The Monday Morning Kickoff - Re-Thinking Growth Prospects And Favoring Dividend Stocks

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Includes: AAPL, AMTD, BBT, BWLD, BYD, CL, CLX, CMG, CPLA, CSCO, CVX, CYBR, DATA, DHR, DIS, DOC, FAST, FLIR, GMCR, GNC, GPRO, GRPN, HPY, HSIC, HTZ, IFF, IRBT, K, KO, KR, L, LNKD, LPLA, MAS, NLSN, P, PLNT, PNRA, PPC, RAI, RDS.A, RGC, RRGB, RUSHA, SCHW, T, TAP, TWTR, USAT, UUP, WFC, WFM, WWAV, WYNN, XOM, XRAY, YELP
by: Tematica Research

Summary

January Jobs Report misses and re-ignites growth concerns and pushes out Fed action.

S&P 500 earnings expectations for 2016 continue to move lower; with 65 S&P 500 companies reporting this week, we see more downside risk to expectations.

Big week ahead - earnings from CVS, DIS, CSCO, TWTR, WFM, CYBR, WWAV, PNRA, YELP plus Yellen testifies and OPEC's monthly oil view.

We had another bout of pain in the market last week with all the major indices well into the red. While the market seems to have moved off oil prices for the moment, it remained concerned with the combination of slowing economic data that came out last week (ISM Services and the Employment Report, both for January) and weaker than expected outlooks this earning season from a growing number of companies. If you're a regular reader of Monday Morning Kickoff, neither of these issues are a surprise to you; however to others, is has led to a re-think of growth expectations and valuations. Notable disappointments last week included LinkedIn (NYSE:LNKD), GoPro (NASDAQ:GPRO), Tableau Software (NYSE:DATA), Buffalo Wild Wings (NASDAQ:BWLD), Chipotle (NYSE:CMG) and others. What this tells us is that even after all the volatility we've experienced thus far in 2016, there are still land mines in the field to be avoided.

With the Tematica Select List we are more than content to hang onto our cash, as well as our higher dividend yielding positions mixed in with some dividend dynamo companies for now, with an eye to adding quality companies at better prices. Later this week we'll publish our a special edition of Tematica Investing, which will feature words right from the horses' mouth - key comments from earnings calls that underscore our thematic way of investing and offer solid proof points for several of our investing themes. But first, let's reflect on last week . . .

Digging into Last Week's Economic Data

On Friday, we received the January Employment Report, which showed 151,000 jobs were added during the month - well below the 188,000-190,000 that was expected. Factoring in the revisions to November and December (lowering total jobs for the two months by 2,000) and we are once again on the path of slower job creation month over month (280,000 in November; 262,000 in December and 151,000 in January). This trajectory matches with the economic data we've been tracking the last several months, all of which points to a dramatic slowdown in the domestic manufacturing economy (ISM manufacturing index below 50 for the fourth consecutive month in January). As is the normal course with these things, typically following closely on the heals of slowing manufacturing, came last week's news of a slowdown in the pace of the domestic service sector via the January ISM Services report.

While some will point to the uptick in average hourly wages, which climbed 2.5 percent year over year last month, and the 2.1 percent increase in the Employment Cost Index, we see the slower job creation corroborating slower growth. Our concern has been the same for several months: facing higher costs in both wages and benefits, in 2016 companies will slow the rate at which they add jobs. While the last three months of jobs data could point to that, we would prefer to see more jobs data in 2016 before jumping to any definitive conclusions. As such, we will look to the February Employment Report for more confirming data. Given the fall-off in seasonal hiring as the post-holiday return cycle fades, we see a high probability of flat to down job creation in February. If that's indeed what happens, it should fan the flames of pushing off an interest rate boost from the Fed to much later than initially thought.

With expectations for an interest rate hike in 2016 slipping, the US dollar retreated last week, weighing on US dollar funds and ETFs, like the PowerShares DB US Dollar Index Bullish (NYSEARCA:UUP), which fell 2.7 percent. From our perch, if the Fed does push back its rate hike timing as is increasingly expected, additional monetary policy moves by the European Central Bank and the People's Bank of China are likely to devalue those respective currencies relative to the dollar, keeping existing foreign currency headwinds talked about by industrial companies like Danaher (NYSE:DHR) and Fastenal (NASDAQ:FAST), and others, like Apple (NASDAQ:AAPL), intact. Already, we've seen analysts and economists start to weigh the increasing probability of later than expected rate hikes in 2016 and re-calculate their net interest margin assumptions, which has weighed on financial stocks from Wells Fargo (NYSE:WFC), BB&T Corp. (NYSE:BBT) and other banks to brokerage firms, such as TD Ameritrade (NASDAQ:AMTD) and Charles Schwab (NYSE:SCHW) among others.

Given the boost in average hourly wages mixed with the downward vector in economic data, we are likely to see investors continue to gravitate to consumer staple stocks, like Clorox (NYSE:CLX), Colgate Palmolive (NYSE:CL) and the like as well as higher dividend yielding stocks like Physicians Realty Trust (NYSE:DOC) and AT&T (NYSE:T), both of which have been solid performers for us in 2016.

Earnings Expectations continue to tick lower.

As we've pointed out over the last few weeks, corporate outlooks are catching up to the economic data and that has led, and will likely continue to lead to reduced expectations for the S&P 500 group of companies. Last week, expectations for the S&P 500 earnings this year continued to tick down and now sit at 122.75 per share, a reduction from $123.32 per share last Friday and $130.55 per share in October per data from FactSet. Year over year, that FactSet forecast call for just 4 percent growth in collected earnings from the S&P 500 group of companies this year, but there are others that are dialing back the growth even further. Noted economist Ed Yardeni, President of Yardeni Research has cut his 2016 expectations to $122 per share for the S&P 500, up 3 percent, and also recast his 2017 expectations to $128 per share, which still reflects 5 percent growth year over year.

With another 65 S&P 500 companies reporting their results this week, as well as factoring in the impact of those companies that issued results late last week, we continue to see more downside than upside with S&P 500 earnings expectations in the near-term. Digging into the revisions we've received thus far, once again analysts are calling for pronounced earnings acceleration in the back half of 2016 with 3Q 2016 up 5.5 percent and 4Q 2015 10.7 percent following declines in the first half of the year.

When we see such significant reversals, particularly several quarters out, we have to wonder about the underlying assumptions and whether or not those making them are listening to the data or if they are closing their eyes and wishing for the best. As any investor knows who has tried to wish a stock price higher, it rarely works if the fundamentals are going against you.

We'll continue to stick to digging into the data - it's worked very well for us so far, and we see no reason to deviate for something found in the Magic Kingdom.

The Week Ahead

That seems like a pretty solid transition to talk about what's coming up from what happened last week. While the economic calendar cools down following the burst of data at the start of each month, the earnings fun continues with several hundred companies reporting their results, although we are nearing the edge of the reporting forest.

After next week we will have likely seen the bulk of negative earnings revisions to be had, assuming the economic data doesn't get significantly worse. As such, we'll continue to monitor the upcoming data to get a bead on both the industrial economy, as well as services and consumer facing data points, to assess the likelihood of further revisions as we exit the current quarter in just a few weeks. Of the modest data we'll be getting this week, the January Retail Sales report (Feb. 12) will be the one to watch, as we look to see if consumers are indeed spending their "big gas" savings. Given the tone of the economy, we would not be surprised to see another disappointing Retail Sales report even after we strip out gas sales for the month. In keeping with our Connected Society investing theme, we will continue to watch the E-Retailing/Non-store line item.

Before we get to the usual breakdown of corporate earnings over the coming days, we've got a number of other happenings in the week ahead:

Chinese New Year! All week this week, markets are closed in China as celebrations and festivities tied to the Year of the Monkey. Markets in Hong Kong and Korea are also closed for the New Year holiday, which occurs on Monday, Feb. 8.

Interplant Janet's testimony. Yes, it is that time again for Fed Chairwoman Janet Yellen to answer questions from the House Financial Services Committee as well as share prepared remarks. While we don't expect any direct revelations, we do see economists and investors hanging on her every word to determine if the Fed is on track for an interest rate hike in March. Given the slowing glide path of the domestic economy and additional monetary actions taken in recent months outside the US, we continue to see the next rate hike later than sooner in 2016.

Oil and OPEC. Oil prices have been one of the driving forces of the stock market thus far in 2016, with the major indices rising on speculation of potential production cuts and giving back ground when the markets found little credibility behind those rumored production cuts.

To date, weekly oil inventory data has been the best litmus test for the oil market, but this week (Feb. 10) OPEC will publish its monthly oil-market report and its comments on demand and supply will be no doubt be the catalyst for the next pronounced move in oil prices. We suspect investors in Exxon-Mobil (NYSE:XOM), Chevron (NYSE:CVX), Royal Dutch Shell (NYSE:RDS.A) and similar companies will be parsing through this monthly must read.

We'll be looking at what OPEC reports for direct as well as indirect comments, like those that might point to medium to longer term expectations tied to the growing middle class in the emerging economies, which ties right into our Rise and Fall of the Middle Class investing theme.

Now turning to this week's notable corporate earnings…

As we mentioned above, there are 65 S&P 500 companies on tap to report this week, amid a sea of more than 650 earnings reports. Here are the ones we'll be zeroing in on:

Monday, February 8

American Express (AMEX) commented earlier this month of a slowdown in corporate spending, so we'll be looking at Hertz (NYSE:HTZ) for corroborating data points. Did Loew's (NYSE:L) benefit or get hurt from the winter storm that hit the east coast - we'll find out today. We've seen a number of weak outlooks for one-time technology high fliers, and after falling more than 8 percent on Friday, we have to wonder if Yelp (NYSE:YELP) will be the next to disappoint.

Tuesday, February 9

As the velocity picks up, there is a smattering (technical term) of companies reporting and the ones we'll be focused on include Disney (NYSE:DIS), Coca-Cola (NYSE:KO), Masco (NYSE:MAS), Panera Bread (NASDAQ:PNRA), Rush Enterprises (NASDAQ:RUSHA) and Regal Entertainment (NYSE:RGC) as well as Guilty Pleasure company Wynn Resorts (NASDAQ:WYNN).

Wednesday, February 10

Among the dozens and dozens of company reporting today, the standouts will likely be Cisco Systems (NASDAQ:CSCO), Twitter (NYSE:TWTR), Whole Food Market (NASDAQ:WFM) and Keurig Green Mountain (NASDAQ:GMCR). With our Connected Society theme, Cisco's demand outlook for data is something we always watch, as well as its corporate capital spending expectations.

Twitter - well let's just say it's been a tough one to own (lucky we don't). With rumored product changes as well as chatter the company could be in play, Jack Dorsey's comments could make for a wild ride in after market trading. We know as part of our Food with Integrity investing theme that consumers continue to shift dollars to organic, gluten free and other healthier foods, leading Kroger (NYSE:KR) and others to respond and thus making things far more complicated for Whole Foods than just a few years ago. Other companies of note include International Flavors & Fragrances (NYSE:IFF), iRobot (NASDAQ:IRBT), Pilgrim's Pride (NYSE:PPC) and Henry Schein (NASDAQ:HSIC).

Thursday, February 11

Like most weeks during earnings season, Thursday seems to be the busiest and that's the case once again this week with almost 200 companies issuing results. We've grouped the ones we'll be watching by investment theme to make it a tad easier on the eyes:

- Connected Society - Pandora (NYSE:P), Nielsen NV (NYSE:NLSN), and

- Rise and Fall of the Middle Class - Groupon (NASDAQ:GRPN),

- Guilty Pleasure - Boyd Gaming (NYSE:BYD), Molson Coors (NYSE:TAP), Reynolds American (NYSE:RAI),

- Aging of the Population - GNC Holdings (NYSE:GNC), Planet Fitness (NYSE:PLNT), and LPL Financial Holdings (NASDAQ:LPLA)

- Food with Integrity - WhiteWave Foods (NYSE:WWAV), Kellogg Company (NYSE:K)

- Safety & Security - Flir Systems (NASDAQ:FLIR), Cyberark Software (NASDAQ:CYBR)

- Tooling & Retooling - Capella Education (NASDAQ:CPLA)

Friday, February 12

There are several thematic contenders reporting results today, including USA Technologies (NASDAQ:USAT) and Heartland Payment Systems (NYSE:HPY), which both fall into our Cashless Consumption theme, as well as dental products company, aptly named DENTSPLY International (NASDAQ:XRAY) that is a part of our Aging of the Population and Rise and Fall of the Middle Class themes. On the Cash Strapped Consumer front, we'll be paying attention to traffic and average ticket comments from upper end burger company Red Robin Gourmet Burgers (NASDAQ:RRGB), as well as any and all comments on beef and chicken prices.

Enjoy your week and we'll see you back here next Tuesday given the Presidents Day holiday that has domestic markets closed next Monday.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.