The overall market moved higher this week, but getting there was quite the roller coaster ride.
With five trading days left in the quarter, the S&P 500 was unchanged over the last month, leaving it up 3.4% year to date, while the Dow and Russell 2000 are in the red. Following its strong move in January, the Nasdaq remains in the pole position so far this year, up around 13%. But we are starting to see folks question the strength of that move, which has so far been primarily driven by multiple expansion with little to no earnings per share growth. This could give us an opportunity to grow our exposure to some tech positions in the portfolio as well as ones we've been watching.
The culprit behind that roller coaster move in the market this week was renewed concerns over the banking sector, mixed messaging from Treasury Secretary Janet Yellen regarding deposit coverage, and data that showed borrowings against the Fed's emergency lending facilities offset the last several months of Fed balance sheet reductions. As you may be thinking, and you'd be right, that roller coaster ride is more clearly seen in a trailing five-day chart for the SPDR S&P Bank ETF (KBE) . While KBE shares ended the week on a strong note, following reassuring comments about the financial system from St. Louis Fed President and Atlanta Fed President Raphael Bostic, we suspect the market will feel far better with several days of bank free drama under its belt. As we've shared with a few Roundups ago, typically, the weekend when markets are shut, is when some of things be they deals or emergency measures get hammered out. We'll be looking to see if fresh headlines for either are made this weekend regarding the banking sector. If there are any, the devil will once again be in the details and those details could either help uncertainty fade or rekindle it. Either way, we'll be watching.
The driving force behind the positive move in the market this week, was the market shrugging off Fed Chair Powell's comment the Fed does not see any rate cuts ahead in 2023 and the path to taming inflation, particularly in the services economy, remains a long one. Late in the week, the CME FedWatch Tool still showed multiple rate cuts for this year, with the driving through being the credit tightening to be had as a result of recent bank failures. The prevailing thought by the market is that credit tightening will serve as a defacto interest rate hike, but how big of a hike it equates to is still up for debate. Some have postulated credit tightening could be the equivalent of a 25-basis point rate hike, while others have indicated it could be more like a 100-150 basis point rate hike. That thought process explains the multiple rate cuts we are now seeing for 2023 per the CME FedWatch Tool.
We would note St. Louis Fed President has very different take compared to what is found in the CME FedWatch Tool. On Friday, Bullard shared he had raised his estimate of how high the fed funds rate needs to rise by the end of 2023 by a quarter of a percentage point to a 5.50%-5.75% range. For context, the updated economic projection by the Fed released earlier this week points to 5.1%. However, as Powell indicated if the impact of credit tightening is less than feared and inflation continues to be stubborn, the Fed could do more. Bullard's sees an 80% probability for the financial stress to pass and shared that by late spring or summer the Fed's focus will have returned to lowering inflation back to the 2% target. He added there will likely be a need to "ratchet up" interest rates to make that happen.
With the Fed's March meeting behind it, we expect to see other Fed heads making the rounds in the coming days and we will be looking to see if they reiterate Bullard's comments or to what extent they offer a different view. One thought that speaks to the Fed's being a bit of a cheerleader for the economy is the Fed heads are likely to downplay the impact of recent bank stress, calling for the economy to be modestly impacted by credit tightening impact. The follow through on that thought would suggest the Fed will need to do more than the market currently expects. In other words, the market is once again ahead of itself in forecasting where the fed funds rate is likely to be in the second half of this year.
We will continue to revisit that line of thinking as we inspect incoming data to get a more accurate read on what is likely to unfold. We would caution you it will be at least several weeks until we can start to get our hands around the credit tightening impact and what it could mean for the vector and velocity of monetary policy. Needless to say, as we move through those weeks, we will continue to inspect fresh inflation data and other economic data as well to determine the strength of the economy and earnings prospects ahead.
More importantly, we will continue to focus on the portfolio, looking for opportunities with both existing and new positions while also managing for downside risk.
The AAP Portfolio
That quick roller coaster ride for the S&P 500 had its impact on the portfolio with some wide swings this week. Big winners for the portfolio over the last five trading sessions were Coty shares, which climbed more than 5%, and ChargePoint, which came in a not too distant second. Other top performers included Apple, Alphabet, Cboe Global Markets, Marvell, Vulcan Materials, Verizon, and Lockheed Martin, all of which added 2% or more this week. Those gains offset modest declines in Bank of America and Elevance Health, as well as our market hedging inverse ETF positions.
We had a far quieter week for portfolio action compared to last week. We used the continued strength in PepsiCo shares that pushed the position size past 4% to lock in some gains, using the proceeds to scoop up additional AMN Healthcare shares. Later in the week, we also started to build up our position in Bank of America shares.
As we noted in last week's Roundup, there are several other portfolio positions we are closely watching including Deere, Elevance and Lockheed Martin among others with either scoop up additional shares or revisit our current rating. Based on what we learn from Micron's quarterly results next week and updated outlook for the PC and smartphones, we may be inclined to revisit our rating on Microsoft shares. And we share below, should UPS shares zero in on our $200 target, we may do some register ringing there as well. Proceeds from those or other profit taking are likely to be used to build up other newer positions, take advantage of deeply oversold conditions in others, or perhaps call up another Bullpen resident to the active portfolio.
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: Bandages Won't Hold on KBE
Since the well-documented troubles of Silicon Valley Bank (SIVB) just weeks ago, most regional and mid-size banks have come under assault. It makes sense really, as when a shocking development such as SVB occurs, the market is sensitive and with ears pricked. There is rarely just one bad apple after looking deeper into the situation. That skepticism has taken its toll on the banking stocks in general, with the exchange traded funds KRE (KRE) and KBE (KBE) index getting hammered, along with the XLF (XLF) .
We focus today on the KBE, which is trying to stop the bleeding but cannot seem to get massive selling under control.
(Click here for a more detailed look at the chart.)
The candles are purple, which tells us strong bearish, Moving Average Convergence Divergence (MACD) oscillator is on a strong sell signal while money flow continues to leak. There is no reason to buy this index until a bottom has emerged, and we won't know that for weeks. There is so much uncertainty out there and very little clarity, selling the banks (at least in the KBE) has been the best move until more information is known. We'll be watching the KBE and KRE for more information about how stocks in these ETFs perform. For now, going back a few years there is support around $30 for the KBE, and with lower highs, lower lows created that seems a lock.
The Coming Week
Next week brings new data on the economy as well as the consumer mindset. As we close the month, the February Personal Income & Spending data will arrive, bringing in tow the PCE Price Index data for the month. When we examine that report, we'll be looking to see if the core PCE Price Index reverses course and moves lower on a month over month basis after accelerating sequentially in each of the last few months. Given what we saw in the core CPI data of late, the services sub-index for the February PPI data and the inflation comments found in S&P Global's Flash March Services PMI for the US, the odds of that happening are rather low.
As we indicated above, the data will likely argue the path to taming inflation in the services sector will continue to be a very long one. However, in the very near-term the impact of the expected credit tightening on the economy likely means the market will give that inflation data a pass.
As we called out during Thursday's Daily Rundown, the reality is it is too early to determine the extent that credit tightening will have on the economy. In the coming weeks as we move into the March quarter earnings season, we will be leaning into their comments about what they are seeing and doing. Those comments should give us a better sense as to what degree credit tightening will impact the economy. As we learn that and digest fresh inflation data, we'll have a much better sense as to how right or wrong the current fed funds rate scenario depicted by the CME FedWatch Tool is.
Here's a closer look at the economic data coming at us next week:
U.S.
Tuesday, March 28
- Retail Inventories ex Auto - February (8:30 AM ET)
- FHFA Housing Price Index - January (9:00 AM ET)
- S&P Case-Shiller Home Price Index - January (9:00 AM ET)
- Consumer Confidence - March (10:00 AM ET)
Wednesday, March 29
- Weekly MBA Mortgage Applications (7:00 AM ET)
- Pending Home Sales - February (10:00 AM ET)
- Weekly EIA Crude Oil Inventories (10:30 AM ET)
Thursday, March 30
- Weekly Initial & Continuing Jobless Claims (8:30 AM ET)
- 4Q 2022 GDP, PCE Price Index - Third Estimate (8:30 AM ET)
- Weekly EIA Natural Gas Inventories (10:30 AM ET)
Friday, March 31
- Personal Income & Spending, PCE Price Index - February (8:30 AM ET)
- University of Michigan Consumer Sentiment Index - March (10:00 AM ET)
International
Monday, March 27
- Germany: Ifo Business Climate Index - March
Tuesday, March 28
- France: Business Survey - March
- Italy: Business and Consumer Confidence - March
Wednesday, March 29
- Germany: GfK German Consumer Climate - April
- European Central Bank Non-Monetary Policy Meeting
Thursday, March 30
- Eurozone: Business and Consumer Survey - March
- Germany: Consumer Price Index - March
Friday, March 31
- Japan: Tokyo Core CPI - March
- Japan: Industrial Production, Retail Sales - February
- China: Manufacturing and Non-Manufacturing PMIs - March
- Eurozone: Consumer Price Index - March
As we close out the quarter with the close of trading next week, it means the March quarter earnings season will soon be upon us. This has us scouring the earnings reports we will be getting this week for data points that will set the stage for what we're likely to hear in the coming weeks.
With that in mind, one of the reports we'll be focused on next week will be from Micron. When that company last reported in late December, it shared expectations for the PC market to fall low-to mid-single digits this year with the smartphone market flat to up slightly. We'll be looking for an update on those markets and others as well as inventory levels to see if the expected second half rebound is tracking or poised to emerge even sooner. We'll also be dissecting quarterly results from EVGo with an eye to ChargePoint shares as well as Blackberry's comments on both the cybersecurity and IoT markets.
As we do that and move toward the end of the quarter, we'll also be on watch for earnings pre-announcements in and out of the portfolio, factoring the reasons for them into our investment mosaic.
Here's a closer look at the earnings reports coming at us next week:
Monday, March 27
- Open: Carnival (CCL)
- Close: PVH (PVH)
Tuesday, March 28
- Open: Conn's (CONN), McCormick & Co. (MKC), Walgreens Boots Alliance (WBA)
- Close: Cal-Maine Foods (CALM), Dave & Buster's (PLAY), Jefferies (JEF), lululemon athletica (LULU), Micron (MU), RH (RH)
Wednesday, March 29
- Open: Cintas (CTAS), Kingsoft Cloud (KC), Paychex (PAYX)
- Close: EVO Payments (EVOP), Semtech (SMTC)
Thursday, March 30
- Open: EVgo (EVGO),
- Close: Blackberry (BB)
AMN Healthcare Services, Inc. (AMN) ; $83.46; 1,525 shares; 3.71%; Sector: Health Care Services
WEEKLY UPDATE: There were no new meaningful developments for AMN this week and the shares remain extremely oversold. During Wednesday's Daily Rundown, we discussed that since we last sold AMN shares near $126 in November, the shares have fallen more than 30% despite no changes in the monthly JOLTs data for health care, no change in headlines discussing the nursing shortage, and consumers continuing to face long lead times for medical and related visits. While the position has been frustrating to many, including ourselves, we will continue to focus on the data, and should it rollover in a meaningful way, we would look to reconsider our stance on AMN shares. Given what we've seen in the last few weeks, however, that doesn't seem likely in the near-term. During the week, we used some of the proceeds from our prudent trimming in PepsiCo shares to pick up additional AMN shares.
1-Wk. Price Change: -0.6; 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) ; $141.84; 810 shares; 3.36%; Sector: Utilities
WEEKLY UPDATE: None. 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: 1.8%; 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.
ChargePoint Holdings Inc. (CHPT) ; $9.83; 10,930 shares; 3.15%; Sector: Electrical Components & Equipment
1-Wk. Price Change: 5.2% Yield: 0.00%
WEEKLY UPDATE: Last week Jefferies issued a bullish report on EV uptake and this week JP Morgan discussed funding applications being open for EV charging stations. But JPM also agrees with our view that as funding begins to flow, we should see a more robust implementation phase unfold in the second half of the year. Before we get there, however, we are likely to see contract announcements and other wins that should confirm the upcycle for the EV charging station build-out is ready to roll. In closing out its comments, JP Morgan reiterated its Overweight rating on CHPT shares, preferring them over other EV charging companies given a clearer path to profitability. We agree with that assessment.
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) ; $23.49; 3,885 shares; 2.67%; Sector: Technology
WEEKLY UPDATE: This week was rather quiet for YOU, with JPMorgan reiterating its $33 price target. Like ourselves, JPM is bullish on shares given it growing network of airport partners and prospects for additional gains in the top 100 US airports. As we noted during the week, we see that continued expansion as positive catalyst to drive membership growth as would the addition of any new airline or nonairline partners for its secure identity verification solutions. With YOU shares being oversold at current levels, we are inclined to scoop some additional shares up in the coming days.
1-Wk. Price Change: -4.3%; 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) ; $495.27; 262 shares; 3.80%; Sector: Consumer Staples
WEEKLY UPDATE: None. 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. We continue to think the much-anticipated membership fee is only a matter of time, and it would serve as a favorable catalyst for the shares.
1-Wk. Price Change: 1.7% 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) ; $11.60; 6,550 shares; 2.22%; Sector: Consumer Discretionary
WEEKLY UPDATE: After increasing our price target, boosting our rating to "One" and adding additional COTY shares to the portfolio, this week Shares of Coty were added to Piper Sandler's top ideas list and the firm boosted its price target to $15 from $14. The catalyst for those moves were recent channel checks as well as the same Coty comments that recently led us to not only add to our holdings but boost both our price target and our rating. Piper also echoed our decision to add COTY shares to the portfolio and remove those for Estee Lauder from the Bullpen, as it switched COTY shares for EL in its top idea list naming them its "favorite beauty conglomerate." As it did that it noted more upside associated with COTY shares than EL. We certainly agree with that assessment.
1-Wk. Price Change: 6.7%; 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) ; $37.66; 3,295 shares; 3.63%; Sector: Communication Services
WEEKLY UPDATE: Verizon announced it will report its quarterly results on Tuesday, April 25.
1-Wk. Price Change: 2.4% Yield: 6.9%
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) ; $166.20; 725 shares; 3.53%; Sector: Building Materials
WEEKLY UPDATE: After adding to our VMC holdings last week, this week KeyBanc Capital Markets issued bullish comments surrounding the recently completed ConExpo 2023, North America's largest construction trade show representing asphalt, aggregates, concrete, earthmoving, lifting, and mining. As you know, our bullish thesis on URI shares stems from the combined stimulus of the Biden Infrastructure Law, CHIPs Act, and the Inflation Reduction Act, all of which should stimulate demand for construction equipment. Keybanc's bullishness stemmed from favorable contractor optimism, with some sectors like highways and bridges seeing faster funding flow-through. Moreover, backlogs remain at record levels with few cancellations, and order activity remains solid against tough year-ago comparisons. That said, the primary constraint remains supply chain issues that in some cases could likely mean under shipping relative to demand. That could help prolong the expected upcycle and could lead to stronger revenue later as the supply chain catches up to demand. Also, this week, Mexican cement company Cemex, aided by Mexican armed forces, illegally took possession last week of its port terminal near Playa del Carmen in southern Mexico. Vulcan shared there is no contract permitting Cemex's use of its port facilities. Those facilities have been shut since last year when an agreement for Cemex to lease part of Vulcan's property expired at the end of 2022 without any renewal. Following White House comments that Mexico's actions raise concerns about the treatment of U.S. companies in Mexico, Mexican President Lopez Obrador said his government would comply with a pending ruling from a trade dispute panel following a complaint by Vulcan. Given the shut nature of those facilities, the issue should have little to no impact on Vulcan operations that are poised to benefit from the ramp in non-residential spending outlined above.
1-Wk. Price Change: 3.2% 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
TWOs
Axon Enterprise Inc. (AXON) ; $216.58; 380 shares; 2.41%; Sector: Aerospace & Defense
1-Wk. Price Change: 1.6% Yield: 0.00%
WEEKLY UPDATE: AAP Team Member Bruce Kamich shared he likes the technical setup with AXON shares in an uptrend. 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) ; $27.14; 1,200 shares; .95%; Sector: Financial Services
WEEKLY UPDATE: Comments from Treasury Secretary Janet Yellen, pressuring bank stocks anew including our shares of Bank of America. Speaking at an Economic Club of Washington event midweek, Citigroup CEO Jane Fraser stressed that the string of bank failures was isolated, noting the biggest U.S. banks remain well capitalized and that "This isn't like it was last time. This is not a credit crisis. This is a situation where a few banks have some problems and it's better to make sure we nip that in the bud." Early indication is Bank of America picked up more than $15 billion in deposits following the failure of Silicon Valley Bank, and our thinking remains it will continue to grab market share in the near-term. That led to add to our initial BAC position. Given Yellen's comments, we will hold off in revising our Two rating higher for now. As the banking waters calm further, we would look to revisit that rating, but in the meantime should BAC shares drift closer to $27 we would be more aggressive buyers.
1-Wk. Price Change: -2.4% 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
Cboe Global Markets Inc. (CBOE) ; $125.58; 950 shares; 3.60%; Sector: Financials
WEEKLY UPDATE: Continued market volatility is a positive driver for Cboe's suite of options and trading products. Even though the Wall Street consensus price target has creeped up to $145 vs. our $140 target, we would be buyers of Cboe between $112-$120. Should we see the shares get down in that range, we may top off that position. With that in mind, we will downgrade CBOE shares to a Two from One rating. During the week, Cboe announced it will report its March quarter results on Friday, May 5.
1-Wk. Price Change: 3% Yield: 1.5%
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 $140; Rating: One.
RISKS: IT spending, competition, supply chain challenges
ACTIONS, ANALYSIS & MORE: Addition to AAP Portfolio; Initial Technical Review, Addition to Bullpen, Investor Overview.
Chipotle Mexican Grill (CMG) ; $1,624.25; 75 shares; 3.80%; Sector: Restaurants
1-Wk. Price Change: 1% Yield: 0.00%
WEEKLY UPDATE: Building on recent comments that called for more favorable avocado pricing, this week we learned Barclay's Commodity Cost Index that measures the year over year change in seven restaurant commodities (beef, chicken, pork, cheese, coffee, corn and wheat) was down 8% year over year in March, following an 11% drop in February. 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) ; $41.23; 2,900 shares; 3.50%; Sector: Cybersecurity
WEEKLY UPDATE: Ferrari recently got a ransom demand related to certain client-contact details. We see this as the latest reminder that cyberattacks remain unrelenting and companies will continue to spend on cybersecurity despite the economic backdrop. In other words, Ferrari's pain is a positive for our shares of the First Trust Nasdaq Cybersecurity ETF (CIBR) Should CIBR shares fall below the $41 level, we would be inclined to top off the portfolio's position.
1-Wk. Price Change: 1.6% 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; 3.51%; Sector: Farm Machinery & Equipment
WEEKLY UPDATE: DE shares traded off further this week amid continued declines in wheat and soybean prices, while those for corn made a nice move higher. Despite those moves lower, pricing for corn and soybeans remains well above 2021 levels and the March USDA World Agricultural Supply and Demand Estimate report continues to see no change in its 2022/2023 wheat supply-demand outlook. Also supporting prospects for favorable farmer income and the ongoing ag equipment upgrade cycle, the USDA now sees lower 2022/2023 ending stocks for wheat and wheat, while those for corn are up modestly vs. the USDA's February estimate. In our view, healthy farm fundamentals and favorable crop supply-demand dynamics should extend the agriculture-equipment cycle into 2024 while Deere also benefits from the improving non-residential construction market. With DE shares now firmly below $400, barring any unforeseen developments over the weekend, we will look to revisit our current Two rating.
1-Wk. Price Change: 0.3% Yield: 1.3%
INVESTMENT THESIS: The global agriculture equipment market size is expected to reach $166.5 billion in 2027, growing at 6% CAGR over the 2020-2027 period. The favorable outlook for equipment purchases in the coming quarters reflects rising farmer income that historically drives new equipment purchases. At the same time, Deere continues to lean into the sustainability movement with its precision ag offering. That technology is helping farmers drive crop yields higher while also realizing cost savings, which makes the new technology a productivity upgrade compared to older equipment. 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) ; $456.69; 145 shares; 1.94%; Sector: Health care
WEEKLY UPDATE: This week the company held its 2023 Investor Conference during which it reaffirmed its previously issued 2023 guidance that calls for EPS greater than $32.60. Management shared it targets a compound annual revenue growth rate of upper single digits through 2027. Alongside that, management also shared it continues to target deploying around 50% of its free cash flow toward strategic M&A and business reinvestment. Those targets speak to not only continued share gains but also a key part of our aging of the population investment thesis. While that offers a favorable long-term view, the near-term catalyst we are waiting for is the "final notice" for Medicare Advantage payment rates that should arrive in early April. Typically, the final rates are more favorable than the initial indications. With room to grow our position size and do so below the position's average cost basis, ELV shares ones we are eyeing rather closely.
1-Wk. Price Change: 1.4%; 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) ; $183.65; 312 shares; 1.68%; Sector: Commodities
WEEKLY UPDATE: Gold has really been making a nice move of late, but this week's move was outstanding. The gold future pushed up near $2,000 per ounce, that took our GLD ETF up near $187. We are sporting a nice gain on this, a nice diversified against other dollar-denominated holdings. With inflation still strong and the Fed only pushing rates up a quarter percentage point this week, there is a worry the Fed is getting behind the curve a bit. That would mean more upside for GLD, which we believe can make a run toward $200 before long. We rate GLD as a "Two". GLD is up about 9% on the year, far better than a return on the SPX 500 or Dow Industrials. The ETF is a big overbought here but is still a buy on pullback name.
1-Wk. Price Change: -0.1% Yield: 0%
INVESTMENT THESIS: The GLD ETF is a proxy for gold. This "trust" buys and sells gold futures each day in an attempt to mimic the daily moves in the underlying asset, in this case, gold. We see gold as an ideal hedge against a weaker dollar, strong inflation (which tends to weaken the dollar) alternative, and in uncertain times (worry over war and battles). For the past 15 years, gold has been a strong asset class held by fund managers, countries, and banks. The metal is not correlated with markets and will move based on the demand/supply dynamic in the marketplace. Other precious metals such as silver and platinum are good proxies for the criteria stated earlier, however, gold is far more liquid and offers better upside opportunities.
Target Price: Reiterate $200; Rating: Two
RISKS: Weak inflation data, interest rate risk, dollar strength relative to other currencies, geographic risk.
Lockheed Martin Corp. (LMT) ; $474.54; 155 shares; 2.15%; Sector: Aerospace & Defense
WEEKLY UPDATE: Following last week's appearance at the JPMorgan Industrials Conference, this week Lockheed continued to bag additional contracts that expand its multi-year backlog. Those gains should overshadow last week's comments the current quarter has started off at a slower pace with a slower pace with revenue tracking to come in a tad shy of the $15 billion-$15.1 billion consensus. Alongside those comments, Lockheed shared the March 2023 quarter should be the lowest revenue quarter of the year as it works through its multi-year backlog. With our position nicely profitable, we would look to pick up more shares in the $440-$460 range.
1-Wk. Price Change: 1.9% 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) ; $41.07; 800 shares; .96%; Sector: Technology
WEEKLY UPDATE: Marvell announced it has joined the club of companies announcing layoffs that includes Intel, Micron, Amazon, Meta Platforms, and Alphabet. The wireless, data processing, and storage chip company will cut around 320 jobs, roughly 4% of its workforce and the market is likely to embrace that action much the way it has with other companies. The thinking is trimming the fat to become a leaner, more focused company will help drive margin improvement in the coming quarters. We're not inclined to disagree. Later in the week we learned this will eliminate the company's entire research and development operation in mainland China. Given the current geo-political tension in the chip industry between the US and China, this was likely the place for Marvell to make its cuts. Next week brings quarterly results from Micron and as we enter April, we will also get the S&P Global Manufacturing PMI for Taiwan. That report should give us some indication if export activity rebounded in March. According to Business Korea, the annual output of the Taiwanese semiconductor industry is about 20 percent of Taiwan's GDP and its semiconductor exports account for more than one-third of its total exports. Based on what we learn and the level at which MRVL shares are trading, we may have an opportunity to add to our position size.
1-Wk. Price Change: 0.27%; 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) ; $351.63; 275 shares; 2.83%; 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. On a positive note, Flash March PMI data from S&P Global points to continued strength in the services economy, a likely positive for transactions being carried across Mastercard's payment processing network. We also learned retail sales in the UK unexpectedly surged 1.2% month over month in February, following an upwardly revised 0.9% rise in January and the expected February reading of 0.2%. Next up will be the February retail sales data for the Eurozone due on April 11. For now, 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: .6% Yield: 0.6%
INVESTMENT THESIS: Mastercard is a card network company that benefits from the secular shift away from cash transactions and toward card-based and electronic payments. On Covid-19 dynamics, we view MA as a "reopening" play and an economic recovery play within technology because its cross-border volumes fell sharply during the pandemic but will rebound as mobility increases and travel restrictions ease. Mastercard has more international exposure relative to Visa, making its growth outlook more susceptible to new travel restrictions. However, we view MA as the better long-term play as we are betting on that inevitable recovery.
Target Price: Reiterate $425 Rating: Two
RISKS: The recovery in cross-border transactions, regulation in payments market, competition from other fintechs, pricing pressures.
ProShares Short QQQ ETF (PSQ) ; $12.57; 4,070 shares; 1.50%
WEEKLY UPDATE: Closing out the week, the CME FedWatch Tool continues to show the market expects multiple rate cuts in the back half of this year, despite Fed Chair Powell reiterating the Fed doesn't see that in the cards. Rather Powell continues to see a long road ahead to returning inflation back to the 2% target. Granted one swing factor is the credit tightening we are starting to see as a result of recent bank failures, but how extreme that becomes is yet to early to call. In our view the market is staring down an eventual re-adjustment ahead for what is expected. We will continue to hold onto PSQ shares until we have a clearer sense for the fed funds terminal rate.
1-Wk. Price Change: -2.6%; 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) ; $15.50; 3,310 shares; 1.50%
WEEKLY UPDATE: Closing out the week, the CME FedWatch Tool continues to show the market expects multiple rate cuts in the back half of this year despite Fed Chair Powell reiterating the Fed doesn't see that in the cards. Rather Powell continues to see a long road ahead to returning inflation back to the 2% target, and the Flash March PMI data for the services sector reaffirms that likelihood. Granted one swing factor is the credit tightening we are starting to see as a result of recent bank failures, but how extreme that becomes is yet to early to call. We will look for more clarity on that when banks start to report their March quarter results in the coming weeks. In our view the market is staring down an eventual re-adjustment ahead for what is expected. 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: -2.1%; 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) ; $186.07; 640 shares; 3.49%; Sector: Industrials
WEEKLY UPDATE: Following last week's reiteration of its 2023 revenue guidance for $97 billion-$99.4 billion, this week UPS shares received three price target cuts. Deutsche Bank lowered its target to $214 from $220, while Loop Capital trimmed its to $212 from $219 and Credit Suisse dropped its target to $203 from $206. Our $200 price target that was once an outlier increasingly looks more realistic. While we still see UPS benefitting from the tilt back to digital shopping, given continued declines in the manufacturing sector, should the shares approach our $200 target in the coming days and weeks, we would look to ring the register and lock in at least a portion of the position's gains.
1-Wk. Price Change: -.04% 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) ; $77.89; 1,130 shares; 2.58%; Sector: Energy
WEEKLY UPDATE: Continued concerns over the banking sector and the trajectory of the global manufacturing economy weighed on oil prices this week. Added to the mix were comments from U.S. Energy Secretary Jennifer Granholm that refilling the country's Strategic Petroleum Reserve (SPR) may take several years. That's a longer time horizon that the market was looking for and dials back one potential demand driver. AAP team member Carley Garner recently shared that we have likely moved into a buy the dip regime. We have no major economic data out next week that is likely to influence oil prices. However, as we enter April we will get manufacturing PMI data for China, and if it supports the re-opening thesis on China, it will strongly suggest rising demand from the largest importer of oil. If that is what we see in the data, we would look to step further into XLE shares.
1-Wk. Price Change: 1.2%; 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.
THREEs
Amazon (AMZN) ; $98.13; 835 shares; 2.40%; Sector: Consumer Discretionary
WEEKLY UPDATE: Findings from Bank of America suggest Amazon is one of the beneficiaries of share gains from Bed Bath & Beyond. We see that continuing as brick & mortar retailers return to more normalized pricing environment having worked down bloated inventory levels. CEO Andy Jassy said the company will lay off 9,000 more employees in the coming weeks, in addition to the around 18,000 it shed between November and January. This latest group will come primarily for Amazon Web Services, Advertising, and streaming video service Twitch. Exiting 2021, the company's overall headcount was just shy of 800,000 and suggests the total headcount being shed is around 3.05%-3.3% of its total workforce. While those cuts aren't the largest, we've heard of, they still point to a leaner, more focused and cost-conscious company, something we appreciate. 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: -0.8%; 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) ; $160.25; 750 shares; 3.52%; Sector: Technology
WEEKLY UPDATE: Apple shares continued to chug higher this week, adding to their strong gains over the last month and for 2023 thus far. While we wait to hear what Micron has to say next week about the potential for a rebound in the PC and smartphone markets, Apple made several other headlines this week. Apple TV+ is returning to its Friday Night Baseball coverage April 7. This new season brings some changes, including broadcasts being offered in 60 countries and regions, up from 13 last year, and a price point of $6.99 per month/$69 per year vs. free last year. We see this as a bid by Apple to recoup Major League Baseball outlays as well as bolster its own Services revenue. Other reports indicate Apple may boost its already big push into original entertainment content by investing $1 billion annually into movies that will debut in theaters. Should Micron signal a firming in Apple's key hardware markets, we may look to revisit our current Three rating.
1-Wk. Price Change: 3.4% 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) ; $11.51; 7,850 shares; 2.65; Sector: Industrials
WEEKLY UPDATE: At its New Financial Reporting Teach-In, Ford revealed its revised reporting segments with Ford Blue, Ford Model 3, and Ford Pro, replacing what was the company's auto segment that housed various geographic reporting. In our note to you, we shared the insights gathered from the event reaffirms our view this is a volume game for Ford -- as volumes ramp toward that 600,000 run-rate target, manufacturing synergies are realized. In our view, this is where the EV tax credit comes into play and the degree to which it is accelerating adoption of EVs, especially Ford's EVs. Given Ford's recent EV issues, we do not expect to have meaningful clarity as to how that is impacting Ford's business until early May. It also means we will be closely watching the degree to which Ford uses promotional efforts and other sales tactics to drive volume; should it be overly aggressive it could mean a push out in its break-even timetable. For those reasons, we continue to rate Ford shares a Three or Holding Pattern rating. As we enter and exit the month of May, which could be a very important one for Ford and its shares, we hope to greater clarity on its transition and its ability to deliver on its targets. Exiting the week, Ford shared it plans to produce 500,000 electric trucks a year at its manufacturing complex in Tennessee that will begin production in 2025. Following the last year's rollout of the Ford F-150 Lightning, an all-electric version of its bestselling full-size pickup, the company is expected to start producing its next-generation electric truck in 2025.
1-Wk. Price Change: 1.9% Yield: 5.2%
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) ; $105.44; 1,000 shares; 30.9%; Sector: Communication Services
WEEKLY UPDATE: Stifel reinstated coverage of GOOGL shares with a "Buy" rating and a $130 target. The belief is competition from an AI-powered Bing search engine is overdone, while YouTube and YouTube TV should take share against traditional and cable TV. On the AI front, Shopify announced Google Cloud's Discovery Al solutions are now available for integration and use by merchants on its platform and this week Google released its artificial intelligence chatbot for public use. With a few days left to go in the month, we will look to revisit Search engine market share data for March, noting for the first two months of 2023 Google's share of that market was 93.1% according to Statcounter. By comparison, Bing's share was ~2.9%. As we get that data, we will look to re-think our "Three" rating on GOOGL shares.
1-Wk. Price Change: 3.8%; 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) ; $280.57; 420 shares; 3.45%; Sector: Technology
WEEKLY UPDATE: We watch Micron's updated view of the PC and smartphone market to inform our views on Microsoft. We received a positive development on the pending Microsoft-Activision merger late this week when the U.K.'s Competition and Markets Authority (CMA) antitrust regulator "provisionally concluded" that the proposed deal would not reduce competition in the console gaming market. The CMA is slated to issue a final report on the matter by April 26. We'd remind you the European Union deadline to rule on the Activision deal was recently pushed out to May 22
1-Wk. Price Change: 0.4% 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) ; $179.09; 760 shares; 3.98%; Sector: Consumer Defensive
WEEKLY UPDATE: Bernstein shifted on PEP to "Hold" from "Underperform," admitting that, "Strong, pricing-led category growth is what caught us offside. But that would be missing the forest for the trees. Through the pandemic, Pepsi has delivered the strongest organic growth across mainstream U.S. staples. And what's more, we do now see signs of improvement in beverages." With that Bernstein "threw in towel," upgraded the shares and lifted its price target to $185 from $172. Also, this week Deutsche Bank upped its price target on PEP to $188 from $186. That popped PEP shares, moving them past the 4% position size for the portfolio. That prompted us to do some prudent trimming, locking in a nice gain on that slug of PEP shares. With 2022 price hikes poised to turn into margin drivers across the company's beverage and snack portfolio, we will continue to be patient PEP holders as that thesis plays out.
1-Wk. Price Change: 2.3%; 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) ; $370.78; 315 shares; 3.42%; Sector: Industrials
WEEKLY UPDATE: After adding to our URI holdings last week, this week KeyBanc Capital Markets issued bullish comments surrounding the recently completed ConExpo 2023, North America's largest construction trade show representing asphalt, aggregates, concrete, earthmoving, lifting, and mining. As you know, our bullish thesis on URI shares stems from the combined stimulus of the Biden Infrastructure Law, CHIPs Act, and the Inflation Reduction Act, all of which should stimulate demand for construction equipment. Keybanc's bullishness stemmed from favorable contractor optimism, with some sectors like highways and bridges seeing faster funding flow-through. Moreover, backlogs remain at record levels with few cancellations, and order activity remains solid against tough year-ago comparisons. That said, the primary constraint remains supply chain issues that in some cases could likely mean under shipping relative to demand. That could help prolong the expected upcycle and could lead to stronger revenue later as the supply chain catches up to demand.
1-Wk. Price Change: 0.2% 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.