Weekly Roundup: Fed Hits the Brakes on Rate-Cut Hopes
During the week, we added to our positions in Labcorp and Microsoft, and to Trade Desk twice.
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The major stock market indexes ended the week with a mixed day on Friday. However, for the week, all four notched gains, bringing all into positive territory on a quarter-to-date basis.
Stalling out the market’s progress from earlier in the week following Wednesday’s April CPI report were sobering comments from Fed officials on Thursday. The April core CPI reading improved to 3.6% on a year-over-year basis compared to rangebound readings of the last few months, but that April figure was still far from the Fed’s 2% target. Suffice it to say, Fed officials did not share the same enthusiasm for the April CPI report that the market did.
Those "cold-water" comments came from Cleveland Fed President Loretta Mester, New York Fed President John Williams, and Richmond Fed President Thomas Barkin who argued it may take longer for inflation to reach their 2% target. Mester stuck with higher for longer until the Fed “gains clarity about the path of inflation.” That jives with our comment Thursday that the Fed isn’t likely to start cutting rates until the core CPI moves below 3% on a sustained basis.
Fed Governor Christopher Waller did not comment on monetary policy during a presentation on Friday, but Fed Governor Michelle Bowman shared she sees inflation remaining elevated for some time. Bowman added that her baseline outlook continues to be that inflation will decline further with the policy rate held steady, but that she still sees a number of upside inflation risks .
In our view, Williams summed it up well on Thursday: “I don’t expect to get that greater confidence that we need to see on the inflation progress towards a 2% goal in the very near term.” Those collected comments put the market back into a mode of needing to see more of that good data Fed Chair Powell keeps talking about. They also led the yield on the 10-year Treasury to rebound on Friday.
Because the next set of economic data will be Thursday’s Flash May PMI report, odds are the market will be treading water early next week. When we get that report, we will look for what it says about the speed of the economy as well as inflation and job creation. We’ll be triangulating those learnings against this week’s April inflation reports as well as the newly updated Atlanta Fed GDPNow figure of 3.3% for the current quarter.
The ideal scenario will be for the Flash PMI report to signal further inflation improvement and the economy continuing to grow above trend. That would mean another supportive data point on the inflation front and an economy that can continue to deliver robust earnings growth. As we digest that report, we’ll be sure to share what it means for the economy, the Fed, and the Portfolio.
In terms of the market, the last 30 days or so have seen strong moves in the S&P 500 as well as the Nasdaq, and that has their relative strength indexes closing in on overbought status. At 65-68 exiting the week, they aren’t there yet but it will be something we watch closely as we plot our next moves with the portfolio, especially with the Fear & Greed Index back to flashing “Greed” from “Neutral” last week.
Our collective maneuvers with the portfolio over the last several weeks mean we have more capital, but it also means we will need to be more selective going forward when putting cash to work. We’ll stay focused on companies with superior EPS prospects and tailwinds powering their businesses. With a light start next week, we’ll use that time to revisit some of the positions that are bumping up against their price targets, as well as potential entry points for another Bullpen resident.
Catching Up on the Portfolio This Week
As hard as it might be to believe, Friday was the halfway point in the current quarter. While the last month has been a strong one for the market and has brought stronger double-digit moves for Apple (AAPL), Applied Materials (AMAT), Costco (COST), Alphabet (GOOGL), Marvell (MRVL), Morgan Stanley (MS), Nvidia (NVDA), Universal Display (OLED), Qualcomm (QCOM) and Trade Desk (TTD) shares, the S&P 500 is up less than 1% quarter to date. On a year-to-date basis, we are running neck and neck with the S&P 500, which speaks to the moves we’ve made with the portfolio over the last several weeks.
During the week, we added to our positions in Labcorp (LH), Microsoft (MSFT), and not once but twice with Trade Desk (TTD). We also dug a bit deeper into Eaton Corp. (ETN), indicating what it would take for us to consider graduating them from the Bullpen. On Friday morning, we boosted our price target on Applied Materials to $240 from $225 but kept our Two rating intact.
Office Hours in the Portfolio Forum next week will be on Tuesday, May 21, from 4 PM – 5 PM ET and again on Thursday, May 23, from 12 PM – 1 PM ET. We hope to see you there!
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 13: Buckle Up for a Busy Week of Economic Data and Earnings
Tuesday, May 14: Our Game Plan Going Into CPI and Why Walmart's Earnings Are So Important
Wednesday, May 15: These Portfolio Names Are Ripe for the Picking
Wednesday, May 15: Bob Lang on Why Technicals Matter, His Favorite Indicators, and More
Friday, May 17: Thoughts on Nvidia Ahead of Earnings
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: VanEck Retail ETF
With the poor retail sales report from April released this past week there could be more weakness coming to retail companies — as more of those companies report next week. Of course, we did have Walmart (WMT) earnings this week and they are not seeing the same pressures for the consumer, but then this is Walmart, the biggest revenue earner around. Amazon is right on its heels, however, and is making a run at the big retail chain. The consumer has been threatened before and counted out many times only to revive and thrive.
The retail ETFs are a nice glimpse into the behavior of the entire group, though, rather than picking and choosing companies. There are two big retail ETFs out there and they have stark differences. The SPDR Retail index (XRT) differs from the VanEck Retail ETF (RTH) as the RTH carries a heavier weighting in Amazon. In fact, Amazon is about 20% of that ETF, and only about 1.5% of the XRT. Hence, since we own Amazon in TheStreet Pro portfolio, it is nice to look at this ETF for a view on how this position is doing relative to the rest of retail.
The RTH has been going sideways since the start of April, but the indicators are showing strength. We see a nice up move in money flow (bottom pane), a buy signal on Moving Average Convergence Divergence (MACD), and overbought stochastics. This tells us momentum is still positive in RTH, and a series of higher highs, and higher lows since early May signals bullishness, too. We see a breakout above $204 as being very bullish for this ETF.
Other charts we shared with you this week were:
Monday, May 13: S&P 500: Correction is Over!
Monday, May 13: Energy Select Sector SPDR Fund (XLE): This Energy ETF Is Strong During Volatile Moments
Tuesday, May 14: TreeHouse Foods (THS): Our Latest Bullpen Stock May Soon Offer a Nice Entry Point
Wednesday, May 15: First Trust Nasdaq Cybersecurity ETF (CIBR): This Cybersecurity ETF Is Positioned to Move Substantially Higher
Thursday, May 16: United Rentals (URI): United Rentals Is on the Move
The Coming Week
Following this week's barrage of April economic data points, the pace slows meaningfully. Stll, next week will bring the latest Fed meeting minutes and the Flash PMI reports for May. We’ll be giving the PMI data as well as the Fed meeting minutes the usual scrubbing as we look for clues on the velocity of the economy, job creation, and inflation.
We’ll also have another wave of Fed speakers, with nine appearances on Monday and Tuesday alone. Following the market’s renewed enthusiasm for the start of rate cuts following this week’s April CPI data, we’ll be sure to balance those Fed comments, which are likely to mimic those we received on Thursday and Friday, calling for “more good data” before embarking on a rate-cutting cycle. To us, the more important Fed official comments to watch next week will be those after Thursday’s Flash PMI reports are released.
Here's a closer look at the economic data coming at us next week:
U.S.
Wednesday, May 22
● MBA Mortgage Applications – Weekly (7:00 AM ET)
● Existing Home Sales – April (10:00 AM ET)
● EIA Crude Oil Inventories – Weekly (10:30 AM ET)
● FOMC Meeting Minutes – May (2:00 PM ET)
Thursday, May 23
● Chicago Fed National Activity Index – April (8:30 AM ET)
● S&P Global Flash Manufacturing & Services PMI – May (9:45 AM ET)
● New Home Sales – April (10:00 AM ET)
● EIA Natural Gas Inventories – Weekly (10:30 AM ET)
Friday, May 24
● Durable Orders – April (8:30 AM ET)
● The University of Michigan Consumer Sentiment Index (Final) – May (10:00 AM ET)
International
Wednesday, May 22
● Eurozone: ECB Non-Monetary Policy Meeting
Thursday, May 23
● Eurozone: HCOB Flash Manufacturing & Services PMIs – May
● Eurozone: Flash Consumer Confidence – May
The next tranche of earnings skews heavily toward retail, with the likes of Target (TGT), Macy’s (M), TJX Companies (TJX), and VF Corp. (VFC) on deck. We’ll be parsing their comments about consumer demand, selective spending, and trading down, but we’ll also be watching their inventory levels. Should we see a combination of weak consumer demand and rising inventory levels, it could be a harbinger of more aggressive promotional activity and margin pressure.
From a portfolio perspective, the only company we have reporting next week will be Nvidia (NVDA), and its results and guidance will be closely watched by the investing community. Given the headlines and spending announcements surrounding AI and data center, the market’s expectation for Nvidia’s results and guidance will be high. This means the company will need to surprise to the upside, and if it doesn’t, we could see the shares trade off in response. Because we are in the early innings of AI, we intend to be owners of NVDA shares for some time. The outcome, which we think should be a favorable one, will set the table for Marvell’s (MRVL) earnings the following week.
Here's a closer look at the earnings reports coming at us next week:
Monday, May 20
● Close: Palo Alto Networks (PANW), Trip.com (TCOM), Zoom Video (ZM).
Tuesday, May 21
● Open: AutoZone (AZO), Eagle Materials (EXP), James Hardie (JHX), Lowe’s (LOW), Macy’s (M).
● Close: Toll Brothers (TOL), Urban Outfitters (URBN).
Wednesday, May 22
● Open: Analog Devices (ADI), Dycom (DY), Target (TGT), TJX Companies (TJX).
● Close: Nvidia (NVDA), Snowflake (SNOW), VF Corp. (VFC).
Thursday, May 23
● Open: BJ’s Wholesale (BJ), Ralph Lauren (RL), Shoe Carnival (SCVL).
● Close: Deckers Outdoor (DECK), Dollar Tree (DLTR).
Friday, May 24
● Open: Big Lots (BIG), Buckle (BKE), Hibbett (HIBB).
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; $176.06; 1,035 shares; 4.19%; Sector: Communication Services
WEEKLY UPDATE: In last week’s Roundup, we shared that GOOGL shares were in a sideways consolidation, but this week the stock chugged higher following the company’s Google I/O event. The event reaffirmed our view that Google remains very well positioned when it comes to AI and its investments in Gemini and its broader generative AI strategy are evolving the current search experience to make it more natural, personal, useful, and impactful. Bank of America agreed with our view, adding it sees Google as a net AI beneficiary. Also lending support were reports that a bipartisan group of four U.S. senators, led by majority leader Chuck Schumer, are calling for at least $32 billion in congressional spending on artificial intelligence over the next three years to “harness the opportunities and address the risks” associated with the technology. We’ll monitor those developments in Washington to see how they progress and more importantly for specific spending details. We continue to see Google’s business and the shares as well positioned to capture the accelerating shift to digital advertising, especially in a presidential election year, as well as the cloud. Netflix (NFLX) opening its advertising business only strengthens this view. 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 dividend of $0.20 per share on June 17 to shareholders of record on June 10.
1-Wk. Price Change: 4.4%; 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; $184.70; 835 shares; 3.54%; Sector: Consumer Discretionary
WEEKLY UPDATE: Amazon shares gave back a sliver of their year-to-date gains this week, leaving them up more than 20% so far this year. April Retail Sales confirmed consumers continue to flock to digital shopping to stretch their spending dollars. The AMZN chart showed a strong overbought condition last week, so we are not surprised at this recent pullback towards support. The 20-day moving average was tested this week, an area where the stock often bounces higher. The April dip to the 100-day moving average was an anomaly; the following day saw a strong move back up as buyers stepped in to buy Amazon aggressively. This week Needham reiterated its "Buy" rating and kept its price target at $205. We raised our AMZN target to $220 last week. 13F filings show Michael Burry (Scion) dumped Amazon shares but the Soros Fund increased its holdings by 1.92 million shares (17%). We continue to see Amazon as well-positioned as shoppers re-embrace 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: -1.5%; 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; $288.79; 535 shares; 3.54%; Sector: Aerospace & Defense
WEEKLY UPDATE: Following Axon’s beat-and-raise March-quarter last week, we boosted our price target to $375 from $330 and lifted our rating to a One. However, AXON shares traded off this week as the company announced it would sell up to 1.95 million shares and company President Josh Isner sold 44,000 shares. While that is a sizable amount, Isner still owns almost 276,000 shares of AXON after that trade. The silver lining, in our view, is the shares have strong support at the $287 level giving newer members an opportunity. 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. The continued mix shift toward that higher margin and recurring cloud business should drive further margin expansion and EPS growth.
1-Wk. Price Change: -4.8%; 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 ; $10.66; 14,480 shares; 3.56%; Sector: Consumer Discretionary
WEEKLY UPDATE: Coty shares made a run to the 200-day and 50-day moving averages but were soundly rejected, and on strong turnover. Yet, we still see the stock rangebound with higher lows and lower highs. That is the textbook definition of a trendless stock. Retail sales figures for April were released and were quite disappointing, but as we discussed on this week’s Podcast there are no reporting lines in that report that capture Coty’s business. There is strong support at the $10.50 level but if that breaks, we could see a run to the October lows, circa $9. That will have us watching that $10.50 level closely. From a fundamental perspective, share gains and expanding margins support a bullish stance on the stock. 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, especially during the seasonally strong second half of the calendar year.
1-Wk. Price Change: -4.6%; 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; $71.92; 2,420 shares; 4.03%; Sector: Technology
WEEKLY UPDATE:
It was quite a week for Marvell as the stock moved above resistance on Thursday with some strong volume. That means we have a reference point near $70 if the stock decides to pull back. That level was breached after three attempts and with volume that was much better than average. A catalyst for the sharp rise was disclosure by Dan Loeb’s Third Point which had taken a stake worth $108 million in the company. Marvell will release earnings on May 30 after the market close, but quarterly results and guidance next week from Nvidia (NVDA) will set the table for Marvell’s results. Looking at the shares, the next level of resistance is close at $76 but above there, we could see a run towards all-time highs at the $86 level. Indicators are bullish as we do not see Marvell as being overbought yet (thus not due for a pullback). 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.
1-Wk. Price Change: 5.0%; Yield: 0.3%
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; $924.79; 180 shares; 3.82%; Sector: Technology
WEEKLY UPDATE: Despite Friday’s retrenchment, NVDA shares put in another positive showing this week, bringing their move over the last month to more than 20%. The company will report its quarterly results after Wednesday’s market close, and as we discussed in Friday’s video, we expect a solid earnings report, but its guidance will determine the next move in the shares. As we’ve seen in recent weeks, beat-and-raise earnings reports have driven stock prices higher while beat and in-line reports can weigh on stock prices. Should Nvidia’s guidance fall short of the market’s expectations, we may have room to add some additional NVDA shares to the portfolio. We remain in the early innings of AI adoption, and we intend to own NVDA as AI use cases spur further adoption. One example from this week came from Northrop Grumman (NOC), which announced an agreement for access and use of Nvidia AI software to accelerate development of some of the most advanced systems. During the week, Jefferies assumed coverage of Nvidia with a Buy rating and a price target of $1,200.
1-Wk. Price Change: 2.9%; 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; $94.78; 1,570 shares; 3.42%; Sector: Technology
WEEKLY UPDATE: Last week we boosted our price target on TTD shares to $110 from $105 and following Wednesday’s April CPI report we added to the portfolio’s TTD position. On Thursday, we dipped even further into TTD following news that Netflix (NFLX) would expand its ad-buying capabilities to include Trade Desk and others. Because of this Netflix news, we are likely to see upward revenue and EPS revisions for the coming quarters, and more than likely more in the Wall Street analyst community will bump up their price targets to those more in line with our own $110 target. Already, Wells Fargo has lifted its TTD target to $115 from $110, Citi reiterated its $112, and Loop Capital boosted its target to $109 from $102.
1-Wk. Price Change: 8.6%; 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; $173.14; 965 shares; 3.84%; Sector: Technology
WEEKLY UPDATE: Last week was a busy one for OLED shares that culminated with our raising our price target to $225 from $200. W Reports indicate Samsung is planning to bring an entry-level foldable smartphone with premium camera features to market in 2H 2024. Meanwhile, Chinese smartphone company Honor has introduced one of the thinnest foldable in the market, the Honor Magic V2. This supports the expected growth in foldable smartphones, a positive for Universal given the larger display format. Those reports also explain reports Apple recently inked a deal with Samsung for foldable devices. 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 further revisit our OLED price target.
1-Wk. Price Change: 1.2%; 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 ; $259.10; 613 shares; 3.65%; Sector: Building Materials
WEEKLY UPDATE: It was a quiet week for VMC shares following recent price target hikes by Stephens and Raymond James last week. The next known catalyst will be the April Construction Spending report. We remain bullish on the shares as various stimulus spending programs drive non-residential construction and demand for Vulcan’s products, especially as we have entered the seasonally strong time of year for construction activity. The modest sequential decline in April single-family housing starts is a modest headwind, but we see that market turning around when the Fed starts its rate-cutting cycle. Vulcan will pay its next quarterly dividend of $0.46 per share on June 7 to shareholders as of May 24. With the shares moving below the 50-day moving average, the $266 price level could present some resistance near-term. Should the shares successfully test the 100-day moving average at $251 that would be a nice place for new members to pick up some VMC shares.
1-Wk. Price Change: -4.8%; 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 ; $189.87; 790 shares; 3.45%; Sector: Technology
WEEKLY UPDATE: Apple had a pretty strong week, rising quietly on strong turnover that left the shares up ~15% over the last month. However, the chart shows an overbought condition with the shares right at resistance from the last minor top from early February. If Apple can get above that level, then the old highs near $198 are the next challenge. The shares holding the earnings gap from early May is positive, and the trend shows higher highs and higher lows. MACD is on a strong buy signal, but the RSI is overbought, and while money flow is being dragged higher it is still negative. We are likely to hear Apple chatter grow as we approach the June WWDC event. 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: 3.7%; 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 ; $212.08; 460 shares; 2.24%; Sector: Semiconductor Manufacturing
WEEKLY UPDATE: Following better-than-expected quarterly results that showcased solid margin improvement, we boosted our AMAT price target to $240 from $225. We see that translating into even greater profit and EPS generation as rising chip capacity utilization levels drive incremental chip equipment demand and the impact of reshoring spending, like the U.S. CHIPS Act, kicks in. Ahead of that inflection point, which looks to be a H2 2024 event and should reignite revenue and EPS growth, we’ll look to revisit our Two rating for AMAT. Between now and then, if AMAT shares find their way to the $195 level, that could be an opportunity to pick up more shares for the portfolio.
1-Wk. Price Change: 1.1%; 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 $240; Rating: Two
Panic Point: $175
RISKS: Manufacturing and Supply Chain, Competitive Factors, Government Regulation, Technology Change.
Bank of America Corp. BAC ; $39.31 ; 4,000 shares; 3.61%; Sector: Financial Services
WEEKLY UPDATE: BAC shares notched another positive week, bringing their year-to-date gains to a mid-teens percentage. During the Week, CEO Brian Moynihan shared that despite high interest rates in the U.S., the return of real wage growth has helped consumers be resilient. Moynihan also noted that businesses are back to exploring M&A, as financing costs become more predictable, and the economy remains strong. We see those supporting the company’s various businesses, but with BAC shares bumping up against our price target, we’ll look to revisit it as more Q2 2024 economic data are 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: 2.2%; Yield: 2.4%
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 ; $795.81; 240 shares; 4.39%; Sector: Consumer Staples
WEEKLY UPDATE: COST shares continued to chug higher this week, bringing their move over the last month into the low double-digits, significantly more than the mid-single-digit move in the S&P 500. Once again comparing the April Retail Sales report against Costco’s April sales report leaves little question about Costco continuing to win consumer wallet share. At its Go-Get 2024 event, Uber (UBER) said it is partnering with Costco to make it easier than ever to get your order delivered to you. We see this as a nice incremental win for Costco, which continues to explore new ways to bring value to its membership at a time when consumers are looking to stretch their spending dollars. For Uber, it’s a boon for its delivery business and one that is likely to come at the expense of Instacart (CART). We continue to wait for the long-anticipated membership price hike, which would give us a reason to revisit our current $830 price target. Costco will report its quarterly results on May 30.
1-Wk. Price Change: 1.1%; 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; $547.71; 275 shares; 3.46%; Sector: Health Care
WEEKLY UPDATE: There were no notable company-specific developments this week. Our rating for ELV remains a Two and our target is $560. As we move into the late May-July conference season, our plan will be to mine competitor presentations and revisit our price target as needed.
1-Wk. Price Change: 1.6%; 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 ; $94.97; 1,345 shares; 2.94%; Sector: Energy
WEEKLY UPDATE: Oil moved higher for the first time in three weeks as favorable economic data in China and the U.S. pointed to improving demand. In China, its industrial output rose 6.7% year on year in April amid an upswing in the country’s manufacturing sector. Despite the decline in U.S. manufacturing captured in the April Industrial Production report and the downtick in April single-family housing starts, the latest revision for the Atlanta Fed GDPNow model puts the US economy at 3.3% in the current quarter. That has helped fuel the recent rebound in XLE shares, but as we look ahead we will continue to monitor Middle East tensions and reports some OPEC+ participants may not adhere to another extension of voluntary oil production cuts.
1-Wk. Price Change: 1.2%; 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 ; $55.92; 2,530 shares; 3.24%; 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. This week the shares moved beyond the strong level of resistance at 50-day and 100-day moving averages ($55.34-$55.57). We are interested in expanding the portfolio’s position size, but we will be prudent buyers of the shares. As we digest upcoming earnings from CIBR constituents, we’ll plot our next move with CIBR shares noting support near the $51 level.
1-Wk. Price Change: 2.7%; 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 ; $210.59; 610 shares; 2.94%; Sector: Healthcare
WEEKLY UPDATE: On Wednesday, we added to the portfolio’s holdings in Labcorp, leaving us some additional room left for our LH position size. The same day the company announced its latest product expansion, the launch of its first trimester preeclampsia screening test to be performed between 11- and 14 weeks gestation to determine the risk of developing preeclampsia before 34 weeks of pregnancy. It is the only test of its kind available in the United States and is relevant for all pregnant individuals, including those with a low- to average risk for preeclampsia or first-time pregnancies. 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: 1.4%; 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; $466.20; 330 shares; 3.54%; Sector: Aerospace & Defense
WEEKLY UPDATE: Lockheed’s Missiles and Fire Control was awarded a $332.13 million modification to contract W31P4Q-23-D-0003 for the Guided Multiple Launch Rocket System. The expected completion date is October 2027. Later in the week, the U.S. Government Accountability Office said Lockheed’s F-35 stealth fighter jet won’t have its most advanced capabilities until 2025 because of delays with a $1.8 billion upgrade. The upgrade package, known as Technology Refresh 3, or TR-3, will boost processing power by 37 times and memory capacity by 20 times. Our view remains that the key catalyst for Lockheed’s EPS and LMT shares is the re-ramp for F-35 shipments that are now expected to begin in Q3 2024. 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. We will continue to monitor geopolitical tensions and the U.S.’s willingness to deliver additional weapons to its allies as well as non-U.S. defense spending.
1-Wk. Price Change: -0.6%; 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; $460.27; 275 shares; 2.91%; Sector: Info. Tech
WEEKLY UPDATE: Following a few price target increases last week for MA shares, Piper Sandler initiated coverage this week with an "Outperform" rating and a $531 target. The rationale is the “massive untapped opportunity” for consumer payments. We agree Mastercard remains well-positioned to take advantage of the ongoing shift to cards as well as digital and mobile payments from cash and check. However, we would want to see more progress on Mastercard’s China JV to become more bullish on the shares, especially amid softer consumer spending in the U.S. From the NY Fed's Quarterly Report on Household Debt and Credit, "In the first quarter of 2024, credit card and auto loan transition rates into serious delinquency continued to rise across all age groups. An increasing number of borrowers missed credit card payments, reveling worsening financial distress among some households." As it relates to U.S. consumer spending prospects, we will continue to monitor consumer credit, job growth, and real wage growth data. On Friday, a federal judge on Friday temporarily blocked the U.S. government from trying to limit credit-card late fees, a positive for MA shares.
1-Wk. Price Change: 0.7%; 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; $420.21; 377 shares; 3.64%; Sector: Technology
WEEKLY UPDATE: Following the April CPI report, we added to the portfolio’s position in MSFT shares. Through its efforts as well as its partnership with OpenAI, we see Microsoft well positioned to capitalize on AI adoption in the enterprise and other institutions. That in turn should bolster cloud adoption, a positive for Microsoft’s cloud business. Reports that a bipartisan group of four U.S. senators, led by majority leader Chuck Schumer, have called for at least $32 billion in congressional spending on artificial intelligence over the next three years to “harness the opportunities and address the risks” associated with the technology is another potential tailwind for MSFT shares. We also see Microsoft’s PC and tablet business benefitting from the looming AI-on-device upgrade cycle. Late in the week, the U.K.’s Competition and Market Authority shared that Microsoft's partnership with French artificial intelligence startup Mistral AI does not qualify for an investigation.
1-Wk. Price Change: 1.3%; 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 ; $100.22; 1,575 shares; 3.63%; Sector: Financial Services
WEEKLY UPDATE: We continue to watch recently priced IPOs as an indicator of the overall 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: 2.0%; Yield: 3.4%
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; $182.19; 800 shares; 3.36%; Sector: Consumer Defensive
WEEKLY UPDATE: During the week, we noted PepsiCo PEP shares have been a stealthy performer over the last several weeks and are approaching our $185 price target. This week the accelerating in grocery store sales found in the April Retail Sales report confirmed consumers are re-embracing eating at home, a positive for PepsiCo’s snack and beverage businesses. Comments from Walmart (WMT) during its earnings call this week also confirmed the uptick in grocery. Those data points along with Topgolf (MODG) announcing an eight-year beverage agreement with PepsiCo have us revisiting our price target. 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: 1.3%; 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 ; $193.85; 1,040 shares; 4.62%; Sector: Technology
WEEKLY UPDATE: Qualcomm shares put in a nice week, making new highs on very strong turnover. This tells us big institutions are constantly adding the name to their portfolios, and with a series of higher highs and higher lows Qualcomm is in an uptrend condition. Relative strength shows QCOM is overbought but that condition can last for a while, as we saw happen back in November and December of 2023. When overbought in November, Qualcomm rose another 16% into the end of the year. The company and Ampere are collaborating to develop AI inferencing solutions with Ampere using the Qualcomm Cloud AI 100 cards in the development process. The company and oil giant Aramco announced a collaboration that includes accelerating the development of the industrial 4G/5G ecosystem, which could be big in driving the digital transformation and enhancing operational efficiencies for the energy company down the road. Daiwa Securities upped their price target on Qualcomm to $210 from $175 and kept an "Outperform" rating. We continue to see Qualcomm well-positioned for the upcoming AI-on-device upgrade cycle for both PCs and smartphones. Upcoming catalysts include Qualcomm presenting at the upcoming JPMorgan Global Technology and Media Conference on May 21, Taiwan Semi’s (TSM) May revenue report, and Apple’s (AAPL) WWDC event in June. As we digest those events, we will update our QCOM price target as needed.
1-Wk. Price Change: 6.5%; Yield: 1.8%
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 ; $223.66; 238 shares; 1.23%; Sector: Commodities
WEEKLY UPDATE: Gold had a strong week as the metal is back above $2,400 per ounce. The recent 5% correction has been completed and GLD shares remain in a strong uptrend of higher highs, and higher lows. We could see the recent all-time highs in GLD at $225 challenged very soon. The data this past week were favorable for gold and other commodities, and the U.S. dollar has resumed its downtrend. Fed Chair Powell spoke this week and signaled patience is needed in rate policy, which means they still see a problem with inflation being too high, something we saw in the elevated PPI figures on Tuesday. Gold remains a great diversifier for market exposure, especially as Middle East tensions remain.
1-Wk. Price Change: 2.3%; 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 ; $685.79; 232 shares; 3.64%; Sector: Industrials
WEEKLY UPDATE: United Rentals continues to march towards all-time highs, which are just above $722 from late March. At that time, URI stock peaked in an overbought condition and was ripe for a pullback. That move down was to the 100-day moving average where buyers picked up the stock and started a new uptrend of higher highs, and higher lows. We discussed the chart in great detail this week and where the shares could go. Earlier in the week Evercore ISI upped their price target to $771 from $740. We continue to various infrastructure and stimulus programs driving non-residential construction and demand for United’s rental fleet. As fleet utilization levels rise, we should continue to see margins move up, driving bottom-line growth. 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: -1.8%; Yield: 1.0%
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 ; $210.44; 425 shares; 2.05%; Sector: Industrials
WEEKLY UPDATE: Shares of Waste Management WM perked up late in the week following reports the company is working with JP Morgan (JPM) to explore the sale of its renewable natural gas business which could be worth about $3 billion. Previously, the company targeted investing ~$1.2 billion in the business between 2022-2025, but the sale would not only bring in capital it would also allow management to redirect those investment dollars. If the sale is accomplished, potentially to an energy company or perhaps even private equity, received funds could be used to accelerate the rollout of automated trucks, make acquisitions, or reduce leverage on the company’s balance sheet. Any of those moves could warrant revisiting EPS expectations and potentially our price target. Next week’s Flash May PMI report will provide a fresh look at the economy, and a pick-up in manufacturing activity would be positive for Waste’s business. We also look forward to the April Construction Spending report and what it says about non-residential construction. 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 remains on our shopping list of stocks.
1-Wk. Price Change: -0.5%; 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.
