5 Ideas For The Holiday Season

Summary

• Instead of putting together a shopping list for gifts, I decided to focus on stocks.
• I've included 5 ideas, 3 bullish and two bearish, with regard to upcoming Q4 catalysts.
• I like AAPL, ATVI, AMZN, UPS, and FDX; I don't like EA and M.

With Halloween over and done with, I suspect it won't be long before we'll all start seeing advertisements for the holiday shopping season. Now that Black Friday as morphed from a massive shopping day into about a week, gift givers across the country (and even the world) will soon have to begin planning their assault on all of the holiday sales. Personally, I've never bought into this hype. To me, Thanksgiving is about turkey, macaroni and cheese, mashed potatoes and gravy, cranberry sauce, and football…not shopping. I'll be using a combination of the Internet and the classic mad dash on Christmas Eve to buy my Christmas gifts. Instead of spending my time and energy trying to plan out the gifts I'll be giving this year (I'll leave that up to Santa Clause), I'd like to put together a potential shopping list for myself, as an investor, as we head into the very lucrative Q4. So, here are five of my favorite investing ideas headed into the year's end with holiday inspired catalysts.

The Nice List: Apple (AAPL)

The first idea of my "Nice List" is the largest holding in my portfolio, Apple. To me, owning this company is about as easy as they come. Sure, just like any equity, AAPL carries risks, but with this company's brand name, ecosystem, and top notch balance sheet, I feel very comfortable being very overweight AAPL shares. What's more, in a strong economy, I think the momentum that its new hardware brings into Q4 makes the stock a nearly no-brainer equity to own.

I know there have been rumors flying all over the place with regard to demand for the iPhone 8 and more importantly, the high margin iPhone X. Just a few weeks ago AAPL shares sold off to ~$150 because of rumors that the company's supplier orders were lower than expected. Well, flash forward to today and we're seeing incredible reviews for the iPhone X and hearing new rumors that demand is through the roof which have helped to send the company's shares to all-time highs at nearly $170.

This is exactly why you own a company like Apple, instead of trading it. Over the years I've heard all sorts of negative comments about Apple as a company; it's a one trick pony, it's never a first mover, it won't succeed without its visionary leader, its ecosystem isn't real, etc. Well, time and time again, Apple has proven the naysayers wrong (I will admit that this company is rarely a first mover, though that doesn't matter much when it brings out a higher quality product in short order, carving out massive market share while generating wider profit margins than its competition).

Right now, the naysayers are focused on the company's newest phones. They say that the iPhone 8's form factor is the same as it has been for several models now. They say innovation is gone (ignoring faster processors, better cameras, and longer battery life). They say competition is eroding the moat of Apple's services. And, they say the X is simply too expensive, regardless of quality, not to mention the difficulty the end consumer will have adjusting to the updated form factor (no home bottom), which is ironic, because it's almost a "damned if you do, damned if you don't" type situation for Apple when they innovate.

Except, that AAPL isn't damned in the least. I think this company will easily meet current expectations for the 8 and the X based upon the simple fact that this refresh cycle is absolutely huge coming off of the very popular 6 model. Simply put, I don't think consumers are going to choose the 7, a phone that is over a year old now, because they don't want to pay ~$20 extra dollars per month. Sure, the ticket shock is huge when you're looking at a phone with a four-digit price tag, but when you consider that fact that you're not paying $1,000, but instead ~$40/month, it's really not such a bad deal for owning the best of the best when it comes to mobile phones, which dominate our lives.

I know that Apple is covered all of the time here on SA and on other investing sites, so I won't harp on the company's financials or even the valuation (which I think is more than fair at the moment). Instead, I'll just say that I think when we look back on 2017, we'll remember the updated form factor of the iPhone X and the fact that the Holiday season was not only full of peace and joy, but elegant Apple devices, expanding the company's user base and fortifying the revenues of their service offerings.

The Nice List: Activision Blizzard (ATVI)

Next up, I'm going from my largest personal position to one of my smallest. Right now, ATVI makes up only 0.10% of my portfolio right now. Yes, I typed that right. It's basically nothing. However, because of valuation issues, I've decided to take the long road when it comes to ATVI, buying a few shares every month for a year or so, spreading my risk out over time as I build my position.

Just because ATVI makes up a small portion of my portfolio doesn't mean I'm not bullish on shares. Owning the stock in the first place is a vote of confidence on my part (for whatever that's worth). I think this is the best in class videogame pure play over the long-term. But for the sake of this article, I also think ATVI is best suited to capitalize on shopping during the upcoming holiday season in Q4.

ATVI has/is launching arguably the top two first person shooters this year. In early September, Destiny 2 hit the shelves and has gotten off to a strong start. After a slow summer, Destiny 2 helped September sales to jump an impressive 39% y/y, according to NPD Group. Destiny 2 lead the way in September, followed by Take-Two's (TTWO) NBA franchise, 2K 18 in second place and Electronic Art's (EA) NFL franchise, Madden 18. I expect Destiny 2 to maintain its top selling trend through October, where it will be unseated by another ATVI product, the much anticipated Call of Duty: WWII.

I think this Call of Duty game has the potential to be the year's best selling console game (while making a huge impact in the PC market as well). ATVI is finally getting back to its "boots on the ground" roots with this year's version of the shooter, which should bring back former fans (such as myself) who didn't enjoy the direction the franchise was headed. I loved the recent advertisement the company released for the WWII game, focused on the message, "get your squad back together." The company is trying hard to bring back older players into the fold. Obviously my personal story is purely anecdotal, but I can say for certain that the group of friends that I play video games with haven't bought a Call of Duty game in years and we're all excited about this game because of the "boots on the ground" gameplay bringing back the good times of our youth (college years).

I expect ATVI to outperform its peers, EA and TTWO, in Q4 because of its impressive game slate. I expect both Destiny 2 and CoD WWII to outperform EA's Battlefront 2, though I admit that the Battlefront release in tandem with the upcoming Star Wars film puts this theory at risk. I would have been much more bullish on TTWO in the short-term if it hadn't delayed the release of its upcoming Red Dead Redemption 2, which I think has the opportunity to be the company's next, Grand Theft Auto-like release, in terms of long-term cash flows and gamer interest. But Red Dead isn't scheduled for release until 2018, so that's a story for a few quarters down the road.

My biggest hang up when it comes to ATVI is its valuation. This company's shares are quite expensive at ~30x earnings. I know investors got excited about the company's content pipeline, impressive mobile presence, and the potential for eSports to become the next big thing in the entertainment industry, but I worry that they've pushed the stock too high, too fast. As you can see on this F.A.S.T. Graph below, ATVI is currently trading well above its long-term historical average with regard to P/E ratio.

I think the stock deserves a premium to the market, but probably not one this steep. Over the long-term, I still really like ATVI's potential to create wealth for shareholders, but as previously stated, because of valuation issues in the present, I'm not willing to dive head first into this one. That said, for traders who're interested in more short-term moves, I wouldn't be surprised to see ATVI get a nice bump off of Q4 earnings, which could surprise to the upside.

The Naughty List: Electronic Arts

Unfortunately for EA shareholders, I think it's more likely that you will receive a lump of coal in your stocking than a shiny present under the tree this year. EA just reported a disappointing earnings report which sent the stock down 5% or so. Like ATVI, EA is also expensive, trading at ~28x earnings. Unlike ATVI though, I don't think EA has a huge catalyst headed into the end of the year.

As I said before, I'm not overly bullish on Battlefront 2, but I could be wrong. I was disappointed in several design and content features of this game; it seems like EA is planning on relying heavily on DLC's for Battlefront instead of front loading the game with more maps & characters, which will disappoint gamers. Admittedly, this is the new direction that all of the game studios seem to be heading and I'm sure that Call of Duty will be full of micro transaction opportunities that turn off gamers from my generation who remember the good old days before they were so prominent in unlocking content, so I can't exactly cast all of the blame here on EA. With that said, this incremental income only adds up if there is long lasting interest in the game and if ATVI's shooters prove to the far superior from the outset, then Battlefront's DLC's won't sell huge numbers.

Even though I think Battlefront will be outperformed by ATVI's shooters, I think it will be the bright spot for EA during the quarter. Why? Because both of the company's other major sporting franchises, Madden and FIFA, face domestic headwinds.

Although I know FIFA is a popular global franchise, I wouldn't be surprised if U.S. sales suffered a bit because of the fact that the U.S. Men's National Team did the unthinkable in failing to qualify for the upcoming World Cup. Personally, I think this is a major setback to domestic soccer. I think it could be a long-term issue; the World Cup every four years did wonders for interest in soccer amongst Americans and I highly doubt that will be the case this time around without our boys participating. I suspect that FIFA will experience headwinds as a fallout here, both in Q4 and in the coming years as well (with regard to domestic sales, the rest of the world probably doesn't care all that much whether or not the U.S. is in the World Cup).

And probably an even larger headwind for EA in the fourth quarter is the NFL's recent PR struggles associated with the National Anthem protests. Whether you agree with the protests or not (and please, don't turn the comment section of this piece into a political cesspit; let's keep any protest related discussion classy and investment oriented), it's becoming clear that at least a certain segment of NFL fans is boycotting the league. I think it's too soon to say if this diminished fan interest will be a short-term phenomena driven by political rhetoric or a long-term demand issue for the NFL. Either way, I think Madden sales will struggle this holiday season. Just today we saw Papa John's (PZZA) blaming the NFL for their struggling sales in throughout this football season and I have to imagine that this will spill over into NFL related video game sales as well.

The Nice List: Amazon (AMZN), FedEx (FDX), and United Parcel Service (UPS)

I think that this year's shopping season will break records with regard to online sales volume and percentage of total sales. This bodes well for AMZN. It also bodes well for the logistics companies responsible for shipping all of these goods, which is why I've included FDX and UPS in this section. I'm an owner of all three names. I'm bullish on all three long-term. I know that many investors aren't willing to own AMZN because of its unique valuation, so if you fall into that category, I think both FDX and UPS offer much cheaper alternatives that will allow for investors to take advantage of this trend.

I prefer to own the lot because you get a nice blend of growth, dividend growth, and yield here.

AMZN is probably the ultimate growth company in the U.S. market. This company has its hands in so many high growth cookie jars that even Santa Clause would be jealous. AWS continues to be the market leader in the cloud space and the company's primary profit generator. AMZN's retail sales continue to grow, though its margins are razor thin (and even negative in certain markets). That said, even though we oftentimes think of Amazon being synonymous with eCommerce, the company has a relatively small market share and I expect that Bezos and crew are just getting started taking market share from more traditional retailers.

I'm of the belief that eventually AMZN will turn on the profit levers in the retail segment, but probably not until it's in a much greater position of strength in the market. I'm also excited about AMZN's initiatives in AI, hardware, especially with regard to the smart home, and original content. To me, this is the ultimate long hedge; AMZN threatens to take market share from so many of the companies within my portfolio (including FDX and UPS) that I felt compelled to own shares of the company as a defensive measure against potential disruption.

But, if you're not into paying triple digit P/E multiples for shares, I can hardly blame you. That's where FDX and UPS come into play. I own both companies with relatively equal weightings. Both FDX and UPS trade for less than 20x earnings. FDX offers relatively better growth at a slightly lower valuation, which is a rare combination in a head to head comparison and makes the stock attractive to me, but UPS offers what I believe to be a safe, nearly 3% yield with solid dividend growth prospects.

UPS currently yields ~2.8% and has provided investors with high single digit dividend increases over the last 5 years or so. UPS did freeze its dividend in 2009, though the company wasn't forced to cut its payment and has given investors a 12.4% CAGR with regard to its dividends over the last 18 years. This is fabulous long-term dividend growth.

FDX only yields 0.9%, but since initiating the current dividend in 2002, FDX has provided investors with a 25.1% dividend CAGR. This is very impressive dividend growth. What's more, the pace hasn't slowed in recent years (which is a trend DGI investors are seeing across much of the market). In 2014, FDX increased its dividend by 33.3%. In 2015, FDX increased its dividend by 25%. In 2016, FDX increased its dividend by 60%. And in 2017, the company gave investors a 25% increase. The company's yield remains low because the stock has grown quickly alongside these increases and I don't expect the earnings growth that powers this total return play to slow down anytime soon.

The Naughty List: Macy's (M)

The last idea I'll include on this "shopping list" is a short idea based upon my Amazon's-going-to-take-over-the-world thesis. This isn't a trade that I will be putting on; I never short on principle due to limited upside compared to unlimited downside, but I decided to include the idea as a caution to longs/those considering going long Macy's shares.

I know that many income oriented investors might look at M right now, see that ~8% yield, and think to themselves, "that's a great gift right there!" Well, I don't agree. I actually think it's likely that M will cut its dividend. Frankly put, this company needs every dollar that it can get its hands on to continue to compete with the likes of AMZN. And while I think the market is partially pricing this into the share price, I suspect there are still investors out there holding onto shares for the income they produce that will sell if the dividend situation changes for the worst, which will send M shares on yet another leg lower.

I actually think Macy's has done a pretty good job of competing against the secular headwinds that companies in the physical retail space face. I'm not really a fan of the omni-channel approach when it comes to physical retail, but I do appreciate the fact that M has tried to expand its product offerings, focusing on things like cosmetics and other goods/services that are thought to be more resistant to pressure from eCommerce competition. When I think about M, I keep coming back to Starboard's old real estate argument and it's difficult to believe that the company's flagship properties aren't worth more than the current market cap of its equity. This real estate piece alone temps me to buy shares; however, Starboard bailed out on its investment long ago, which is reason to be concerned about the ability of Macy's real estate to somehow stave the stock. At the end of the day, it just seems like the forces that Macy's is fighting against are too strong.

I wouldn't be surprised to see many of the department store type companies continue to struggle until they're eventually put out of business. I hate saying this about an American Icon like Macy's. I'm even more sad talking about Macy's in the light due to the fact that Miracle on 34th Street (the 1947 version) is one of my favorite Christmas movies. I just don't really see any clear path towards success for these names. eCommerce platforms have basically become more convenient versions of department stores and Macy's doesn't have the size, scale, or logistics platform to compete with AMZN or even Wal-Mart (WMT) in the eCommerce space.

Analyst’s Disclosure: I am/we are long AAPL, ATVI, AMZN, UPS, FDX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.