
Axon Enterprise Inc. (AXON) ; $213.12; 380 shares; 2.37%; Sector: Aerospace & Defense
1-Wk. Price Change: 0.1% Yield: 0.00%
WEEKLY UPDATE: There was no meaningful news this week that would cause us to revisit our investment thesis on AXON shares. Absent new program wins or details on either federal, state, or local policy and safety spending that would lead us to re-think our $240 price target, we would look to revisit our current Two rating on AXON shares closer to $205-$210.
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.
Bank of America Corp. (BAC) ; $27.82; 875 shares; .71%; Sector: Financial Services
WEEKLY UPDATE: We added a starter position in Bank of America this week to capitalize on its prospects to gain market share as a result of the recent banking malaise. Soon thereafter reports indicated BofA pulled in more than $15 billion in deposits over the preceding days, confirming part of our investment thesis. Given the tradeoff between upside to our $37 target and the downside to the $25 area from a technical perspective, we started the position off with a Two rating. We would be inclined to pick up more shares should they trade off or on signs the investment banking window has reopened or signs of stronger than expected performance at its key Consumer Banking and Global Banking businesses has occurred. Based on what we know and expect today, if the shares fell below $27, we would be inclined to revisit our initial Two rating.
1-Wk. Price Change: -3.3% Yield: 3.2%
INVESTMENT THESIS: Bank of America is one of the world's leading financial institutions, serving individual consumers, small and middle-market businesses and large corporations with a full range of banking, investing, asset management and other financial and risk management products and services. The company provides unmatched convenience in the United States, serving approximately 67 million consumer and small business clients with approximately 3,900 retail financial centers, approximately 16,000 ATM and award-winning digital banking with approximately 56 million verified digital users. Bank of America is a global leader in wealth management, corporate and investment banking and trading across a broad range of asset classes, serving corporations, governments, institutions and individuals around the world. Bank of America offers industry-leading support to approximately 3 million small business households through a suite of innovative, easy-to-use online products and services. The company serves clients through operations across the United States, its territories and approximately 35 countries. From a reporting basis, the company's business breaks down as follows: Net Interest Income breakdown: Consumer Banking 57%, Global Banking 23%, Global Wealth & Investment Management 14%, and Global Markets 6%; Income Before Tax breakdown: Consumer Banking 42%, Global Banking 27%, Global Wealth & Investment Management 16%, and Global Markets 15%. Bank of America pays a quarterly dividend of $0.22 per share.
Target Price: $37; Rating: Two
RISKS: Financial markets, fiscal, monetary, and regulatory policies, economic conditions, and credit ratings.
ACTIONS, ANALYSIS & MORE: We're Initiating a Bank Position, Investor Relations
Chipotle Mexican Grill (CMG) ; $1,608.84; 75 shares; 3.53%; Sector: Restaurants
1-Wk. Price Change: 3.7% Yield: 0.00%
WEEKLY UPDATE: Last 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 week we learned via the February Retail Sales report restaurant sales rose more than 15% year over year, adding to the more than 24% year over year gain posted in January. This along with 2022 pricing action taken by Chipotle bodes well for margin improvement in the current and coming quarters. Given our two rating, we would look to scoop up additional CMG shares closer to $1,500 or on signs other aspects of 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
First Trust Nasdaq Cybersecurity ETF (CIBR) ; $40.58; 2,900 shares; 3.44%; Sector: Cybersecurity
WEEKLY UPDATE: The Federal Bureau of Investigation (FBI) revealed in its 2022 Internet Crime Report that ransomware gangs breached the networks of at least 860 critical infrastructure organizations last year. However, given that the FBI's report only includes attacks reported to the Internet Crime Complaint Center, the actual number is likely higher. As we see it that report underscores a key driver behind our owning CIBR shares, but it also reminds us that most attacks aren't detected until 9 months after they have occurred. We continue to see cybersecurity a must have for companies, making an area of spending they aren't likely to sacrifice. Should CIBR shares remain near or below the $41 level as we enter next week, we would be inclined to top off the portfolio's position.
1-Wk. Price Change: 1.3% 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) ; $385.50; 310 shares; 3.49%; Sector: Farm Machinery & Equipment
WEEKLY UPDATE: North American high-horsepower tractor sales jumped 12% in February, with combines more than doubling as supply constraints subside and demand remains strong. That more than offset declines in small tractors, but we would note that historically, February isn't a significant month and represents less than 6% of annual sales. March and April are key selling months ahead of the spring planting season, comprising a combined 19% of annual sales. Even with grain prices and farmer profitability poised to ease this year after a record 2022, we believe healthy farm fundamentals and favorable crop supply-demand dynamics should extend the agriculture-equipment cycle into 2024. At ConExpo this week, Deere's head of construction shared customer conversations revealed strong demand in the sector, with pipelines for new work still filling up into 2024. We see this as another positive indicator for our URI and VMC shares as well. When we enter next week, if DE shares remain below $400, we will revisit our current Two rating and we have room to round out the portfolio's position in the shares as well.
1-Wk. Price Change: -2.6% 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) ; $463.17; 145 shares; 1.96%; Sector: Health care
WEEKLY UPDATE: We continue to wait for the "final notice" for Medicare Advantage payment rates that should arrive in early April. On March 23, the company will hold its 2023 Investor Conference and we expect an upbeat presentation but no incremental clarity on Medicare Advantage payment rates. Typically, the final rates are more favorable than the initial indications. With the shares hovering near our ~$475 average cost basis, we are inclined to add further to the position in the coming days, especially given the more defensive nature of the business as well as the lower beta of 0.74 vs. the S&P 500.
1-Wk. Price Change: 1.9%; 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) ; $183.77; 312 shares; 1.68%; Sector: Commodities
WEEKLY UPDATE: Gold has been on quite a ride this week. Rallying sharply above $1,900 an ounce, the yellow metal backed off and remains in a solid up trend. Inflation figures remain high as the dollar remained volatile this past week. GLD the ETF we own remains near highs put in late January. While the catalysts for owning gold include fears over wartime and high inflation, we should note those catalysts are starting to soften. However, we believe GLD remains a good diversifier of risk vs the markets. With higher volatility moves this week gold was solid, boosted more than 2% on Tuesday following the hot CPI data. We continue to look for more upside in gold, the ETF looks to make a move toward $200 by the end of 2023.
1-Wk. Price Change: 5.7% 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) ; $465.87; 155 shares; 2.11%; Sector: Aerospace & Defense
WEEKLY UPDATE: Speaking at the JPMorgan Industrials Conference this week, Lockheed's CFO Jesus Malave shared the March quarter is once again beginning with a slower start with revenue tracking to come in a tad shy of the $15-$15.1 billion consensus. We'd point out the nature of the federal government spending tends to make the March quarter the lowest in the calendar year, at ~23% of full year revenue over the last five years. By comparison, the second half of the calendar year represented 52-53% of full year revenue over the same period, which matches with the concept of "use or lose it" when it comes to this kind of spending. Alongside those comments, Malave also shared the March 2023 quarter should be the lowest revenue quarter of the year as it works through its multi-year backlog. With that in mind, Lockheed was awarded a $143 million cost plus incentive fee contract modification to work previously awarded by the Navy. That work is expected to be completed by February 2031. As we move into next week, we may add to the portfolio's position in LMT shares, and we will continue to keep an ear to the ground as it relates to President Biden's proposed fiscal 2024 budget. That budged includes a 3.2% increase in defense spending to $842 billion with $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.
1-Wk. Price Change: -2% Yield: 2.6%
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) ; $39.97; 800 shares; .33%; Sector: Technology
WEEKLY UPDATE: With MRVL shares pulling back below $38, we added to this newer position in the portfolio. Even after that, the portfolio's exposure remains on the small side giving us ample opportunity to chip away until we have a full position size. We would remind you our play on Marvell is the continued growth in data traffic that will drive spending on data center and its other end markets over the coming 12-24 months. With that in mind, midweek we shared research firm Point Topic updated its forecast for global fixed broadband subscribers and now sees it growing 18% to about 1.6 billion residential and business connections by the end of the decade. Meanwhile Ericsson sees the continued rollout of the 5G and Internet of Things markets across the globe driving total mobile network traffic to go from around 115 exabytes (EB) per month exiting 2022 to around 453 EB per month by the end of 2028. Note that one exabyte is the equivalent of one billion gigabytes. On March 22, Marvell will present at the Evolution of Cloud Data Center Connectivity event hosted by BofA Securities.
1-Wk. Price Change: 0.93%; 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) ; $349.66; 275 shares; 2.81%; Sector: Info. Tech
WEEKLY UPDATE: 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. Fueling that concern was the move lower in retail sales data in February vs. January even though MasterCard's own February SpendingPulse survey showed U.S. retail sales ex-auto rose 6.9% year-over-year, a quicker pace than the 4% year over year gain portrayed in the February Retail Sales data. As we exit this week, MA shares along with those for Visa and PayPal will be removed from S&P and MSCI's tech sector and placed in the financials ones. That will boost the S&P 500 index's exposure to financials and reduce the exposure to technology. Currently, data from FactSet has Technology accounting for ~27% of the S&P 500 while Financials are ~12%. Normally this rebalancing would lead investors to scoop up shares, however given the market mood we've seen modest movement in MA shares this week. 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.
1-Wk. Price Change: .7% 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) ; $12.90; 4,070 shares; 1.54%
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. As we shared in one of this week's Daily Rundowns, the odds of the Fed cutting interest rates as depicted by the CME FedWatch Tool is rather low given recent inflation data. This likely means another re-adjustment ahead for the market's expectations. At the same time, in the near-term, we are likely to see additional fallout from recent bank closures. We will continue to hold onto PSQ shares until we have a clearer sense for the fed funds terminal rate.
1-Wk. Price Change: -5.4%; 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) ; $15.83; 3,310 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. As we shared in one of this week's Daily Rundowns, the odds of the Fed cutting interest rates as depicted by the CME FedWatch Tool is rather low given recent inflation data. This likely means another re-adjustment ahead for the market's expectations. At the same time, in the near-term, we are likely to see additional fallout from recent bank closures. The ISM February PMI data showed the manufacturing economy continued to contract suggesting further revenue downside for the basket of S&P 500 companies. 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: -1.2%; 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) ; $186.79; 640 shares; 3.50%; Sector: Industrials
WEEKLY UPDATE: Last week UPS reiterated its guidance for $97-$99.4 billion this year with adjusted operating margins in the 12.85-13.6% range. This week the February Retail Sales report showed consumers shifted their spending back to digital shopping with non-store retail sales climbing 8.5% vs year ago levels, a quick pace than January's 6.8% increase. This along with competitor FedEx (FDX) reporting stronger than expected quarterly results and hiked its full-year forecast to a range of $14.60-$15.20 vs. prior guidance of $13.00- $14.00 and the $13.62 consensus bode very well for UPS's upcoming March quarter results. Should the shares approach our $200 target, we would look to ring the register and lock in at least a portion of the position's gains.
1-Wk. Price Change: 2.9% 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) ; $76.97; 1,130 shares; 2.54%; Sector: Energy
WEEKLY UPDATE: In last week's Roundup we noted XLE prices moved below the $85 level, and that continued this week amid the continued fallout from bank closures and concerns over the speed of the economy. However, demand expectations from China are expected to remain strong as its economy continues to open and rebound.
Oil prices firmed on Friday after a meeting between Saudi Arabia and Russia calmed markets amid strong China demand expectations but were headed for their biggest weekly falls since December as a banking crisis rocked global financial and oil markets. According to OPEC's latest forecast released earlier this week, Chinese oil demand is expected to grow by 710,000 barrels per day (bpd) in 2023, up from last month's forecast of 590,000 bpd and a contraction in 2022. That forecast offset weaker expectations elsewhere allowing OPEC to maintain its 2023 world oil demand forecast grow of 2.32 million bpd, up 2.3% vs. 2022. Last week, AAP team member Carley Garner shared that we have likely moved into a buy the dip regime. We are inclined to wait until we get past the Fed's monetary policy next week to make our next move with XLE shares. That could include adding to the portfolio's position as well as revisiting either our price target or the current Two rating.
1-Wk. Price Change: -6.8%; Yield: 3.6%
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.
Amazon (AMZN) ; $98.95; 835 shares; 2.42%; Sector: Consumer Discretionary
WEEKLY UPDATE: Amazon shares bounced nicely this week following bullish comments from Goldman Sachs. The firm's view is concerns of a slowdown at Amazon Web Services are overdone and e-commerce margins are poised to improve as we move through 2023. While our opinion isn't too dissimilar, we recognize the near-term will continue to be challenging given concerns for the global economy and enterprise spending. During February, per the monthly Retail Sales report, we saw consumers lean further into digital shopping as non-store retail sales rose 8.5% vs. year ago levels, up from 6.8% in January. That echoes the findings of the February Mastercard SpendingPulse that also supported consumers wading back to digital shopping. We see that continuing as brick & mortar retailers return to more normalized pricing environment having worked down bloated inventory levels. With strong support for the shares near $90, we are seeing a more favorable risk to reward tradeoff in the shares emerge and this could lead us to make a small move with AMZN shares.
1-Wk. Price Change: 9.1%; 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) ; $155.00; 750 shares; 3.40%; Sector: Technology
WEEKLY UPDATE: Evercore reiterated its bullish stance of Apple shares, supporting its $190 price target by arguing the shares deserve a premium valuation. However, later this week, key Apple manufacturing partner Foxconn shared it was taking a "relatively conservative view" towards smart devices, as rising inflation and the weakening global economy impact demand. That conservative view includes flat revenue year in the coming quarters. revenue for the rest of the fiscal year will be roughly flat year-over-year. Earlier this month, Foxconn reported February revenue of equivalent to $13B, down 39.1% month-over-month and down nearly 11.7% year-over-year. One bright spot called out by Foxconn that is good for our position in Marvell shares - cloud and networking, which Foxconn expects to see strong growth in the coming quarters. Late in the week, KeyBanc Capital Markets said its Key First-Look Data that measured proprietary spending data of 1.8M credit and debit card customers found spending on Apple transactions declined 11% month-over-month, better than the three-year average of a 13% decline. 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: 4.4% 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) ; $11.30; 7,850 shares; 2.56; Sector: Industrials
WEEKLY UPDATE: This week it was announced Ford would recall ~1.3 million Ford Fusion and Lincoln MKZ vehicles to fix a front brake hose that could break. While this is a sizable recall, we would share the top 12 auto makers in the U.S. recalled about 26 million vehicles over the past year via 407 separate recalls. Because the recall affects models between 2013-2018 models and Ford not making Fusions or MKZs anymore, the impact should be modest. More interesting to us is Ford working with Ernst & Young to help commercial customers understand Inflation Reduction Act electric vehicle tax credits. Ford vehicles that may qualify for IRA tax credits include the 2023 E-Transit van and 2023 F-150 Lightning pickup, as well as the 2023 Mustang Mach-E SUV and 2023 Escape plug-in hybrid. 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. Next week brings another data point we will be scrutinizing - car registrations in the UK and Europe.
1-Wk. Price Change: -6.6% Yield: 5.3%
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) ; $101.62; 1,000 shares; 2.97%; Sector: Communication Services
WEEKLY UPDATE: Alongside its bullish comments for Amazon that we shared above, Goldman Sachs also issued favorable comments on GOOGL shares. In its view, GOOGL shares have a similar risk-reward profile as AMZN shares and sees the company "among the very best companies positioned for future computing cycles tied to artificial intelligence, augmented reality & quantum computing". Those are sound thoughts, but we also have to remember the bread-and-butter business at Alphabet is advertising related. 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.
1-Wk. Price Change: 12.1%; 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) ; $279.43; 420 shares; 3.43%; Sector: Technology
WEEKLY UPDATE: The European Union deadline to rule on the Activision deal has now been extended to May 22 and reports indicate Microsoft submitted remedies to that regulator for its planned $69 billion acquisition of (ATVI) in a bid to secure its approval. We and others are as focused on Microsoft's efforts with backlash from the U.K.'s antitrust authority, which is scheduled to make its final decision on the transaction on April 26. Also, this week, Microsoft unveiled it was integrating generative AI from OpenAI to its Microsoft 365 software suite. Given the revenue contribution by Microsoft 365/Office, roughly $45 billion last year vs. $11.5 billion for search and advertising, this is a much bigger move for the company. The main feature being released in the coming months is Microsoft 365 Copilot, allowing the software suite - which includes its PowerPoint, Word, Excel and Outlook tools - to generate presentations, documents and summarize emails using natural-language prompts. 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: 12.4% Yield: 1%
INVESTMENT THESIS: We believe the cloud to be a secular growth trend and that upside to shares will result from Microsoft's hybrid cloud leadership as the company grabs market share in this expanding industry. While companies may look to build out multi-cloud environments, Microsoft's Azure offering will be a prime choice thanks to the company's decision to provide the same "stack" used in the public cloud, to companies for their on-premises data centers. Additionally, we would note that hybrid environments are currently the preference for most companies because it allows them to maintain critical data in-house while taking advantage of the agility and scalability provided by public clouds. Outside of the cloud opportunity, we maintain a positive view on the company's growing gaming business, which we believe is becoming an increasingly prominent factor in the Microsoft growth story as gaming becomes more mainstream, management works to convert its gaming revenue from one-time license purchase to a recurring subscription model and as technologies like augmented/virtual reality evolve. Finally, as it relates to LinkedIn and other subscription-based services such as O365 and various Dynamics products, we continue to value them highly for their recurring revenue streams, which we remind members, provide for greater transparency of future earnings.
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) ; $175.13; 790 shares; 4.05%; Sector: Consumer Defensive
WEEKLY UPDATE: The February Retail Sales report found grocery store sales climbed 5.8% vs. year ago levels in February, a faster pace than January's 5.4% gain. Falling commodity costs bode well for PepsiCo's pricing action last year to drive margin and EPS improvement in the coming quarters. For members who are underweight PEP shares, the risk-to-reward tradeoff is rather favorable near $171 for this inelastic business model and dividend dynamo company.
1-Wk. Price Change: 1.8%; Yield: 2.6%
INVESTMENT THESIS: PepsiCo is one of the largest food-and-beverage companies globally. It makes, markets, and sells a slew of brands across the beverage and snack categories, including Pepsi, Mountain Dew, Gatorade, Doritos, Lays, and Ruffles. The firm uses a largely integrated go-to-market model, though it does leverage third-party bottlers, contract manufacturers, and distributors in certain markets. In addition to company-owned trademarks, Pepsi manufactures and distributes other brands through partnerships and joint ventures with companies such as Starbucks. The combination of the consumable nature of those products along with PepsiCo's ability to realize price increases has led to consistent revenue, EPS, and dividend growth during both the Great Recession and the Covid pandemic.
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) ; $370.09; 315 shares; 3.41%; Sector: Industrials
WEEKLY UPDATE: We used the recent drop in URI shares, which was likely due to the ripple effect of the recent bank closures, to add to the portfolio's position. Granted some of the recent severe winter weather may impact construction activity in the current quarter, which could impact United's revenue in the current quarter. However, when we look at the longer-term, especially spending tied to the Biden Infrastructure Law, CHIPS Act and Inflation Reduction Act continue to ramp in the coming quarter, the stock market is likely to see this as a speed bump viewed through the rear-view mirror. Later in the week, Steel Dynamics issued upside EPS guidance citing strong demand and increased shipments, which reflects the pick-up in nonresidential construction being driven by spending out of Washington.
1-Wk. Price Change: -13.8% Yield: 1.6%
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
*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.
A more in-depth discussion as to how we utilize the AAP rating systems can be found here.