Best US Stock Ideas Today

The authors of the content on this page from Sept 2012 to June 2017 are:
Market Commentaries: Gary Paulin, Ameet Patel, Paul Moran, Douglas Morton, Oliver Sherman, Ben Brownette, Rob Arnott, James Santo, Neil Campling
Research: Ameet Patel, Paul Moran, Douglas Morton, Oliver Sherman, Rob Arnott, Neil Campling

1.    Qualcomm: closing short. Returned 35%. Better alpha elsewhere from here
2.    Workday:  WoW NOW. Workday next. Stay short
3.    Fiat-Chrysler: the emperor’s new clothes. Stay short
4.    Facebook: simply Exceptional. Stay long. Buy
5.    Crown Castle: all good along the watch tower. Stay long
6.    Nvidia: Virtual Reality is real. Stay long
7.    General Motors: Ford points to strong 2016 for GM’s two largest markets. Stay long
8.    Arista Networks: Facebook CapEx increase a positive. Stay long
9.    MGM Resorts: Las Vegas commentary supportive. Stay long
10.  Apple “Super Cycle” Supply Chain Unwind (cont)
11.  United Rentals: it’s been painful but now what? We can’t avoid the value. Stay long
12.  Tractor Supply (QCC): SSS down, but EPS up
13.  Weekly S&P 500 vs Initial Jobless Claims – interesting pattern


 

1.    Qualcomm: closing short. Returned 35%. Better alpha elsewhere from here

Starting from the China issue we highlighted last April (which has abated a little) through poor execution, strategy mis-steps, socket losses and slow response to competitive pricing Qualcomm has been a key structural Short. Results last night were better-than-feared but guidance once again disappointed, especially in light of December’s attempt at an upbeat outlook. Recent licensing deals could bring some visibility and stability and it feels as if now is the time to bank the return and move on to other short opportunities (of which we see plenty).

Rate of change of downgrades is likely to slow. Previously Qualcomm traded at a 50% premium valuation to its largest customer and given the overlap in businesses this made little sense. That premium is now just ~10%. Since the Short call in April last year the stock has fallen 35%, double the decline in the Sox, and 3x the S&P 500.

CLOSE THE SHORT. In US Semis, we remain short Skyworks.

2.    Workday: WoW NOW. Workday next. Stay short

ServiceNow -21% on disappointing numbers. Q4 sales grew 44% YoY, compared to 46% in Q3. Average contract terms for new customers of 31.9 months up from 31.6 months in Q3. Comparing numbers to guidance doesn’t explain the huge move in the stock. Q4 billings, on the face of it, is the reason. At $365.7M the billings came in below street consensus of $373.7M and guidance of $370-375m. Reasons being an error in its internal renewals forecast and currency headwinds. Q1 billings guidance of $360-$365m represents growth of 34-36%, an increase from the 33% growth posted in Q4, and full year 2016 billings growth of 33-34%.

In fairness, the -20% stock move feels more indicative of positioning than fundamentals. There is an aggressive sell down of positions in stocks the market previously labeled a new form of GAAP…’growth at any price’ given the companies high valuation. BUT there is no room for disappointment in these GAAP stocks. Before today’s action NOW traded on 123x F12M P/E, 47x EV/EBITDA, 15x P/B. Cloud, SAAS software companies are priced for perfection. Yet they are far from perfect. Prior to these results NOW had ZERO Sell ratings.

Turning to WDAY. This stock trades on >500x P/E, 9x EV/Sales, 137x EV/EBITDA and has ZERO Sell ratings. It relies on billings growth to justify valuation. Last quarter billings growth slowed to 41% YoY from 51% YoY the previous quarter. Mix, renewals impact, timings, milestones and “accommodating the unique needs of our customers” to restructure billings terms have all been given as reasons for the slowing. A similar set of excuses for FQ4 will see the stock crushed. The risks of SaaS market maturation, slow rate of new financials products expansion, rising competition in core HCM (Human Capital Management) are real. We remain SHORT SELLERS OF WDAY.

3.    Fiat-Chrysler: the emperor’s new clothes. Stay short

For a very low margin, cyclical business, that has never generated FCF ex working capital inflows, to upgrade 2018 FCF targets beggars belief. Most OEMs are afraid to commit to Y1 sales guidance. Then there’s the fact that the rationale for industry consolidation – and in FCA’s case get to 7m units pa – has been dropped because ‘it doesn’t matter anymore’. Marchionne has given us super-bullish, transformational targets for FCA that no one will measure him against until 2018, the year he is due to retire. Interesting to see the price action of FCA’s financing partner in the US, Santander, making new lows on credit quality deterioration and -30% YTD! We will be most interested to see how 2015 panned out in terms of cash flow and working capital, but we won’t get the full statements for a few weeks, the accounts always get release a long time after headline ‘adjusted’ EBIT and net income are presented. Ex the net debt, pension deficit and enormous working capital imbalance, we struggle to see any equity value in FCA.

We remain a seller.

4.    Facebook: simply Exceptional. Stay long. Buy

Revenues grew an incredible 58% YoY, once again showing that Wall Street struggles to capture the sales momentum of the platform. Once again Mobile advertising momentum at Facebook crushed Street estimates. Advertising sales of $5.64bn for FQ4 was 10% above Street estimates primarily driven by mobile ads of $4.51bn which significantly beat Street consensus of $4.09bn and is now an incredible 80% of advertising sales, versus 69% a year ago. Mobile revenues grew 82% YoY and is now 80% of advertising sales. It is a far cry from the media headlines of a few short years ago “Facebook doomed to fail” (Huffington Post, 2013), “the social media bubble bursts” (Telegraph, 2012) and “Facebook will collapse and take down the Web” (MIT 2012).

Pretty impressive for mobile advertising launched LESS THAN FOUR YEARS ago.  In the face of the macro concerns and plethora of headwinds from currency wars, commodity and energy complex issues etc. the fact is companies still seek to spend their advertising and marketing budgets in the most efficient ways. And Facebook is the most efficient platform. Facebook has 1,038,000,000 people connecting on the Facebook platform every day (DAUs). For context that is close to a quarter of the world’s population aged 15-65. Strip out China where Facebook isn’t present and that rises to 30% of the world  engaging on Facebook every day. Whereas DAUs (Daily Average Users) as a percentage of MAUs (Monthly Average Users) remains at a stead 65% rate, the number of Mobile DAUs continues to rise. In fact 90% of DAUs are Mobile DAUs providing further evidence, if needed, that Facebook is a mobile company.

EPS of $0.79 beat by 11c with operating margins coming in 380bps above expectations, showing the operating leverage in the model (as and when required, or rather when Facebook chooses to turn on or off investment phases).

More than 1 billion people are using Groups. This should have LinkedIn (aviate SHORT) afraid as this is an additional channel Facebook can use to drive the Facebook professional platform. 123 million events were created on Facebook. Over 50 million small businesses are now active on Facebook (which, in turn, has killed Yelp’s sub scale 2 million…and again serves as a warning to LinkedIn). And there are now an incredible 2.5 million advertisers on Facebook. 9 of the top 100 advertisers now advertising on Instagram is a ‘heads up’ that Instagram is just getting started in turning on the monetization tap. ​

We expect 2016 to be an exceptional year for Facebook with multiple drivers. Display advertising continues to grow at incredible speed, Instagram advertising, WhatsApp advertising, Oculus growth (against low expectations) and new platforms such as Facebook Professional (watch out LinkedIn) and Facebook’s ability to maintain exceptional growth remains.

What may surprise many is that Facebook’s valuation is CHEAP versus history. It is the ONE component of the FANG trade we would buy for 2016 (for full disclosure, we have a SHORT on Netflix). Facebook now trades on 33x P/E, below 40x average since IPO and significantly below that of LinkedIn (Aviate SHORT) which trades on 56x P/E.

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Source: Source Starmine Professional

Stay long/Buy Facebook.

5.    Crown Castle: all good along the watch tower. Stay long

Total revenues were $945.8M (+3% q/q) versus $930.8M consensus. Upside was driven by network services and strong site rental revenue, particularly in small cells which increased 12% sequentially to $94M. Total site rental revenues were $785.3M (+3% q/q) vs. $781.2M consensus.

FY16 guidance update. Mgmt tweaked FY16 guidance slightly higher, increasing its midpoint for site rental revenues (+$10M), Adjusted EBITDA (+$12M) and AFFO per share (+$0.02). This brings the new AFFO midpoint to $4.68 – in line with consensus. The new midpoint of site rental revenue is $3,175M ($3,172M consensus) and the EBITDA midpoint of $2,181M is above $2,172M consensus.

Given concerns about corporate revenue and earnings growth throughout the investor community, last night’s results from Crown Castle and FY16 guidance reinforce our preference for Crown Castle given its positioning in the fast increasing mobile data market as demand continues to increase on higher usage and more intense data demands for many modern day Smartphone applications. Stay long. Buy more.

From Yesterday

We noted above there was very little to be excited about on the AT&T call but we didn’t say there wasn’t anything. What we found most interesting is the rapid uptake of mobile devices that are connected given it’s just the start of the cycle. AT&T in their earnings presentation noted that they have 26.2M connected devices globally driven by tablets and connect cars. In the 4th quarter alone, the company connected nearly 700K tablets and other devices. Just two weeks ago, AT&T introduced UNLIMITED DATA if wireless subscribers also signed up for a DirecTV package. Since then, they have signed over 500K subscribers to the offer. That number is only going to increase as the costs for such services decrease leading to increased data usage and demand from the network and tower network. Currently, 50% of AT&T’s CapEx spend goes towards wireless infrastructure. The tower companies are poised to benefit as CapEx overall grows, and as wireless begins to increase as a proportion of overall CapEx costs.

Increased demand for small cell and traditional towers is going to be an industry wide theme. Just yesterdaySprint stated on their earnings conference call that most of its tower leases are long-term in nature (5-7 years) and it is “well aware” of its contractual obligations with the tower operators, with no plans to exit existing leases. Sprint expects to maintain a strategic and ongoing relationship with the tower companies “for many years to come”.

Crown Castle has ~15K small cell nodes. Small cell networks are going to be a major focus for Crown Castle going forward post the Sunesys acquisition. The acquisition gave the company access to an additional 10K miles of fiber in metro markets in addition to the 7K miles of fiber that Crown Castle can utilize to increase their small cell network. Management stated “we believe small cells represent a natural progression of network simplification and cell splitting by the carriers as they contend with consumer demand for mobile data.” During the last quarter, small cell revenues grew 60% YoY and represented 11% of site revenues. Given this is going to be an area of emphasis for the company we expect this business unit to continue posting healthy growth.

Crown Castle also increased their dividend 8% to $3.54/share, representing a 4.23% yield on-top of the secular growth drivers the company currently enjoys. As such, over the long term we continue to remain buyers as we see Crown Castle as a major beneficiary in the explosion of mobile data usage.

http://us.aviatelive.com/tag/crown-castle/

6.    Nvidia: Virtual Reality is real. Stay long

Two notable points overnight.

Facebook: VR shipping in over 20 countries over the next eight weeks while at the same time over 100 VR games coming out of Oculus this year. Facebook view this as “a big moment for the gaming community”. Zuckerberg, known for his conservatism appears, to us, to be unequivocally bullish on VR: “ultimately, I think, (VR is) going to change the way that we communicate and live and work in addition to how we play games.”

Google announce VR is going mainstream. Yesterday Google announced 5 million Google Cardboard viewers and 25 million installs of cardboard apps have been downloaded. This was a small project launched quietly by Google 18 months ago. But the real surprise is that download growth has exploded since VR interest took off last quarter. 10m of these downloads took place in the last 3 months.

VR is real. VR is happening this year. VR is not in Street estimates nor investor mindsets for 2016. Which gives yet another reason to be buying Nvidia.

http://us.aviatelive.com/tag/nvidia/

7.    General Motors: Ford points to strong 2016 for GM’s two largest markets. Stay long

Ford noted delinquencies in their auto financing unit remain near all-time lows. They expect North America to remain strong in 2016 albeit with less tailwinds. January auto numbers are most likely the next catalyst in our minds. As for China, Ford continues to see healthy growth and see China as a strong tailwind for sales growth over the long term. The slide below from this morning’s call sums up their optimism (excl. Brazil). We continue to believe sentiment in the US auto sector, mainly towards shares of General Motors have swung too far negative given stable/growing auto market conditions in 2016.

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Source: Ford FY15 earnings presentation

8.    Arista Networks: Facebook CapEx increase a positive. Stay long

Facebook and Microsoft are two of the largest customers for Arista Networks. While Arista has been doing a good job of diversifying its customer base and is far less reliant on Facebook and Microsoft than two years ago, both companies are still a big part of sales for Arista and a good indicator of growth.

Last night, Facebook announced a 70% increase at the midpoint for CapEx spend in FY16. Facebook guided for $4B-$4.5B versus $2.5B in 2015 and $1.8B in 2016. The company continues to build out datacenters as increased usage on Facebook’s main site and expanded properties such as Instagram and WhatsApp increase relevancy.

We expect Microsoft to once again give healthy datacenter spending guidance when they report tonight as Microsoft continues to compete with Amazon in web services.

We continue to like shares of Arista and believe current share weakness represents an opportunity. Stay long.

9.    MGM Resorts: Las Vegas commentary supportive. Stay long

Last night Las Vegas Sands reported strong numbers for Last Vegas and showed signs of a bottom in Macau. Macau only represents ~17.5% of EBITDA for MGM unlike WYNN Resorts that derives over 70% of EBITDA from Macau. Tailwinds from a recovering US economy should continue providing tailwinds to MGM Resort’s Las Vegas operations not only for increased tourism but convention business, which continues to be a big driver for Las Vegas. Commentary below from Las Vegas Sand’s conference call last night highlights why we still remain excited about shares of MGM Resorts. Lastly, continued shift towards REIT structure to also enhance shareholder value. Stay long. 

Las Vegas

“It’s an ADR and RevPAR story more than a gaming story. We have 7,100 keys right now in this environment, and we think we can do over $400 million a year annually if markets hold up. All the segments are performing well, the FIT, group, wholesale and I think it’s been a strong year for the lodging side. Gaming is a mixed bag. We are very pleased with our mass slot and table business (positive for MGM given exposure to mass gaming space) in the last quarter. We are seeing softness in the high end and premium, because it emanates from China and Asia (MGM smallest exposure to China compared to LVS and WYNN). But I agree with you. The market in Las Vegas feels good and feels favorable, and it’s a RevPAR, ADR lodging story more than anything else. And visitation keeps climbing. I think Vegas has been on sale for too long and perhaps the market’s responding favorably to the price. The price movements in the right direction are good for everybody and we’re certainly participating.”

Macau

We do see stabilization in gaming revenue trends. In the mass gaming segment, our Non-Rolling drop was down just 1% over the prior quarter, despite new competition that is predominantly focused on the mass market. Our VIP Rolling volumes were actually up 5% over the prior quarter, outperforming the 2% sequential increase in the Macao market.”

Additionally, China’s economy and the Yuan have been front and center on investor’s minds. Comments last night about both the economy and Yuan may be of some use to investors. See below.

China Macro and Currency

“Right now, we are just studying it and hopefully we will continue to grow our business in the face of any currency changes that may occur.”

10.    Apple “Super Cycle” Supply Chain Unwind (cont)

A whole host of further warnings/misses overnight from Apple supply chain stocks and the first look at Samsung numbers; both supplier and competitor of course, show significant misses of their own. Three supply chain stocks we continue to SHORT where numbers must be reset lower are Murata in Asia (report tomorrow), Skyworks in the US (report tonight) and Dialog in Europe.

With respect to Murata, we highlighted yesterday the impact of Apple on both Alps earnings miss and also how far behind the curve street estimates are (as oft is the case in Japan). So note Alps today has fallen the most since 1977, the stock is -18%. The street are equally behind the curve on Murata in our view.

Invensense -8% (a 16% swing from original prints on inline Q3 numbers) following Q4 guidance on conference call. A ~25% cut to sales ($77-83m) Q4 guide versus street estimates of $103m results in EPS guidance 80% BELOW THE STREET.

Cirrus Logic: (remember had pre-announced lower earlier this month) report FQ3 sales just ahead of lowered guidance but FQ4’s first guidance is for sales 13% BELOW street estimates (at the midpoint of the wide range).

SanDisk: guide Q1 sales of $1.175-1.25bn well below street estimates of $1.3bn (SanDisk is #3 flash supplier to Apple, behind Toshiba and Hynix. Whether SanDisk is in 6S product is unconfirmed as tear downs haven’t determined the same).

Qualcomm: guide FQ1 sales so wide ($4.9-5.7bn) you can drive a truck through it. Mid-point is 700bps below street consensus.

Samsung: Q4 net of KRW3.24tn is an enormous 40% below street estimates on sales of KRW5.4tn, sales KRW53.32tn vs estimates of KRW53.83tn, operating KRW6.14tn vs est KRW6.62tn, CapEx is ‘under review’ and there will be challenges in 2016 to maintain earnings.

11.    United Rentals: it’s been painful but now what? We can’t avoid the value. Stay long

Needless to say we’ve been very humbled by our bullish stance on United Rentals given the stock performance YTD. We didn’t appreciate the building negative investor sentiment related to its energy exposure, ripple effects from weaker energy to other sectors and the impact rising rates would have on non-resi construction. Outside of the evident slowdown in energy, we’re not convinced that energy weakness will have ripple effects into the larger parts of the US economy as well as leading to a slowing in non-resi construction. Having said that, there are also some economic indicators that do point to some slowing but we see more positives than negatives looking holistically across the US.

In fact, last night United Rentals lowered their CapEx spend expectations to ~$700M versus $996M in 2015. Some investors were concerned that United Rentals management would continue to spend on CapEx, which not only reduces the companies FCF profile but risks the company falling into an overcapacity scenario leading to lower utilization rates.  The reduction in CapEx should at the very least be a positive development looking ahead. United Rentals noted that it expects to be vigilant and make the cuts to CapEx quickly and not gradually or back end loaded.

Looking into the quarter and FY16 guidance, United Rentals Q4 EPS missed consensus by 6%, EBITDA was 1.5% light and sales were in-line. FY16 sales guidance 2% light of consensus at midpoint and adjusted EBITDA 3% light. The company see rental rates continuing to be negative at -1% to -2% and utilization should remain at high levels. Speaking as to the current business environment, United Rentals still sees a good construction market with growth being in the high-mid single digit rate.

Now here comes the conundrum, following last night’s CapEx cut and guidance United Rentals trades at close to 20% FCF Yield and 6xs FY16 earnings. Yes, downside risks remain, energy pain may not be over with, further interest rate hikes may hurt construction growth and US Growth may decline further but we don’t think today’s markets are as bad as 2008. In 2008, we were coming off a housing bubble, construction crash, business activity came to a halt and credit dried up. During that time, United Rentals remained cash flow positive. This is a company that has been built to withstand bad times and earn above average returns during peak times. With a 20% FCF Yield and earnings multiple of 6xs consensus FY16 earnings the downside risk post earnings is far less than perceived. Should we gain further insight post the company’s earnings call we’ll update out thoughts.

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Source: Ashtead FY15 results presentation

12.    Tractor Supply (QCC): SSS down, but EPS up

Unseasonably warm weather affected sales at Tractor Supply.  While comparable store transactions were up for the 31st consecutive quarter, same store sales (SSS) fell by 1.6% Despite this mild (pun intended) disappointment gross margins are on an upward trend, 34.1% to 34.4% YoY,  and net income grew+10.7% and EPS +12.8%. FY16 guidance is for $6.9-7.0bn in sales (consensus has $6.9bn), which equates to a solid 11.6% growth at the mid-point. Tractor Supply has the ability to grow earnings without using excessive capital upfront and we see double-digit EPS as a proxy for expected share price growth over time. A member of our QCC, we see solid long term drivers for TSCO.

13.    Weekly S&P 500 vs Initial Jobless Claims – interesting pattern

These two times series move in opposite directions however, Jobless Claims do LEAD at major turn points, especially at the top.

Usually we have a negative divergence – higher highs in the S&P 500 not confirmed by lower lows in Jobless Claims – then Jobless Claims break their long-term resistance trendline then the market follows.

We could be close to such a point considering the extreme low levels Jobless Claims reached in 2015, something last seen in 2000.

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14.    Also, in today’s Technical Analysis Riccardo highlights the following:

Riccardo is initiating a BUY on shares of Dean Foods & CMS Energy due to a multi-month bullish breakout in prices and RS vs. S&P 500.

He is also reiterating his SHORT position on shares of Skyworks & Apple.

Riccardo also reiterated a BUY on shares of WGL Holdings & AT&T.

S&P 500 Tech Hardware & Equip.: new 12‑month lows in RS vs. S&P 500. Price closing at their weakest for months. Keep UW, sell rallies.

S&P 500 vs. US Industrial Production: latest Dec data continue to show IP below our 12-month moving average, historically bearish for the stock market.

Private Debt/Personal Income %: at 22.5% we have the highest reading ever. Deleveraging from these high levels will require a lot of time to repair.

S&P 500 vs. US Initial Jobless Claims: inverse relationship between these two time series but IJC do lead at major turning points. Pattern like 2000-2007.

Citi Economic Surprise Index: below the zero line for all 2015 and 2016 sees new acceleration to the downside.

Daily S&P 500: BEARISH August lows taken out, test Oct 2014 lows on even higher volume. Selling pressure still strong. Consider 1600 next m/t support.