Weekly Roundup: An Upward Drift Amid a Light Slate of Data
The portfolio saw nice gains this week as the all-imporant CPI and PPI numbers await.
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The stock market drifted higher this week amid a dearth of fresh economic data, another barrage of Fed speakers, and the continued flow of quarterly earnings, pushing it further into overbought territory. That upward drift benefited the portfolio, but despite the surprisingly hotter-than-forecasted May consumer inflation expectations data out on Friday, the CME Fed Watch tool continues to show the market expects a Fed rate cut following its September policy meeting.
As we discussed a few times this week, we are in the camp that such timing for a rate cut is unlikely — and this has many bracing for next week’s April inflation data as well as other economic reports. If that data show progress on inflation is back on track, the market will see it as very welcome news. However, if the indications found in the April PMI reports and elsewhere hold, the market will need to accept the likely timing for the first rate cut is toward the end of 2024 at the soonest. That acceptance could give us an opportunity to utilize our portfolio shopping list.
We will also be watching for the Atlanta Fed’s next update for its rolling GDP forecast model better known as its GDPNow. The most recent on Wednesday, May 8, boosted the model’s GDP figure to 4.2% from 3.3% on its May 2 revision. The next update on May 15 will likely bring another round of revisions. While some will point to this barometer of the economy, we should remember we have yet to get all of the April data, which means we will see many revisions between now and early July.
Still, because the current market narrative centers on the health of the economy and EPS generation, we expect each update to this model will be followed closely. And should those revisions lead to a GDP figure that is below the initial print of 1.6% for Q1 2024, market expectations will once again start to price in rate cuts. Our view on this is that barring signs of a recession, so long as inflation remains elevated, the Fed will continue to follow “higher for longer” when it comes to interest rates.
As the coming wave of economic data are reported, we will also be updating our own thinking about the economy, monetary policy, the market, and our holdings. We’ll also be watching implications in the dollar and commodity markets as well as geopolitical developments.
Catching Up on the Portfolio This Week
The portfolio saw some nice gains this week from Costco (COST), United Rentals (URI), Vulcan Materials (VMC), Bank of America (BAC), Morgan Stanley (MS), and several others that outpaced the S&P 500.
Modestly offsetting that progress were the week-over-week declines in Axon Enterprise (AXON), Coty (COTY), and The Trade Desk (TTD). All three of those companies reported this week, and in response, we boosted our rating and price target for AXON shares, lifted our target for TTD, and reiterated our One rating for COTY.
With the market short-term overbought, according to Helene Meisler, the only trade we made this week was Friday’s addition to Nvidia (NVDA). That move was prompted by the significant year-over-year increase in Taiwan Semiconductor’s (TSM) April revenue.
Following that trade, the portfolio has just under 14% in cash, its lowest level in some time. While we have our shopping list, which includes Applied Materials (AMAT), Labcorp (LH), Waste Management (WM), and some others, odds are we will not make any moves until we have digested the April PPI and CPI reports as well as the market’s response.
This Week's Portfolio Videos and Podcasts
We cover a lot of ground during the week in our Daily Rundowns and the Portfolio Podcast. If you happened to miss one or more of them, here are some helpful links:
Monday, May 6: We're Outperforming the S&P 500, But This Is Not a Sprint
Tuesday, May 7: We've Got Our Eyes on This Bullpen Stock
Wednesday, May 8: Let's Review Our Strategy for Costco, Trade Desk, and Qualcomm
Thursday, May 9: You've Got the Brains, I've Got the Books, Let's Make Lots of Money
Friday, May 10: Here's What Prompted Our Multiple Moves With Nvidia
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: iShares TIPS Bond ETF
When we look at the effect of inflation on the economy and consumers, we often focus on the headlines that are published by the Bureau of Labor Statistics (BLS). The CPI and the PPI are the monthly releases (April will be released next week), and in these numbers, we can get monthly and yearly glimpses of inflation, which is often sufficient for those on Main Street.
But we can also look to the bond market to tell us the same or a different story. In fact, the timing of inflation or expectations can be critical to behavior in markets. If we are feeling inflation trends are heating up, we can understand why investors would show worry, but if other sources like the bond market tell a different story, then we may want to revisit that thinking.
So, what vehicle do we choose to look at for inflation trends rising or falling? The iShares TIPS Bond ETF (TIP), is a bond ETF that has built-in inflation protection (and guarantees by the government), as the cash flows (principal and interest payments) are adjusted for inflation. TIPS is an acronym for Treasury Inflation-Protected Securities.
When this ETF starts to rise, it means inflation expectations are starting to build. When there is deflation, the principal value of bonds is adjusted lower. Why would an investor want to keep TIPS? Because it helps maintain buying power when their currency (in this case the U.S. dollar) is devalued by inflation within the economy.
Looking at the chart of the TIP ETF, we see it is starting to turn bullish, though it has not leaped to that side just yet. Remember, when TIPS are rising then bondholders are implying higher inflation is on the way, so to compensate for a loss in buying power they will buy TIPS.
Moving Average Convergence Divergence (MACD) is showing some strength and is on a buy signal. Notice the parabolic SAR, in the top pane, is currently on a buy signal; this shows a change in the trajectory of price before it occurs. Stochastics in the fourth pane are overbought, hence momentum is strong.
The Fed has been telling us to be worried about inflation continuing to rise, yet they are satisfied (mostly) with rates where they are (higher for longer). If the committee is paying attention to inflationary trends and their direction, the TIP ETF can be a nice tool for them (and others) to use to gauge prices. If TIP starts coming down, perhaps rate cuts are back on the table sooner rather than later. But right now, that is not the case and TIP is confirming that view.
Other charts we shared with you this week were:
Monday, May 6: S&P 500 - Better Price Action During a Volatile Week
Monday, May 6: Microsoft (MSFT) - Microsoft's Rare Buying Opportunity
Tuesday, May 7: Applied Materials (AMAT) - Time to Add to Applied Materials? Yes, and We Did So
Wednesday, May 8: Morgan Stanley (MS) - Morgan Stanley's Breakout Is a Thing of Beauty
Thursday, May 9: DR Horton (DHI) - D.R. Horton Is in a Struggle Versus Higher Interest Rates
The Coming Week
Next week is a big one for a few reasons, following a week of the market treading water. Part of the lack of pronounced movement was due to a very light economic calendar but that will change next week with the April PPI, CPI, Retail Sales, and Housing Starts reports.
Our thinking is the market’s expectation for a September rate cut is likely to fall by the wayside as new data are published. We’re basing this off of the price paid data in the April PMI reports as well as the upward move in commodities and other price pressures. Given the relationship between the PMI data and CPI as well as PPI reports, we’re not expecting much of a downside surprise in those upcoming reports.
Oil prices have slumped in recent weeks, but gas prices are still running ahead of last year as the switch to summer blend production is completed. Despite recent inventory builds for oil, fresh calls by Israel to eliminate Hamas in Rafah could recharge geopolitical tensions, especially as indications of progress on cease-fire talks fade.
Getting back to the CPI, the Cleveland Fed’s Inflation Nowcasting model calls for April's core CPI to come in at 3.65%, which would be the lowest print on a year-over-year basis in some time. If that’s the printed figure next week, it would break the 3.8%-4.0% range the data has been trapped in since October. It would still be quite a distance from 2% and likely mean the Fed would still want to see further progress before getting on board with rate cuts, especially since the Cleveland Fed’s model sees 3.6% core inflation in May.
We also have a bit of role reversal with the CPI and PPI data next week. Rather than have the CPI report and then the PPI report, the April PPI data will come first on Tuesday, May 14, with the April CPI following the next day. This means we could see some jockeying in April CPI data just before the report is released. Based on the numbers, we will update our thinking about rate cut timing, but ahead of those reports, our view is a the soonest we could see a cut is late this year.
Comments so far this earnings season point to consumers remaining selective despite job creation and wage data over the last few months. This could shape what we find in the April Retail Sales report, one that we’ll be dissecting for several portfolio holdings. And even though interest rates are poised to be higher for longer, housing affordability is still a headwind, and with more difficult year-over-year comparisons ahead, we’ll review the April Housing Starts report with an open mind. An upside surprise would be positive for our shares of Vulcan Materials (VMC) and United Rentals (URI) and could give us a reason to revisit Builders FirstSource (BLDR) in the Bullpen. For BLDR, we will want to balance that against what next week’s inflation data say about potential rate-cut timing.
Here's a closer look at the economic data coming at us next week:
U.S.
Monday, May 13
Consumer Inflation Expectations – April (11 AM ET)
Tuesday, May 14
Producer Price Index – April (8:30 AM ET)
Wednesday, May 15
MBA Mortgage Applications Index -Weekly· Consumer Price Index – April (8:30 AM ET)·
Retail Sales – April (8:30 AM ET)
Business Inventories – March 10 (AM ET)·
NAHB Housing Market Index – May (10:00 AM ET)·
EIA Crude Oil Inventories - Weekly
Thursday, May 16
Initial & Continuing Jobless Claims – Weekly
Housing Starts & Building Permits – April (8:30 AM ET)
Import/Export Prices – April (8:30 AM ET)
Industrial Production & Capacity Utilization – April (9:15 AM ET)
EIA Natural Gas Inventories - Weekly
Friday, May 17
Leading Indicators – April (10:00 AM ET)
International
Tuesday, May 14
Japan: Producer Price Index – April
Germany: Inflation Rate – April·
UK: Employment Change – March
Eurozone: ZEW Economic Sentiment Index - May
Wednesday, May 15
China: People’s Bank of China medium-term lending facility announcement
Eurozone: GDP and Employment Change Report – 1Q 2024
Eurozone: Industrial Production - March
Thursday, May 16
Japan: GDP – 1Q 2024
Friday, May 17
China: Industrial Production, Retail Sales – April
Eurozone: Inflation Rate - April
The pace of quarterly results takes a bit of a breather next week as we get ready to hear from companies that tend to have a January year-ends. That means we will soon be in the throes of retailer earnings, and the results and guidance will add a dimension to consumer-spending expectations. It begins next week with results from Home Depot (HD) and Walmart (WMT).
From a portfolio perspective, the one position reporting next week is Applied Materials (AMAT). In addition, we will continue to review other earnings reports and conference calls as we update our investment mosaic.
We will also be reviewing management comments as the May-June investor conference season gets underway with the RBC Capital Markets Global Healthcare Conference and the MoffettNathanson Media, Internet, and Communications Conference.
Here's a closer look at the earnings reports coming at us next week:
Monday, May 13
Open: Paysafe (PSFE)
Close: American Healthcare REIT (AHR)
Tuesday, May 14
Open: Home Depot (HD), Jack in the Box (JACK), Sony (SONY)
Close: Prestige Consumer (PBH)
Wednesday, May 15
Open: Monday.com (MNDY)
Close: Cisco (CSCO)
Thursday, May 16
Open: Advanced Drainage Systems (WMS), Canada Goose (GOOS), Under Armour (UAA), Walmart (WMT)
Close: Applied Materials (AMAT), Ross Stores (ROST), Take-Two (TTWO).
Portfolio Investor Resource Guide
· Economic Data: Here's a List of Links to the Key Economic Data We Closely Watch
· Investing Terminology: 16 Key Terms Club Members Should Know
· 10-Ks: Want to Know About a Stock? Read the Company's Reports
· 10-Qs: Unlock the Numbers and Key Information Behind Your Stock With the 10-Q
· Income Statement: Our Cheat Sheet to Understanding This Financial Document
· Balance Sheet, Cash Flow Statements and Dividends: How to Know If a Company Is Off-Kilter? Read Its Balance Sheet
· Valuation Metrics: Everyone Wants a Value. Here's How Investors Can Find
The Portfolio Ratings System
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.
ONES
Alphabet GOOGL; $168.65; 1,035 shares; 4.06%; Sector: Communication Services
WEEKLY UPDATE: Following their rise over the last few months, shares of Alphabet are in a sideways consolidation. That range may start to expand here between the highs achieved last month and the lows a few days later ($175 to $162) but could hold until the company reports its June quarter earnings. The MACD is at a high, so momentum is still very strong with Google, however, volume trends are turning bearish, and that means as the stock rises there is a lack of conviction. In news this week, Elon Musk is making a run at challenging YouTube. He wants "you" to be on the site watching shows, movies, and podcasts. OpenAI announced it will have a Google search competitor as soon as Monday. We’ve seen many look to challenge Google’s search capabilities, and many fall short. We’ll see how this OpenAI effort stacks up when it’s released, but we expect a competitive response from Google to follow. We’ll continue to monitor the regulatory front given a potentially large tech antitrust ruling against Google lies in the wings. We also continue to hear rumblings over Alphabet buying HubSpot (HUBS), a company specializing in customer relationship management (CRM) for smaller businesses. Lastly, as AI adoption accelerates, Google is beefing up its AI sales effort. We continue to see Google’s business and the shares well positioned to capture the accelerating shift to digital advertising, especially in a presidential election year, as well as the cloud. Given Google’s reach, our thinking continues to be the company will be a meaningful player in AI. The company will pay its first quarterly $0.20 per share dividend on June 17 to shareholders of record on June 10.
1-Wk. Price Change: 0.8%; Yield: 0.5%
INVESTMENT THESIS: We believe that while search and digital ad dominance are what will carry shares in the near- to mid-term, 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 its subsidiary Verily, as AI and machine learning continue to disrupt operations across industries. Lastly, adding to our 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. The company is also preparing to roll out Gemini Subscription with enterprise plans for workspace, according to a report. All good news for Alphabet.
Target Price: Reiterate $200; Rating: One
Panic Point: $140
RISKS: Regulatory risk (data privacy), competition, and macroeconomic slowdown impacting consumers and therefore ad buyer activity.
Amazon AMZN; $187.48; 835 shares; 3.64%; Sector: Consumer Discretionary
WEEKLY UPDATE: Following Amazon’s March-quarter results last week we raised our price target to $220. As part of its ongoing investment, this week Amazon Web Services said it will invest nearly $9 billion to expand its cloud infrastructure in Singapore over the coming five years. Also this week, Amazon announced the rollout of its first electric trucks in ocean freight operations, which are part of the company’s growing fleet of heavy-duty electric trucks. The expanded electric truck base is part of the company’s push to achieve net-zero carbon emissions by 2040. Next week brings the April Retail Sales report, and we’ll be focused on what it says about digital shopping at the start of the current quarter. We continue to see AMZN well-positioned as shoppers reembrace digital shopping, especially as they contend with persistent inflation. AI and cloud adoption should remain a tailwind for Amazon Web Services, and we continue to see favorable growth ahead for Amazon’s subscription and advertising offerings.
1-Wk. Price Change: 0.7%; Yield: 0.0%
INVESTMENT THESIS: We believe upside will result from Amazon's continued eCommerce dominance, AWS's 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. While we believe the increasing share of the revenue from these higher margin businesses will be key to driving profitability longer-term, we think 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.
Target Price: Reiterate $220; Rating: One
Panic Point: $155
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.
Axon Enterprise AXON; $303.43; 535 shares; 3.77%; Sector: Aerospace & Defense
WEEKLY UPDATE: Following Axon’s beat-and-raise March quarter, we boosted our price target to $375 from $330 and lifted our rating to a One. Both reflect the continued positive mix shift toward the higher margin Software and Services business, which posted gross margins near 75% vs. ~47% for its Sensors & Other Segment and ~62% for the Taser business. Annual recurring revenue continued to climb, reaching $825 million exiting the March quarter, up dramatically from $551 million in the year-ago quarter and $732 million in the December quarter. We see the company benefitting from public safety spending as it continues to expand the reach of its cloud business through moves like the one this week that shored up burgeoning its drone business. Later in the week, Barclays increased its AXON price target to $381 from $308 while Craig Hallum upped its target to $370 from $325.
1-Wk. Price Change: -4.7%; Yield: 0.00%
INVESTMENT THESIS: Axon Enterprise 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 & Sensors manufactures 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 $375; Rating: One
Panic Point: $260
RISKS: Manufacturing and supply chain, competitive factors, government regulation, technology change.
Coty Inc. COTY ; $11.17; 14,480 shares; 3.76%; Sector: Consumer Discretionary
WEEKLY UPDATE: Following Coty’s COTY earnings report this week we reiterated our $14 price target and our One rating. Looking below the surface of the earnings report, on a like-for-like basis, Coty’s revenue rose 10% year over year led by the 13% increase in the higher margin Prestige business. While the Consumer Beauty business posted slower revenue growth of 6%, management efforts to drive its profitability continued to make progress. Consumer Beauty's EBITA margin hit 5.2% in the March quarter compared to 2.6% in the year-ago quarter. Comparing the revenue performance for Coty’s two business segments against the corresponding ones from Ulta Beauty (ULTA), Esteé Lauder (EL), and LVMH (LVMHF), tells us the company is taking market share. When CEO Sue Nabi was named CEO in mid-2020, the company’s adjusted EBITDA margin was 11.64% and for fiscal 2024 it is closing in on 18% with more room to expand in the coming quarters. Turnaround plans can be a slow burn, but as the momentum builds the results become increasingly evident. We are starting to see that at Coty, and we want to capture that value creation in COTY shares. We admit we may be early in seeing this, but over time the market should catch up to our thinking.
1-Wk. Price Change: -3.7%; Yield: 0.0%
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, the 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: $14; Rating: One
Panic Point: $9.50
RISKS: Industry competition and consolidation, product efficacy and safety, currency, and brand licensing.
Marvell Technology MRVL; $68.47; 2,420 shares; 3.85%; Sector: Technology
WEEKLY UPDATE: Over the last few weeks Meta (META), Alphabet, Microsoft (MSFT), and Amazon (AMZN) have all telegraphed greater year-over-year spending on AI and data center. That set the table for the almost 60% year-over-year increase in April revenue reported by Taiwan Semiconductor (TSM), a company that counts AI and data center as one of its top-end markets. Those and other recent comments from South Korean chipmaker SK Hynix that its high-bandwidth memory (HBM) chips used for AI chipsets were sold out for this year and almost fully booked for the next year, point to favorable AI and data center demand for Marvell. When Marvell last reported, it guided for an H2 2024 rebound in its Networking and Carrier Infrastructure businesses. We continue to think AI adoption and AI-on-device will re-ignite spending in those areas, but we’ll want Marvell management to at least reiterate its prior outlook when it reports on May 30. Because we continue to see ramping AI and data center demand as well as the upcoming AI-on-device upgrade cycle rekindling demand for Marvell’s network and carrier infrastructure business in the coming quarters, we intend to be owners of MRVL shares.
1-Wk. Price Change: -0.1%; Yield: 0.4%
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 necessitates 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 $95; Rating: One
Panic Point: $59
RISKS: Technology risk, customer risk, competition risk, reliance on manufacturing partners, and supply chain constraints.
Nvidia Corp. NVDA; $898.78; 180 shares; 3.76%; Sector: Technology
WEEKLY UPDATE: The April revenue surge reported by Taiwan Semiconductor on Friday was the latest data point confirming robust demand for AI and data center chips. That prompted us to boost our NVDA price target to $1,100, upgrade our rating to One from Two, and add more shares to the portfolio. Earlier in the week, at ServiceNow's (NOW) annual customer and partner event, Knowledge 24, ServiceNow showcased AI avatars of the future together with Nvidia NVDA, leveraging Nvidia's Avatar Cloud Engine speech, large language model, and animation. Also this week, Goldman Sachs raised its price target on Nvidia to $1,100 from $1,000 and kept a "Buy" rating on the shares as well as their place on the firm’s Conviction List. Nvidia will report its quarterly results on May 22.
1-Wk. Price Change: 1.2%; Yield: 0.0%
INVESTMENT THESIS: Nvidia is well positioned to benefit from ramping AI and data center spending. The company pioneered accelerated computing to help solve the most challenging computational problems. Nvidia is now a full-stack computing infrastructure company with data-center-scale offerings that are reshaping the industry. The company's full stack includes the foundational CUDA programming model that runs on all Nvidia GPUs, as well as hundreds of domain-specific software libraries, software development kits, or SDKs, and Application Programming Interfaces, or APIs. This deep and broad software stack accelerates the performance and eases the deployment of Nvidia accelerated computing for computationally intensive workloads such as artificial intelligence, or AI, model training and inference, data analytics, scientific computing, and 3D graphics, with vertical-specific optimizations to address industries ranging from healthcare and telecom to automotive and manufacturing. Nvidia reports in two business segments: Compute & Networking and Graphics. The Compute & Networking segment (78% of revenue, 85% of operating income) is comprised of Data Center accelerated computing platforms and end-to-end networking platforms including Quantum for InfiniBand and Spectrum for Ethernet; NVIDIA DRIVE automated-driving platform and automotive development agreements; Jetson robotics and other embedded platforms; Nvidia AI Enterprise and other software; and DGX Cloud software and services. The Graphics segment (22% of revenue, 15% of operating income) includes GeForce GPUs for gaming and PCs, the GeForce NOW game streaming service and related infrastructure; Quadro/NVIDIA RTX GPUs for enterprise workstation graphics; virtual GPU, or vGPU, software for cloud-based visual and virtual computing; automotive platforms for infotainment systems; and Omniverse Enterprise software for building and operating metaverse and 3D internet applications.
Target Price: $1,100; Rating One
Panic Point: $760
RISKS: Market and interest rate risk, credit risk, country risk, and operational risk, including cybersecurity.
The Trade Desk TTD; $87.26; 1,100 shares; 2.23%; Sector: Technology
WEEKLY UPDATE: On Thursday, we boosted our price target for The Trade Desk TTD shares to $110 from $105 following the company’s beat-and-raise quarterly results. March-quarter revenue growth accelerated to 28% year over year from 23%-25% in the last two quarters, while incremental margin expansion drove a nearly 50% increase in adjusted EBITDA for the quarter. While the company repurchased $125 million in shares during the quarter, it had little impact on its bottom-line results for the quarter, which came in at $0.26 per share, $0.04 ahead of the market consensus. When it comes to the current quarter, Trade Desk forecasts its adjusted EBITDA coming in near $223 million vs. $180 million in the year-ago quarter. That puts its adjusted EBITDA margin for the current quarter at around 38.7% compared to 33% in the previous one. As Trade Desk’s mix pivots even further toward video, something we see as very likely given the growing number of video-capable devices, we should see even further margin expansion and EPS growth in the following quarters. On Friday, Wells Fargo boosted its target to $115 from $110, Citigroup took its to $112 from $110, while Truist and Stifel both lifted their targets to $105 from $100. Because TTD shares are a recent portfolio addition, we have room to grow the portfolio’s exposure.
1-Wk. Price Change: -1.5%; Yield: 0.0%
INVESTMENT THESIS: The Trade Desk offers a cloud-based ad-buying platform that empowers its clients to plan and manage data-driven digital advertising campaigns across ad formats and channels, including video, display, audio, digital-out-of-home, and social. Modalities for those campaigns span a multitude of devices, such as computers, mobile devices, televisions, and streaming devices. This positions the Trade Desk to benefit from the accelerating shift toward digital advertising. That shift is expected to see digital advertising account for more than 70% of total ad spending in 2025 rising to ~74% by 2027. We also see the company benefitting from the use of digital advertising in the 2024 presidential campaign, which is expected to grow more than 150% compared to 2024, putting it around $3.5 billion.
Target Price: Reiterate $110; Rating: One
Panic Point: $72
RISKS: Advertising spending; customer risk and loss; evolving market dynamics and competitive landscape; platform disruptions and outages.
Universal Display OLED; $171.08; 965 shares; 3.84%; Sector: Technology
WEEKLY UPDATE: Coming off Universal’s earnings report last week, one that led us to raise our price target to $225 from $200, as was widely expected Apple (AAPL) introduced two new iPad Pro models that contained organic light-emitting diode displays. Apple also said each of those tablet models will have two per device to achieve what it called a tandem OLED display quality. That means double the Apple demand for organic light-emitting diode displays from these devices. And if history repeats itself, we are likely to see others in the tablet space make a similar move to offer similar display and brightness dynamics. On Friday, reports indicated Apple inked a deal with Samsung Display for foldable products, another demand driver for Universal’s business. We are also starting to see greater inroads for organic light-emitting diodes in other applications, including the automotive market. For example, the 2025 Min Cooper EV includes a giant, round organic light-emitting screen. Others expected to do the same include Audi, BMW, Cadillac, Mercedes-Benz, Porsche, and others. Approaching the larger tipping point for organic light-emitting diode displays, we intend to be owners of OLED shares. As those adoption rates rise, it will give us reasons to revisit our OLED price target further.
1-Wk. Price Change: 0.2%; Yield: 0.9%
INVESTMENT THESIS: Universal Display focuses on the development and commercialization of organic light-emitting diode (OLED) technologies and materials for use in display and solid-state lighting applications. OLED displays are capturing a growing share of the display market, especially in the mobile phone, television, monitor, wearable, tablet, notebook, personal computer, augmented reality (AR), virtual reality (VR), and automotive markets. This adoption reflects advantages over competing display technologies with respect to power efficiency, contrast ratio, viewing angle, video response time, form factor, and manufacturing cost. Universal's business strategy is to develop new OLED materials and sell existing and new materials to product manufacturers for display applications, such as mobile phones, televisions, monitors, wearables, tablets, portable media devices, notebook computers, personal computers, and automotive applications, and specialty and general lighting products. The company also looks to license its OLED material, device design, and manufacturing technologies to those manufacturers. As such, Universal has a significant portfolio of proprietary OLED technologies and materials with more than 5,500 patents issued and pending worldwide.
Target Price: Reiterate $225; Rating: One
Panic Point: $145
RISKS: Patent and Intellectual property protection; maintaining OLED manufacturing and customer relationships; technology risk; market risk.
Vulcan Materials Company VMC ; $272.07; 613 shares; 3.87%; Sector: Building Materials
WEEKLY UPDATE: Following Vulcan’s modest top and bottom-line March-quarter beat and management reiterating its double-digit adjusted EBITDA target last week, we reiterated our One rating and $310 price target in last week’s Roundup. This week Raymond James boosted its VMC target to $280 from $265 and Stephens joined us at the $310 level with its target, up from its prior one of $300.
1-Wk. Price Change: 2.9%; Yield: 0.7%
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 $310; Rating: One
Panic Point: $225
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.
TWOS
Apple AAPL ; $183.05; 790 shares; 3.36%; Sector: Technology
WEEKLY UPDATE: It was a busy week for Apple as the company unveiled several revamped iPad models, data pointed to a rebound in its China iPhone shipments in March, and reports indicated the company is looking to bring some AI features to its in-house servers via its own high-end chips, including those it uses in its Mac computers. Late in the week, other reports indicated Apple forged a deal with Samsung Display for foldable productions, potentially for iPhones, iPads, or both. Also on Friday, we learned April revenue for Apple partner Taiwan Semiconductor (TSM) surged more than 59% year over year. Smartphones are one of TSM’s largest end markets. We would characterize these developments are favorable for Apple, but the event the market is waiting for is June’s 2024 WWDC. During that event, Apple will showcase its next iteration of iOS, MacOS, iPadOS, and Apple Watch Software. The event is also expected to be a showcase for Apple’s initial AI efforts, and we expect to hear ample chatter leading into the event. We will continue to look for opportunities to pick up some additional AAPL shares ahead of the AI-on-device upgrade cycle.
1-Wk. Price Change: -0.2%; Yield: 0.5%
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 each 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 $220; Rating: Two
Panic Point: Reiterate $155
RISKS: Slowdown in consumer spending, competition, lack of new product innovation, elongated replacement cycles, failure to execute on Services growth initiative.
Applied Materials Inc. AMAT ; $209.73; 460 shares; 2.24%; Sector: Semiconductor Manufacturing
WEEKLY UPDATE: It was a quiet week for Applied shares, but Friday’s surge in April revenue at Taiwan Semiconductor adds to our thinking that chip industry capacity levels are rising. That along with the continued disbursement of funds from the U.S. CHIPS and Science Act bode as well as other chip reshoring efforts in the eurozone and Japan suggest a favorable medium to long-term outlook for Applied’s business and our shares. When Applied reports its quarterly results on May 16, we’ll be focused on the near- and medium-term outlook but also on management’s comments about its China business. AMAT shares remain on our portfolio shopping list, and either a post-earnings pullback or stronger-than-expected guidance could tip our hands with the shares.
1-Wk. Price Change: 2.8%; Yield: 0.8%
INVESTMENT THESIS: Applied provides manufacturing equipment, services, and software to the semiconductor, display, and related industries. With its diverse technology capabilities, Applied delivers products and services that improve device performance, power, yield, and cost. Applied's customers include manufacturers of semiconductor chips, liquid crystal, and organic light-emitting diode displays, and other electronic devices. Applied operates in three reportable segments: Semiconductor Systems (73% of 2022 revenue, 78% of 2022 operating income), Applied Global Services (22%, 19%), and Display and Adjacent Markets (5%, 2%). Key customers include Samsung (12% of 2022 sales), Taiwan Semiconductor (20%), and Intel (10%).
Target Price: Reiterate $225; Rating: Two
Panic Point: $175
RISKS: Manufacturing and Supply Chain, Competitive Factors, Government Regulation, Technology Change.
Bank of America Corp. BAC ; $38.45 ; 4,000 shares; 3.57%; Sector: Financial Services
WEEKLY UPDATE: It was a strong week for banks and Bank of America was along for the ride. The stock has been stymied lately and while it is right at 52-week highs, the stock is still far away from all-time highs. Why is that relevant? Other big banks like Wells Fargo (WFC), Goldman Sachs (GS), and JPMorgan Chase (JPM) are at or new historical highs. Does that mean BAC has some catching up to do? Certainly so, and we believe the next run-in banks will help push BAC shares higher, but some patience may be warranted. At Berkshire Hathaway’s meeting last weekend, Warren Buffett talked some about his holdings in Bank of America, remaining quite positive on the bank. With BAC shares bumping up against our price target, we’ll look to revisit it as more April economic data is reported and the next round of IPO offerings are priced. We will also continue to watch developments toward reworking Basel III rules that would require banks to hold more capital as soon as August. While exact changes are still being formulated, reports indicate officials may release as soon as next week data from banks detailing how the changes could affect aspects of their businesses.
1-Wk. Price Change: 3.2%; Yield: 2.5%
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 ATMs, 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: $39; Rating: Two
Panic Point: $31
RISKS: Financial markets, fiscal, monetary, and regulatory policies, economic conditions, and credit ratings.
Costco Wholesale COST ; $787.19; 240 shares; 4.39%; Sector: Consumer Staples
WEEKLY UPDATE: After Wednesday’s market close, Costco published thesis-confirming April revenue sales growth of 7.1% year over year. Next week’s April Retail Sales report will provide some additional context for the company’s April sales report. Backing out the $23.48 billion revenue booked in March and April revenue of $19.8 billion says the company only has to deliver $14.7 billion in May, compared to $18.45 billion in May 2023. With consumers continuing to gravitate toward Costco as evidenced by the strength in its adjusted U.S. comp sales of 5.2% for April vs. 4.4% for the trailing 35 weeks, and 876 open warehouse locations exiting April vs. 853 at the end of May 2023, it’s safe to say that May-quarter consensus revenue forecast will need to be adjusted higher. In response, we lifted our COST price target to $830 from $800. On Thursday, Loop Capital raised its COST target to $840 from $820 and JPMorgan boosted its to $804 from $761. We would consider revising that rating if COST shares pulled back to the 50-day moving average near $731 or if continued same-store sales strength led us to reconsider our price target yet again.
1-Wk. Price Change: 5.8%; Yield: 0.6%
INVESTMENT THESIS: We like Costco's long-term prospects, driven by a club-based operating model that focuses on volumes, not margins, and therefore offers its customers a value proposition of everyday low prices. The strength of this model has created an incredibly loyal customer base with low churn and continued share gains in both bricks-and-mortar and e-commerce. 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.
Target Price: Reiterate $830. Rating: Two
Panic Point: $615
RISKS: Inability to pass through higher costs, fuel prices, weaker consumer, and membership churn.
Elevance Health ELV; $539.18; 275 shares; 3.45%; Sector: Health Care
WEEKLY UPDATE: There were no notable company-specific developments this week. Our ELV rating remains a Two and our target $560.
1-Wk. Price Change: 2.3%; Yield: 1.2%
INVESTMENT THESIS: Elevance, formerly Anthem/Blue Cross Health, is a premier healthcare 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 $560; Rating: Two
Panic Point: $450
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).
The Energy Select Sector SPDR Fund XLE ; $93.82; 1,345 shares; 2.93%; Sector: Energy
WEEKLY UPDATE: Oil prices bounced around this week but finished little changed. Fueling the ups and downs of the last few days were the increase in U.S. oil inventories, the Atlanta Fed’s GDP Model being revised to 4.2% from 3.3% for the current quarter, data showing China imported more oil in April than the same month last year, and ceasefire efforts between Israel and Hamas falling apart. We will continue to factor upcoming economic data into our thinking for oil and XLE shares, especially the May Flash PMI data that will be released on May 23. As we discussed with Prairie Operating Co (PROP) on a recent podcast, the medium-to longer-term outlook for power demand keeps us bullish on XLE shares. We would re-consider the position if signs emerge the economy is slowing more than expected.
1-Wk. Price Change: 1.4%; Yield: 3.5%
INVESTMENT THESIS: The Energy Select Sector SPDR Fund is an exchange-traded fund 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 $100; Rating: Two
Panic Point: $84
RISKS: Interest rates, weakness in the broad economy, energy prices.
First Trust Nasdaq Cybersecurity ETF CIBR ; $54.47; 2,530 shares; 3.20%; Sector: Cybersecurity
WEEKLY UPDATE: Another week, another batch of headlines on the latest hacks and cyber-attacks, several of which we shared with you here. We will be providing additional signals over the weekend. We continue to think all investors should have exposure to cybersecurity, especially as bad actors harness the power of AI in their attacks. We like the diversified exposure we have with the CIBR ETF. As more of the core holdings in the underlying basket report their quarterly results and guidance, we’ll revisit our current $62 target. Favorable guidance from that basket could propel the shares past strong resistance at $55-$56. We are interested in expanding the portfolio’s position size. As we digest those earnings, we’ll plot our next move with CIBR shares noting support near the $51 level.
1-Wk. Price Change: 0.7%; Yield: 0.0%
INVESTMENT THESIS: The First Trust Nasdaq Cybersecurity ETF 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
Panic Point: Reiterate $48
RISKS: Cybersecurity spending, technology, and product development, the timing of product sales cycle, new products, and services in response to rapid technological changes and market developments as well as evolving security threats.
Laboratory Corporation of America LH ; $207.67; 460 shares; 2.22%; Sector: Healthcare
WEEKLY UPDATE: Shares of Labcorp, from a technical perspective, are trying to find a bottom. A long series of lower highs, and lower lows in this stock has pushed LH back towards its October lows. This week saw the stock closing strongly above the 20-day moving average, the first time in a month. That is the start of a move, and from a technical basis, we would be much more bullish with a series of higher lows and higher highs followed by a move above longer-term moving averages (50, 100, and 200). In news this week, Invitae’s acquisition by LH was approved by the court, giving the company testing strategies into key areas like oncology and rare diseases. Barring a new acquisition or solution offering, we’d be buyers of additional shares closer to $195. Labcorp will pay its next quarterly dividend of $0.72 per share on June 12 to shareholders of record on May 28.
1-Wk. Price Change: 3.2%; Yield: 1.4%
INVESTMENT THESIS: Labcorp is a global leader in innovative and comprehensive laboratory services that provides vital information to help doctors, hospitals, pharmaceutical companies, researchers, and patients make clear and confident decisions. By leveraging its diagnostics and drug development capabilities, the company provides insights and accelerates innovations to improve health and improve lives. The Company is organized under two segments, consisting of Diagnostics Laboratories (Dx), which includes routine testing and specialty/esoteric testing, and Biopharma Laboratory Services (BLS), consisting of Early Development Research Laboratories and Central Laboratory Services. Our attraction to LH shares stems from the combination of the aging population driving diagnostic testing growth and the increasing array of diagnostic testing as well. That combination is expected to drive the healthcare testing services market to $12.6 billion by 2029, from $7.4 billion in 2024, according to Markets and Markets. To augment its position in oncology, women's health, autoimmune diseases, and neurology, the company has been expanding through acquisitions and partnerships with health systems and regional local labs.
Target Price: Reiterate $235; Rating: Two
Panic Point: Reiterate $170
RISKS: Macroeconomic factors, changes in healthcare reimbursement models and products, government regulations, product discontinuations or recalls.
Lockheed Martin Corp. LMT; $468.88; 330 shares; 3.59%; Sector: Aerospace & Defense
WEEKLY UPDATE: Shares of Lockheed Martin LMT are off to a strong start this month. After testing the 20-day moving average successfully last week, the stock is now making a run toward the $500 level, a good 8% higher than the current price. The indicators are mixed as the MACD is on a buy signal, stochastics are running higher and have approached overbought but money flow is still bearish. That may change, however, as more volume is pushing through in the weeks ahead as a bullish stock tends to attract money flows. This week saw Lockheed Martin secure two sizable contract modification wins from the U.S. Army, which together add another $1.1 billion to its multi-year backlog. Our view remains that the key catalyst for Lockheed’s EPS and the shares is the re-ramp for F-35 shipments. We continue to see that as a “when” not “if” issue, considering its backlog at the end of March of $159 billion including 373 F-35s.
1-Wk. Price Change: 1.5%; Yield: 2.7%
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.
Target Price: $520; Rating: Two
Panic Point: $385
RISKS: Contracts and budget risk with the U.S. government and the Department of Defense, F-35 program funding and renewal, competition, and subcontractor issues.
Mastercard MA; $456.98; 275 shares; 2.92%; Sector: Info. Tech
WEEKLY UPDATE: We saw some price target re-jiggering this week on MA shares with Tigress Financial upping its to $550 from $495, while Barclays trimmed its target to $530 from $549. Barclays followed our comments last week that Mastercard’s modestly lower gross merchandise volume outlook for this year would lead to some price target cuts. We kept our target at $490 and based on forthcoming consumer spending, we’ll revisit it as needed. Tigress, on the other hand, boosted its target and reiterated its "Strong Buy" rating based on its view the growing global labor market and wage growth will drive consumer spending. Much like us, Tigress also sees Mastercard continuing to take share in the global payments market from cash and check. Following the softer-than-expected April Employment Report, we’ll be watching upcoming jobs data closely with an eye toward MA shares.
1-Wk. Price Change: 3.0%; 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 (V), 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 $490 Rating: Two
Panic Point: $400
RISKS: The recovery in cross-border transactions, regulation in the payments market, competition from other fintechs, and pricing pressures.
Microsoft Corp. MSFT; $414.74; 325 shares; 3.13%; Sector: Technology
WEEKLY UPDATE: Shares of Microsoft have been trying to push higher, back to all-time highs but they keep getting stymied at the 50-day moving average. Longer-term this could be overcome, but give this "magnet" is so attractive to the share price, we have to conclude the stock remains in a tight range at least for now. Volatility has started to subside on Microsoft, and recent price ranges have narrowed significantly. Money flow, however, is bearish and so are volume trends, which tell us there is a lack of conviction to hold shares with these buyers when the stock is rising. With MSFT shares on our shopping list, we will continue to follow the technical setup closely. In news this week, come July Microsoft will challenge Apple and Google with a mobile gaming store, which we see as a natural for its Xbox and Activision content. During the week, President Biden plugged a Mr. Softy 3-billion-dollar AI investment at a Wisconsin site and it was announced that U.S. intelligence agencies will soon be using a secretive generative AI platform from Microsoft to help analyze sensitive data.
1-Wk. Price Change: 2.0%; Yield: 0.7%
INVESTMENT THESIS: We believe the cloud to be a secular growth trend and that upside to the 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 its 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 they allow 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: $480; Rating: Two
Panic Point: Reiterate $350
RISKS: Slowdown in IT spending, competition, cannibalization of on-premises business by the cloud.
Morgan Stanley MS ; $98.28; 1,575 shares; 3.60%; Sector: Financial Services
WEEKLY UPDATE: We continue to watch recently priced IPOs as an indicator of the IPO market. Recent offerings continue to perform well, including last week’s one for Viking Holdings (VIK). Reddit (RDDT) saw several price target increases following its first quarterly results as a public company. With these and other recent IPOs trading above their initial price offerings, we are incrementally more positive about the outlook for the IPO market. On the slate for 2024 are Stripe, Klarna, Discord, Chime, and others. That bodes well for the return of favorable operating leverage for Morgan’s investment banking business and MS shares. As more transactions come to market, we’ll look to revisit our current price target of $100. We will also continue to watch developments toward reworking Basel III rules that would require banks to hold more capital as soon as August. While exact changes are still being formulated, reports indicate officials may release as soon as next week data from banks detailing how the changes could affect aspects of their businesses.
1-Wk. Price Change: 5.0%; Yield: 3.5%
INVESTMENT THESIS: Morgan Stanley reports in three business segments: Institutional Securities (42% of trailing 12-month revenue, 38% of trailing 12-month Income Before Tax), Wealth Management (48%, 55%) and Investment Management (10%, 6%). While the IPO window has yet to reopen, the potential IPO class for 2024 continues to build with recent additions including Panera Bread, Reddit, Fanatics, and Skims, which is backed by Kim Kardashian. This along with the Fed increasingly likely to start cutting rates in H1 2024, suggests we are far closer to the IPO window opening on a sustained basis than we have been in some time. That would be a boon to private equity firms and others that have been nursing IPO candidates during the dark period and a positive for Morgan's investment banking business. Marginally lower rates could also generate a pick-up in M&A activity as the cost of capital with rates improving. As the Fed continues its cutting cycle to get rates back to normalized levels, that effort would also reduce rates for stock market alternatives, ones that quashed the "there is no alternative" trade earlier this year. That along with folks continuing to be behind in retirement savings bodes well for Morgan's wealth management business in the coming quarters.
Target Price: $100; Rating Two
Panic Point: $78
RISKS: Market and interest rate risk, credit risk, country risk, and operational risk, including cybersecurity.
PepsiCo Inc. PEP; $179.79; 800 shares; 3.34%; Sector: Consumer Defensive
WEEKLY UPDATE: According to Vericast’s 2024 Restaurant TrendWatch survey, restaurant food prices are climbing at a much higher rate than groceries, 5.1% annually versus 1.2%. The report shows that survey respondents are trading down from restaurant meals to food from the grocery store to avoid the rising costs, with more than 71% of Gen Z and millennials doing so. This bodes well for PepsiCo’s PEP beverage and snacking businesses. As we put the seasonably weakest quarter for PepsiCo in the rearview mirror, snacking competitor Kellanova (K) shared expectations for snacking volumes to stabilize in the current quarter and improve in H2 2024. Another PepsiCo competitor Utz Brands (UTZ) reaffirmed our expectation for the typical seasonal snacking pattern to play out, guiding its 2024 revenue to be split 49%-51% between H1 and H2 2024. Because of the high margins tied to the snacking business, that bodes well for EPS generation at PepsiCo. PepsiCo’s new quarterly dividend of $1.355 per share, a 7% increase, will be paid on June 28 to shareholders of record on June 7. This marks the 52nd consecutive annual dividend increase for this Dividend King, a sure sign in our book of a high-quality company.
1-Wk. Price Change: 2.1%; Yield: 3.0%
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 $185; Rating: Two
Panic Point: $145
RISKS: Economic conditions, supply chain constraints, raw material costs.
Qualcomm Inc. QCOM ; $182.08; 1,040 shares; 4.40%; Sector: Technology
WEEKLY UPDATE: Qualcomm QCOM shares shrugged off the U.S. Commerce Department revoking one of its export licenses for chips used in laptops and handsets to Huawei. We shared our view that this would only have a modest impact on Qualcomm. Later in the week, Qualcomm reiterated that it did not expect to receive product revenues from Huawei beyond the current calendar year but amended that view to May 7. Despite that action, Qualcomm did not change its financial guidance for the current quarter. We continue to see Qualcomm well-positioned for the upcoming AI-on-device upgrade cycle for both PCs and smartphones. Comments from Arm (ARM) this week reaffirmed that view and Friday’s robust April sales report from Taiwan Semiconductor (TSM) was also a positive data point.
1-Wk. Price Change: 1.4%; Yield: 1.9%
INVESTMENT THESIS: Qualcomm focuses on foundational technologies for the wireless industry, including 3G (third generation), 4G (fourth generation), and 5G (fifth generation) wireless technologies and processor technologies including high-performance, low-power computing, and on-device artificial intelligence technologies. As a connected processor company, its technology roadmap aims to enable the connected intelligent edge (the next generation of smart devices) across industries and applications beyond handsets, including automotive and the Internet of Things (IoT). Qualcomm has three reportable segments: QCT (Qualcomm CDMA Technologies) semiconductor business, which develops and supplies integrated circuits and system software based on 3G/4G/5G and other technologies for use in mobile devices; automotive systems for connectivity, digital cockpit, and ADAS/AD; and IoT including consumer electronic devices; industrial devices; and edge networking products. QCT accounts for 80%-85% of revenue. QTL (Qualcomm Technology Licensing) licensing business grants licenses or otherwise provides rights to use portions of the company's intellectual property portfolio, which includes certain patent rights essential to and/or useful in the manufacture and sale of certain wireless products. QTL accounts for ~15% of Qualcomm's revenue but contributes a greater portion of the company's operating income.
Target Price: $210; Rating Two
Panic Point: $140
RISKS: Customer risk, technology advancement, competition risk, third-party supplier, and manufacturing partner risk.
SPDR Gold Shares ETF GLD ; $218.71; 238 shares; 1.21%; Sector: Commodities
WEEKLY UPDATE: The shiny metal perked up this week, especially late in the week following a hotter-than-expected print for May consumer inflation expectations and fading ceasefire prospects between Israel and Hamas. That led GLD to post its best week since early April, rising with the dollar and U.S. equities. The yellow metal has had a great year so far in 2024, rising more than 13% which puts it ahead of all U.S. equity classes and bonds (which are down for the year). Should next week’s reports confirm inflation remains persistent, we could see even greater interest in gold and our GLD shares.
1-Wk. Price Change: 2.7%; Yield: 0.0%
INVESTMENT THESIS: The GLD ETF is a proxy for gold. This "trust" buys and sells gold futures each day 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 $220; Rating: Two
Panic Point: $190
RISKS: Weak inflation data, interest rate risk, dollar strength relative to other currencies, geographic risk.
United Rentals URI ; $698.13; 232 shares; 3.76%; Sector: Industrials
WEEKLY UPDATE: United will pay its next quarterly dividend of $1.63 per share on May 22 to shareholders of record as of May 8.
1-Wk. Price Change: 4.7%; Yield: 0.9%
INVESTMENT THESIS: United Rentals URI, 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 benefiting 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 $750; Rating: Two
Panic Point: $600
RISKS: Industry and economic risk, competition and competitive pressures, and acquisition risk.
Waste Management WM ; $211.49; 425 shares; 2.09%; Sector: Industrials
WEEKLY UPDATE: Last month, we spoke of the mild pullback in Waste Management’s shares as being a positive development. Nobody likes to see their stocks pull down, but a contained move lower is necessary for a stock to advance further. Such is the case for WM now, as we see a modest series of higher lows as the stock moves up toward recent resistance. Volume trends are turning positive and the MACD is pushing through and is nearly on a buy signal crossover. Money flow is strong in the stock, too. Short interest in Waste Management is usually rather high but has fallen in recent quarters. This simply means the fuel to push the stock much higher is not there, but buyers are certainly still looking for value, which WM still provides. WM's March-quarter results showed meaningful margin improvement due to pricing power, cost containment, and productivity gains, and the prospect for that to continue. We continue to favor the sticky residential business, especially because of further margin-improvement prospects, while the non-residential business continues to benefit from non-residential construction business tied to multiple stimulus programs out of Washington and growing electric power demands. WM shares remain on our shopping list of stocks.
1-Wk. Price Change: 1.7%; Yield: 1.4%
INVESTMENT THESIS: 2024 will see more nonresidential construction activity because of the Biden Infrastructure Law, but now we can finally factor in activity for the CHIPS Act, which saw its first award this week. Other potential drivers include spending associated with the Inflation Reduction Act, including the much-awaited start of building out a nationwide network of EV charging stations. Recently President Biden announced an $8.2 billion passenger rail project, which will likely take several quarters to come onstream, leading us to think it's more of a 2025 catalyst. Alongside that bright outlook for WM's commercial business, automation efforts and pricing power in its sticky residential business should drive margins and EPS generation higher in the coming quarters.
Target Price: Reiterate $230; Rating: Two
Panic Point: $178
RISKS: Industry and economic risk, competition and competitive pressures, and acquisition risk.
