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Trifecta Stocks

Trifecta Stocks Weekly Roundup

By Chris Versace and Bob Lang | 2018-03-16 17:56:08.0

The Stock Market This Week

While the market was down modestly over the last five trading days, it was really just treading water ahead of next week’s Federal Open Market Committee meeting and digesting the latest news emanating from Washington. We entered the week with less bite than bark from President Trump’s steel and aluminum tariffs, before a new round of uncertainty as the administration slapped sanctions on Russia, prepares tariffs and other anti-China measures, and Trump claimed the U.S. is at a trading disadvantage with Canada. At the same time, there were more departures from the executive branch, which could impede its ability to advance Trump’s agenda.

Amid the Washington news flow, monthly retail sales once again disappointed, but other reports, including February Industrial Production and several March regional Fed bank surveys, pointed to a pickup in the economy. With the pace of inflation having been a hot topic of late, the February Consumer Price Index and Producer Price indices were rather benign and didn’t stoke the flames of inflation running amok.

With just nine days of trading left in the quarter, the Nasdaq Composite Index is leading the charge higher this year, up more than 8% year to date. By comparison, the Dow is up less than 1% while both the S&P 500 and Russell 2000 have increased around 3%.

The Trifecta Portfolio This Week

With the market stuck drifting lower for the week, we saw much of the same for the Trifecta portfolio. A quant rating downgrade forced us to exit our position in Alphabet/Google (GOOGL:Nasdaq), but we added new positions in United Rentals (URI:NYSE) and Vulcan Materials (VMC:NYSE), and also brought Dycom Industries (DY:NYSE) back into the fold. With two weeks left in the quarter we have ample fire power to deploy in the coming weeks to scale into these newer positions as well as add additional new ones.

What to Watch Next Week on the Economic and Earnings Front

During the last few days, we’ve gotten several pieces of economic data that, together with others from the last few weeks, have led the Atlanta Fed to downgrade its GDP view for the first quarter to 1.9% from its robust forecast of more than 5% at the start of the quarter. Given the change we’ve witnessed in the Citibank Economic Surprise Index (CESI) these negative revisions are far from surprising, and they are joined by GDP forecast cuts from J.P. Morgan and Goldman Sachs. J.P. Morgan reduced its forecast to 2% from 2.5% for the current quarter, while Goldman Sachs reduced its call to 1.8% from 2.0%.

Some of this can be attributed to rising debt levels that are constraining consumer spending, as we saw in the overall disappointing February Retail Sales report, but we are also starting to see the benefits associated with tax reform on business spending and an improving economy. Confirmation of that was in the February reports for Housing Starts and Industrial Production as well as the March readings for both the Empire Manufacturing and Philly Fed indices. Below the headline figures in those two March figures were robust shipment and order activity numbers.

There’s a full plate of March economic data on tap in the coming weeks, and should it mimic the tone of those two regional Fed indices odds are we will see some upward revisions in those recently cut GDP forecasts. We consider this a positive for our shares of Paccar (PCAR:Nasdaq), United Rentals (URI:NYSE) and Vulcan Materials (VMC:NYSE). We’d also point out that the February Retail Sales report, while disappointing, was very confirming for our Amazon (AMZN:Nasdaq) and Costco Wholesale (COST:Nasdaq) shares.

At the same time, inflation data for February has been coming in as expected and this likely leaves ample room for the Fed to offer a more dovish view exiting its next FOMC meeting being held next week. At that meeting, it is widely expected the central bank will embark on the first of its three much-telegraphed rate hikes, but it will be its updated economic, inflation and monetary policy outlook that will capture investor attention. Given the mixed bag of economic data thus far and the recent spat of inflation data, odds are the Fed will stick to its expected three interest-rate increases forecast although market watchers will be parsing the language for hints of a potential fourth rate hike.

Considering that we are still relatively early in the year, and this is Powell’s first press conference as Fed Chief, there will likely be little cage-rattling next week, especially with the new air of uncertainty in D.C. when it comes to tariffs and trade. We suspect the Fed is also watching to see the impact of tax reform as well as monitoring developments for Trump’s infrastructure plan.

Compared to this week, we have a relatively short list of economic data, which likely means even more attention will be placed on the outcome of the Fed’s monetary policy meeting. Following the Fed’s rate decision on Wednesday (March 21), we’ll get the first look at how the global economy fared in March courtesy of the March Flash PMI readings from IHS/Markit.

With two weeks to go until the end of the current quarter, and roughly a month until first-quarter 2018 earnings season gets under way, we have no companies reporting next week, but there are several that we’ll be assessing. Given our positions in Amazon, McCormick & Co. (MKC:NYSE) and Applied Materials (AMAT:NYSE), this short list includes FedEx (FDX:NYSE), ConAgra (CAG:NYSE), Darden Restaurants (DRI:NYSE), Nike (NKE:NYSE) and Micron (MU:NYSE).

As a reminder, Ones are stocks we would buy right now, Twos are stocks that we'd buy on a pullback, Threes are stocks we would sell on strength and Fours are stocks we want to unload as soon as our trading restrictions allow. (The information in parenthesis at the start of each company rundown contains the company's stock symbol, the stock's most recent closing price and its percentage weighting in the model portfolio. For up-to-date information about the model portfolio, click here.)


Amazon (AMZN:Nasdaq; $1,571.68; 5.09%): We continue to favor Amazon shares even after their strong year to date move given the accelerating shift to digital commerce and ongoing cloud adoption. As we saw in the February Retail Sales Report, digital sales continued at a brisk pace taking share from general merchandise and department stores. Amazon continues to grow its offering, including private-label products under its Prime umbrella as well as expanding the number of third-party products. Unlike other bricks-and- mortar retailers, the shift toward cloud is fueling the high-margin Amazon Web Services business, which serves to fund its investments in international retail, digital content and other areas. New reports reveal that Amazon’s move into original video programming is paying off as it pulled in some 5 million Prime subscribers between late 2014 and early 2017. As the company continues to invest in this content offering, we see it helping grow its global Prime user base. We see Amazon shares as ones to own as the company continues to disrupt the global retail industry and encroach on others as well. Our price target is $1,1750. Current Street Quant Rating: B.

Apple (AAPL:Nasdaq; $178.02; 4.18%): Apple shares were largely unchanged this week. While the shares had a slow start to the quarter, with today’s market close they are up around 5.5% year to date, well ahead of the major market indices. Apple shared the kickoff date for its World Wide Developer Conference 2018 (June 4), an annual event at which the company typically unveils new software for its Macs, iOS and other devices. From time to time, it does presents new hardware at this event as well, but it tends to be more software focused. Also this week, Apple revealed it now has 38 million Apple Music subscribers, up by 2 million month over month, and we see this as adding to its growing services revenue stream. Apple continues to move forward on the original content front, as it ordered its first animated series that will be added to its original programming lineup, and also acquired magazine subscription app, Texture. From our perspective, the Apple story remains very much intact and with several potential positives to be had in the coming quarters, including a new MacBook Air, headphones, a new iPad as well as iPhone models, we intend to play the long game with the stock. When Apple reports its March- quarter results, we expect a clearer picture on how it expects to leverage the benefits of tax reform on its capital structure and detail potential dividend and buyback plans. Our price target on Apple shares is $200, and our rating a One. Initial and current Street Quant Rating: A-.

Applied Materials (AMAT:Nasdaq; $59.44; 5.12%): Applied Materials is a leading provider of nano-manufacturing equipment, services and software to the semiconductor, flat-panel display and solar industries. After grinding their way steadily higher over the last several weeks, the shares dropped 3.5% this week. From growing memory demand, 5G chips sets, 3D sensing and augmented reality to virtual reality and the Internet of Things, we see a robust outlook for chip demand in the coming years that will drive demand for semi-cap equipment. Our next signpost for the shares will be when memory company Micron Technology (MU:NYSE) reports its quarterly results on March 22. Also, let’s not forget Applied’s recently upsized dividend and buyback programs, which, in our view, make for a compelling case for owning AMAT. Our price target on AMAT remains $70. Initial Street Quant Rating: A-; Current Street Quant Rating: B.

Dycom Industries (DY:NYSE; $112.81; 2.28%): On Tuesday we called up shares of specialty contractor Dycom Industries from the Bullpen. Dycom is poised to benefit from the accelerating buildout of 5G and gigabit internet networks. The first quarter is the seasonally weakest for Dycom, and we could see some impact from the recent winter storms in the Northeast on its business. At the same time, Dycom’s customers are beginning to deploy these next-generation networks as well as add incremental capacity to existing 4G and cable networks. For that reason, we are easing into the position and will look to scale into the shares either on weakness or on signs its customers are building these next-gen networks faster than Wall Street expects. Our price target for DY shares is $140, or just under 20x next year’s consensus earnings estimates of $7.05 per share, up from $5.66 this year. The initial Street Quant Rating for DY shares is B+.

Facebook (FB:Nasdaq; $185.09; 4.90%): The bouncing back and forth that we saw during February in shares of this social media platform company continued this week leaving the shares virtually unchanged week over week. The two standout events over the last several days were on the content front as Facebook inked a licensing deal with Warner Music Group that allows for the use of Warner’s songs on its platforms and includes the development of “new products for users.” We see this as Facebook laying the groundwork to compete with Alphabet/YouTube and others in streaming music. The other item was the greater detail over Facebook’s plans for video news on its original content Watch tab, which could launch this summer. Facebook is currently testing partnerships with 10 publishers and is reportedly paying upfront for content creation. We view the push into original content, news and streaming of sporting events as helping Facebook become even stickier with its user base, while driving usage that will attract advertisers. Our price target is $225. Initial Street Quant Rating: A-; Current Street Quant Rating: A.

Paccar (PCAR:Nasdaq; $67.74; 3.75%): Shares of this heavy-duty and medium-duty truck manufacturer traded lower this week, but the combination of today’s February industrial production report and the most recent truck tonnage data keep our bullish stance intact. In early April we will get the preliminary March heavy and medium duty truck orders numbers, and thus far industry orders have been strong year over year in 2018 owing to the current industry truck shortage, which bodes well for rising production levels and profits at Paccar. Our $85 price target equates to just under 16x estimated 2018 EPS. We’ll look to aggressively scale into the position should the market come under further pressure and drag PCAR closer to $60. Initial Street Quant Rating: B+.

ProShares Short S&P 500 ETF (SH:NYSE; $29.19; 3.75%): As the market moved lower this week, our inverse ETF, SH, rose in response. With the return of volatility, we will keep the position intact as we collect data leading up to the Fed’s next FOMC meeting. At that meeting the Fed will update its economic outlook, which should shed some light on whether we get three or four rate hikes in 2018. We also see other bumps ahead -- including consumer and corporate tax-reform spending assumptions that could fall short of expectations -- that warrant holding SH shares. The Street Quant Rating on SH shares is D-, which easily fits with the mandate that inverse ETFs and shorts have a Quant Rating below C+.

ProShares Short Dow 30 ETF (DOG:NYSE; $14.69; 3.66%): Much like our SH position, DOG shares ended higher this week as the Dow Jones Industrial Average declined over the last five days. Given the market concerns noted above, we'll continue to hold DOG as part of our overall hedging strategy for the near term. DOG shares have a Street Quant Rating of D; that's well below a C rating, which meets our investment criteria for inverse ETFs. Our price target for DOG shares is $25.

ProShares Short Russell 2000 ETF (RWM:NYSE; $40.73; 3.64%): Similar to our other inverse ETF positions, this inverse ETF for the small-cap-heavy Russell 2000 index (IWM:NYSE) moved higher week over week. And like our other inverse-ETF positions, we're going to keep the RWM position intact near term, as part of our overall hedging strategy given the market’s stretched valuation, potential risk in tax-reform spending assumptions and likelihood the market will retest its recent lows in the coming weeks. RMW shares have a Street Quant Rating of D. That's well below a C rating, which means RWM meets our investment criteria. Our price target for RWM shares is $67.

United Rentals (URI:NYSE; $186.29; 2.01%): On Monday we called up shares of this equipment rental company from the Bullpen and established a $220 price target. While the stock has traded off during the renewed market volatility this week, the underlying data keeps up bullish as we head into the seasonally stronger spring and summer construction period. Looking at the Architectural Billings Index (ABI), Architecture firms started 2018 on a positive note as AIA’s index rose to 54.7, its highest January score since 2007. Amid the market’s focused attention on potential steel and aluminum tariffs, it missed the detail contained in the January Construction Spending report showing private nonresidential commercial construction rose 6.4% year over year while public nonresidential commercial construction jumped 30% year over year. We will continue to monitor construction and related data as we look to build out our URI position in the coming weeks, as well as developments in Washington to further the president’s infrastructure spending framework. Initial Street Quant Rating: B.

Universal Display (OLED:Nasdaq; $124.00; 3.85%): Universal is a chemical and IP licensing company that is benefiting from ramping demand for organic light-emitting diode displays in a number of markets, not just smartphones. During the week Universal’s CFO presented at the Susquehanna International Group Technology Conference at which he reaffirmed the company’s view the first half of 2018 will be a period on recent capacity addition digestion for the organic light-emitting diode industry. He also restated the company’s view calling for capacity additions to resume in the second half of 2018 and 2019, most notably in China. All in all, industry capacity is expected to grow 50% between 2019 and 2017 as new applications come to market. One such example -- auto companies ranging from Audi, Mercedes, and others are talking about utilizing organic light-emitting diode displays in the dashboard -- was cited. We suspect OLED shares will be range bound near-term with the next catalyst being the announcement and shipping of smartphone, tablets and other products that use organic light-emitting diode displays. We have seen such periods of digestion before that preceded another leg up in demand. We will continue to be patient. Our long-term price target is $225 and our rating a One. Current Street Quant Rating: B.

Vulcan Materials (VMC:NYSE; $117.12; 1.90%): On Monday we also called up shares of this construction aggregates (primarily crushed stone, sand and gravel) and asphalt mix and ready-mixed concrete company from the Bullpen and established a $155 price target. While the shares have traded off during the renewed market volatility this week, the underlying data keeps up bullish on the shares as we head into the seasonally stronger spring and summer construction period. Looking at the Architectural Billings Index (ABI), Architecture firms started 2018 on a positive note as AIA’s index rose to 54.7, its highest January score since 2007. Amid the market’s focused attention on potential steel and aluminum tariffs, it missed the detail contained in the January Construction Spending report showing private nonresidential commercial construction rose 6.4% year over year while public nonresidential commercial construction jumped 30% year over year. We will continue to monitor construction and related data as we look to build out our VMC position in the coming weeks as well as developments in Washington to further the president’s infrastructure spending framework. Initial Street Quant Rating: A-.


Costco Wholesale (COST:Nasdaq; $185.87; 4.32%): Shares of this membership-driven discount warehouse company traded off modestly this past week. Much like we have seen over the last several months, the February Retail Sales report, when compared with Costco’s February same-store sales figures, offered confirmation that Costco continues to gain wallet share. With consumer debt levels sapping buying power, we see club members increasingly turning to Costco to stretch their spending dollars as the company expands its offerings, warehouse count and digital business. In the coming quarters, Costco expects to open a number of new warehouse locations, which bodes well for its high-margin membership fee income. Our price target remains $200. Initial Quant Rating: B. Current Quant Rating: B+.

McCormick & Co. (MKC:NYSE; $107.81; 5.24%): Shares of this spice-and-marinade company dipped after their recent march higher over the last several weeks, but they are still up around 3% over the last month and roughly 6% year to date. One of the driving forces behind that move is the data showing a challenging environment for restaurant sales from a sales and traffic perspective. Per data published by TDn2K, February restaurants results were soft industry-wide, and all segments reported negative sales. We found confirming data in the February Retail Sales report that showed year-over-year sales from Food & Beverage Stores outstripping that from Food Services & Drinking Places, keeping the trend of the last several months intact. Given the strong rise in the shares over the last several weeks, we downgraded them last week to a Two rating from One. Initial Street Quant Rating: B+. Current Street Quant Rating: A+.

MGM Resorts International (MGM:NYSE; $35.99; 4.86%): After moving dramatically higher the prior week, shares of this gaming-and-hospitality company gave back some of their gains this week. With two weeks to go until the close of the current quarter, MGM shares are up some 8% quarter to date. We are hearing favorable commentary over the rebound in Las Vegas gaming activity from MGM competitors, and with a rich lineup of entertainment over the coming months we see MGM being a prime beneficiary. While we remain upbeat given industry commentary for February and expectations for the coming months, we’ll look for confirmation in the monthly gaming data, while we mindfully watch the $33.50 price point at which we would upgrade the shares given our new $39 price target. Current Street Quant Rating: A+.

Why Didn’t the Markets Sell Off More After the Cohn Resignation?

As the sun had just set on the trade on a Tuesday evening last week, news hit the wires that President Trump’s head of the National Economic Council was resigning. Gary Cohn, one of the more prominent figures on Wall Street (Goldman Sachs alum) was going to step down from this post as Trump’s chief economic advisor. There had been rumors last summer that he may depart as he didn’t see eye to eye with the president on some issues. This time around it was the same thing -- Cohn is not a believer in the president’s plan for implementing tariff taxes.

Following the news after the close, equity futures dropped sharply into the wee hours of the morning on Wednesday, March 7. At one point the Dow futures nosedived more than 400 points. But there was something fishy going on. There was not an offsetting jump in volatility, which you would normally see in panic selling. The same thing happened during the Brexit vote and the U.S. elections in 2016. You know how the markets reacted following those events.

We are not saying this was phony, there was certainly selling (or just lack of buyers, bids removed). However, there was little reason to panic from this indication, and indeed markets did recover somewhat, and rallied hard to end the week. The VIX closed sharply lower on the week, and once again portrays a bullish bias for the markets.

If you did the panic and sold based on this news last week, you’re buying back at higher prices.


Chris Versace & Bob Lang
Co-Portfolio Managers, Trifecta Stocks

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