Stocks Under $10 Weekly Summary (original) (raw)

The Stock Market Last Week

Equities kicked off August on a positive note, as evidenced by the move higher in the S&P 500 and fueled by July economic data that confirmed the expected rebound in the global economy. That data overshadowed the week’s earnings reports and the lack of movement on the next round of pandemic-related stimulus in Washington. Ending the week, however, tension between the U.S. and China was reignited by several moves orchestrated by President Donald Trump ahead of the Aug. 15 gathering between U.S. and China officials. Those moves led equities to end the week on a softer note even though week-over-week all the major indexes finished higher, adding to their quarter to date gains. We’d note the Dow has made considerable progress over the last month but continues to trail well behind the Nasdaq and S&P 500.

Let’s review the week’s economic data:

· The July Institute for Supply Management’s manufacturing Index showed domestic manufacturing expanded for the third consecutive month to 54.2 from 52.6 in June, slightly better than expected. Most of the sub-indexes have moved into expansion territory as well, with the only three out of the 10 in contraction related to employment or inventories.

· ADP’s private payroll report for July found employers added only 167,000 jobs during the month, well below expectations for an increase of 1.5 million. On a positive note, the June figures were revised significantly higher to 4.3 million jobs vs. the original figure of 2.37 million.

· The U.S. service sector rose at its quickest pace in nearly 18 months with the ISM Services PMI rising to 58.1 in July from 57.1 in June, the highest mark since February 2019 and better than the expected move lower to 55. Tucked inside the report, however, the employment sub-index fell from 43.1 to 42.1, the fifth consecutive month of contractions.

· While the July Employment Report showed 1.8 million jobs were added during the month, well ahead of the expected 1.6 million, it was a hefty drop compared to the 7.5 million jobs created in May and June.

In examining the data, we find despite the rebound in manufacturing and services data, so far less than half of the jobs lost due to the pandemic have been recovered. While this points to companies being more productive with existing workers, it’s a headwind to consumer spending, a key ingredient for the domestic economy. In our view, this puts even more pressure in Washington for a next round of pandemic-related economic stimulus. As we the close, the trading week outing appears those stimulus talks in Washington have fallen further apart rather than having moved closer toward a viable solution. Now to see if Trump opts to go forward with executive action or if Congress opts to waive its scheduled summer hiatus.

And in keeping with presidential executive actions, let’s review the actions that have reignited trade tensions between the U.S. and China as well as Canada:

The signing of an executive order banning TikTok and WeChat in the U.S. in 45 days unless they are sold to another company;

The President’s Working Group on Financial Markets (PWG) recommending the Securities and Exchange Commission take steps to implement recommendations put forth in President Trump’s Memorandum on Protecting United States Investors from Significant Risks from Chinese Companies;

Trump issuing an executive order to help increase production of essential medicines, medical equipment and protective gear in the U.S.; according to data published by IHS Markit, the U.S. imported $3 billion of pharmaceutical raw material from China in 2017.

The White House confirmed the U.S. will initiate 10% tariffs on Canadian aluminum imports. As noted by Canadian Deputy Prime Minister Chrystia Freeland, “the new NAFTA ensures 70 per cent of the aluminum purchased by North American automakers is produced in North America” so we have yet to see what ripple effects these tariffs will bring.

Also during the week, U.S. Secretary of State Mike Pompeo announced a new five-pronged "Clean Network" effort aimed at curbing potential national security risks. The announcement essentially names China as a “bad actor” and mandates that any and all data in transit and in storage not be allowed access by Chinese owned entities or in any way passed through hardware manufactured by China given fears of embedded security risks.

Needless to say, all of the above has reignited geopolitical concerns and more than likely forthcoming retaliatory steps from China and Canada in the coming days that will only exacerbate it further.

Focusing on the Stocks Under $10 Portfolio’s start to the second month of the quarter, several holdings, including Antares Pharma (ATRS) , Durect Corp. (DRRX) and Orion Energy Systems (OESX) saw pronounced moves last week. Those double-digit moves higher were mitigated by week over week declines at MobileIron (MOBL) , RF Industries (RFIL) and recently added PC-Tel (PCTI) shares. During the week we booked some heady gains when we exited both positions in ADT (ADT) and Nio Inc. (NIO) shares; we added no new positions to the portfolio last week but we did add to shares of compound semiconductor company AXT Inc. (AXTI) . As the velocity of quarterly earnings reports begins to abate, we are once again looking for fresh candidates that satisfy our investment criteria.

The Stock Market This Week

Following the July data deluge we had last week, the New York Federal Reserve’s Nowcasting Report sees current quarter gross domestic product at 14.6% vs. the prior forecast of 16.85% exiting July and 10.4% at the start of July. The economic calendar will be considerably lighter, but two July reports will be ones to watch. Those are the July retail sales report, which we once again see offering confirming data points and context for several of our holdings, and the July industrial production report that will be a gauge for manufacturing activity during the month and confirmation on the recent PMI manufacturing and ISM Manufacturing reports.

Here’s a closer look at key data scheduled for this week:

Tuesday, August 11: July PPI.

Wednesday, August 12: Weekly MBA Mortgage Applications Index; July CPI ; EIA Oil Inventories.

Thursday, August 13: Weekly Jobless Claims; July Import & Export Prices; Weekly EIA Natural Gas Inventories.

Friday, August 14: 2Q 2020 Productivity (Preliminary); July Retail Sales; July Industrial Production and Capacity Utilization; June Business Inventories; August University of Michigan Consumer Sentiment (Preliminary).

We also will see a noticeable down tick in the velocity of corporate earnings reports this week, and we’ll take it after the last few weeks. It will be a temporary lull, as before too long we will see quarterly earnings from retailers for their July quarter. Tucked inside those reports, we’ll be looking to see how successfully they pivoted their business during the pandemic, and how they see consumer spending shaping up during the back to school shopping season. Given the pandemic that is seeing a growing number of students return to school in either a hybrid or all online model this fall, we could see a pronounced shift in consumer spending toward connected devices and peripherals and away from more traditional items such as clothing, bags and other must have items.

Here are the corporate earnings reports that we’ll be focusing on this week:

Monday, August 10: Ceva (CEVA) ; Marriott (MAR) ; Comscore (SCOR) ; Inter Parfums (IPAR) ; International Flavors & Fragrances (IFF) ; Simon Properties (SPG) .

Tuesday, August 11: Canada Goose (GOOS) ; Lumentum (LITE) ; Nio Inc. (NIO) ; Red Robin Gourmet (RRGB) .

Wednesday, August 12: Cisco Systems (CSCO) ; Lyft (LYFT) ; Ping Identity (PING) .

Thursday, August 13: Alibaba (BABA) ; II-VI (IIVI) ; Tapestry (TPR) ; Applied Materials (AMAT) ; Baidu (BIDU) ; Farfetch (FTCH) ; Hertz Global (HTZ) .

The Stocks Under $10 Portfolio

Below is a rundown of our current positions. Figures in parentheses are each stock's Friday closing price and percentage weighting in the model portfolio. (For the most up-to- date portfolio results, please click here.

ONEs

AXT Inc. (AXTI:Nasdaq; $5.00; 1.99%)

During the week we added to our position in this compound semiconductor substrate company, whose products are a core building block for broadband and fiber optic applications, data center connectivity, solar, optoelectronic and 5G applications. Exiting the week, the shares closed 0.6% higher, and we have ample room to add to this position as we get further confirmation on the ramping 5G market for network equipment and connected devices. Recent data points paint a favorable picture for mobile chip demand despite the pandemic and suggesting 5G smartphone volume ramps for the second half of the year are well under way. And that is only beginning of the global 5G smartphone upgrade cycle that will span the next few years. Alongside that, 5G deployments will give rise to other market opportunities, such as the Internet of Things, that should expand the demand for RF semiconductors and AXT’s substrates.

Price Target: $6.50.

Orion Energy Systems Inc. (OESX:Nasdaq; $4.76; 3.85%)

Shares of Orion Energy jumped more than 20% last week returning them to levels last seen in early May. The catalyst for that move was the company’s June quarter earnings that while mixed management shared it has started to see customers restart and refocus on LED retrofit activity, including the resumption of several key projects. That activity spans not only its key customer, widely believed to be Home Depot (HD) but new customers that include a global logistics company and a nationwide specialty retailer. We recognize the energy-related cost savings of the company’s LED-based lighting systems as well as its part in helping companies reduce their carbon footprint. We will also keep watch on some of Orion’s newer lighting solutions, including its LED retrofit fixtures designed to combat bacteria, fungus, mold and mildew that are used in high-traffic areas such as schools, health care, food service and fitness facilities as well as in other high-risk public spaces. Coming out of the pandemic, we would not be surprised to see this product see some legs in the coming quarters.

Price Target: $6.

PC-Tel Inc. (PCTI:Nasdaq; $6.35; 1.92%)

We recently added shares of PC-Tel, which at its core is an engineering and research and development company that designs and manufactures precision antennas and provides test and measurement products that improve the performance of wireless networks. Late last week the company reported mixed results for its June quarter, with an EPS beat, but revenue modestly missed expectations. The revenue shortfall was attributed to the pandemic, which slowed certain aspects of the wireless infrastructure market build out, largely due to supply chain issues. PC-Tel guided its current quarter to 18.5millionto18.5 million to 18.5millionto20 million in revenue and EPS of 0.07to0.07 to 0.07to0.10. As the 5G market continues to build, we foresee further year over year improvement for the company’s revenue, margins, EPS and cashflow. At the close of Friday’s market, PCTI shares had a dividend yield of 3.46%.

Price Target: $10.

RF Industries (RFIL:Nasdaq; $4.29; 2.83%)

Shares of this digital infrastructure component company trended lower last despite favorable long-term prospects associated with next generation mobile and broadband networks. We continue to see signs pointing to incremental mobile capacity needs for existing networks as a result of the pandemic as well as ramping activity with 5G networks. Adding credence to our longer- term view, Fortune Business Insights’ global wireless infrastructure market forecast is for 9.2% compound annual growth between 2019 and 2026 to roughly 250billionfrom250 billion from 250billionfrom121.8 billion. As we noted above, there are ample points of confirmation for the 5G network buildout that keeps us bullish on RFIL share. We will remain patient investors and look to opportunistically round out our position size.

Price Target: $8.

USA Technologies (USAT:Nasdaq; $7.13; 3.05%)

USAT shares ebbed lower again last week, which kept them modestly positive quarter to date. Renewed Covid-19 concerns raise questions for the company’s transaction-facing business in the near term, but our long-term thesis has centered on the adoption of mobile payments, and we only see that accelerating coming out of the pandemic, as consumers adopt to contact- free payments. As the U.S. economy continues to reopen and consumers further embrace contact-free payments, particularly at unattended retail, we expect we will see a similar recovery in the company’s transaction-based business. Given our position size, we have room to nibble further on USAT shares.

Price Target: $10.

TWOs

Antares Pharma (ATRS:Nasdaq; $3.11; 0.85%)

This name really made up some lost ground last week after reporting earnings that surprised to the upside in terms of both profitability and revenue. The firm also re-instated full year guidance on sales. This came just three days after the firm announced an agreement to distribute XYOSTED in both Saudi Arabia as well as the United Arab Emirates.

Price Target: $5.25.

DURECT Corporation (DRRX:Nasdaq; $2.33; 1.33%)

This name really had a fantastic week, after reporting quarterly numbers that beat expectations, but probably more importantly... updating investors on where the DUR-928 candidate is in the pipeline. The fact that this drug might hopefully help Covid-19 patients suffering from acute organ damage is important there. The firm was also on the receiving end of an "Outperform" rating at Oppenheimer with a $7 price target.

Price Target: $4.

Energy Recovery (ERII:Nasdaq; $7.94; 1.13%)

This name performed very well last week after having reported some good looking numbers the week prior on Friday. Readers will recall that ERII printed Q2 EPS of 0.30andrevenueof0.30 and revenue of 0.30andrevenueof43.6 million. Both of these numbers beat consensus. The catch was in product gross margin that contracted substantially on increasing expenses. This put some shade on what amounted to sales growth of 91%.

Price Target: $13.

Farfetch Ltd. (FTCH:NYSE; $27.22; 2.93%)

Shares of this digital shopping for luxury goods platform chugged higher again last week adding to their impressive quarter to date and year to date gains. The company will report its June quarter results later this week, and we expect an upbeat report and favorable customer metrics. We continue to receive confirming data points for the shift to digital shopping, and we see that setting the stage for a robust second half of the year for Farfetch’s business. That said, given the year to date return, the shares are arguably priced to perfection heading into this week’s earnings report. Should there but some chink it the report’s armor, we could see the shares trade off, which could give us reason to revisit our rating alongside our price target.

Price Target: Under Review.

MobileIron Inc. (MOBL:NYSE; $5.69; 2.76%)

After rising more than 14% the prior week, our shares of this cybersecurity company gave back a portion of those gains, The stronger-than-expected June quarter results highlight the company’s cybersecurity products in a world that has shifted to “the Everywhere Enterprise,” in which customers, workers and suppliers connect from anywhere. While this has been a growing shift in recent years, the Covid-19 pandemic has accelerated that changeover driving demand for secure access such as MobileIron’s mobile security solutions.

Price Target: $6.50

Nokia Corp. (NOK:NYSE; $4.98; 3.55%)

Our shares of Nokia closed within striking distance of our price target last week as we continue to receive confirming signs for the strengthening 5G market place. Given the 43% gain in the shares for the portfolio, we’re not inclined to add to our holdings at current levels, but as we continue to receive bullish signals for the 5G market place we will look to revisit our price target.

Price Target: $5.

Ovintiv (OVV:NYSE; $11.45; 4.32%)

A weaker dollar and a bid under commodity prices did more for these shares last week than quarterly earnings ever could. The firm reported a quarter that did disappoint, but that apparently is not the most significant force behind the flow of capital into and out of this name. The moves made by he firm to hedge risk and manage expenses are why this firm will, in our opinion outperform its peers.

Price Target: $13

THREEs

Pareteum Corp. (TEUM:Nasdaq; $0.78; 0.53%)

There has still been no name-specific news of late. The stock has now been largely trading sideways (a little higher last week) since receiving the extension from the Nasdaq Markets regarding their current status. We still want to be out before any possible de-listing, if it happens. That said, we need to see some real numbers. Soon. There is no date set. There are no estimates. We have no target price. This one remains a "working Three."

Price Target: none

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