Report
Dave Nicoski ...
  • Ross LaDuke
EUR 233.53 For Business Accounts Only

Vermilion Compass: Weekly Equity Strategy

Caution still warranted; Shift to market cap neutral

Note: This report is presented in an abbreviated format, as we are in production of our November U.S. Macro Vision book.

This market is still fighting an uphill battle following the S&P 500 breakdown below its 200-day moving average - a level that is now acting as formidable resistance. Our outlook remains extremely cautious due to overhead supply and the additional themes highlighted below:

• Internals deteriorating. Advance/decline lines are violating multi-year uptrends, confirming the market's decline.

• Defensives are leading, indicative of an unhealthy market. Among equal-weighted Sectors, Consumer Staples, Utilities, and Communications have advanced in our relative strength rankings (“RSR”) to the top three positions. Within Health Care, defensive large-cap pharma is leadership as risk-loving biotech lags.

• Banks have broken down. Banking indexes (BKX and KRX) are struggling and have broken down. Considering their role as the linchpin of the economy and an indicator of economic growth, this is an ominous signal for the broader market.

• Semiconductors also breaking down. The PHLX Semi index (SOXX) has broken below support from both a price and RS perspective. Considering semis are the crude oil of the digital world, the breakdown is problematic for the broader market.

• Same for FAANG. Price and RS trends for this former leadership group are breaking down. It will take some time to repair the damage that has been done.

• Interest rates. Treasury yields remain on an upward trajectory. As long as this continues we believe the upside is capped for equity prices.

• USD strong, EM weak. Emerging markets (EEM) remain in a downtrend which continues to put a damper on overall risk sentiment. We believe a weakening dollar and EM bottom could allow U.S. markets to similarly bottom, much like late 2015/early 2016.
In today's report we highlight attractive Groups within Communications and Discretionary... see pages 7-16.
Underlyings
Adtalem Global Education Inc.

Adtalem Global Education provides educational services. The company's institutions and companies provide an array of programs across medical and healthcare, financial services and business and law. The company's segments include: Medical and Healthcare, which includes Chamberlain University and Medical and Veterinary Schools that provide educational programs in nursing and health professions, respectively; Financial Services, which includes Becker Professional Education that provides education serving the accounting and finance professions; and Business and Law, which includes Adtalem Education of Brazil institution that focuses in business, engineering, healthcare, law, management, medical and technology.

American Tower Corporation

American Tower is a holding company. Through its subsidiaries, the company is a real estate investment trusts and an independent owner, operator and developer of multitenant communications real estate. The company's primary business is the leasing of space on communications sites to wireless service providers, radio and television broadcast companies, wireless data providers, government agencies and municipalities and tenants in a number of other industries. The company also provides tower-related services, including site acquisition, zoning and permitting and structural analysis, which primarily support the company's site leasing business, including the addition of new tenants and equipment on its sites.

Bojangles' Inc.

Bojangles' is a restaurant operator and franchisor focused on serving customers with food made from its Southern recipes. The company's menu includes its buttermilk biscuits; its fried chicken; its fixin's; 500 Calorie or Under menu items such as salads, the company's grilled chicken sandwich, and fat-free green beans; its baked and delicious sweets menu; and its Legendary Iced Tea. As of Dec 31 2017, there was 325 Company-operated restaurants, 62 related party franchised restaurants, and 377 independent franchised restaurants operating under the Bojangles'

Bright Horizons Family Solutions Inc.

Bright Horizons Family Solutions is a provider of child care and early education, back-up care and educational advisory services. The company provides services under contracts with employers, who provide child care, as well as other dependent care solutions and educational advisory services. The company's service offerings include full-service center-based child care and early education, back-up care, and educational advisory services. The company operates child care and early education centers across a range of customer industries with the capacity to serve children and their families in the U.S., as well as in the U.K., the Netherlands, Canada and India.

Crown Castle International Corp

Crown Castle International is a holding company. Through its subsidiaries, the company owns, operates and leases shared communications infrastructure that is geographically dispersed throughout the U.S., including towers and other structures, such as rooftops (collectively, towers), and fiber primarily supporting small cell networks (small cells) and fiber solutions. The company's towers, fiber and small cells assets are collectively referred to herein as communications infrastructure. The company's core business is providing access, including space or capacity, to its shared communications infrastructure via long-term contracts in various forms, including lease, license, sublease and service agreements.

El Pollo Loco Holdings Inc

El Pollo Loco Holdings is a holding company. Through its subsidiary, El Pollo Loco, Inc., the company develops, franchises, licenses and operates quick-service restaurants under the name El Pollo Loco ?. The restaurants, which are located principally in California but also in Arizona, Nevada, Texas, Utah and Louisiana, engaged in flame-grilled chicken in a variety of contemporary Mexican-influenced entrees, including chicken burritos, chicken quesadillas, chicken tortilla soup, variations on its Pollo Bowl? and Pollo Salads. The company serves individual and family-sized chicken meals, a variety of Mexican-inspired entrees, and sides, and, on a limited-time basis, additional proteins like shrimp.

Everbridge Inc.

Everbridge is a software company that provides enterprise software applications that automate and accelerate organizations' operational response to events in order to keep people safe and businesses running. Through its Critical Event Management platform, the company delivers applications that provide organizations with the ability to assess threats, locate people, automate actions, monitor incident response, and deliver contextual communications in any volume, in near-real time. The company's applications include mass notification, safety connection, incident management, information technology alerting, visual command center, public warning, community engagement , crisis management, and secure messaging.

Grand Canyon Education Inc.

Grand Canyon Education is an educational services company focused on providing support services to institutions in the post-secondary education sector. The company's services include: Technical and Academic Services, which provides services that relate to the ongoing maintenance of its client's educational infrastructure, including online course delivery and management, student records, assessment, customer relations management and other internal administrative systems; Counseling Services and Support, which includes team-based counseling and other support for prospective and existing students of its client as well as financial aid processing; Marketing and Communication; and Back Office Services.

Papa John's International Inc.

Papa John's International operates and franchises pizza delivery and carryout restaurants and, in certain international markets, dine-in and delivery restaurants. The company has four reportable segments: domestic the company-owned restaurants, which engages in retail sales of pizza and side items; North America commissaries, which includes the operations of the company's regional dough production and product distribution centers; North America franchising, which includes the company's franchise sales and support activities; and international operations, which includes the distribution sales to franchised Papa John's restaurants in the United Kingdom and its franchise sales and support activities.

pdvWireless

pdvWireless is a wireless communications company focused on developing and providing its assets for the deployment of network and mobile communication solutions to infrastructure and enterprise customers. The company provides its commercial push-to-talk (PTT) service, which it markets as TeamConnect throughout the U.S., including Atlanta, Baltimore/Washington, Chicago, and Dallas. TeamConnect includes features that allow communications between PTT radios on the company's MOTOTRBO networks and smartphones or tablets operating on any cellular carrier network, and that permit, through its TeamConnect Hub functionality, any computer connected to the internet to use its browser as a dispatch control center.

SBA Communications Corp. Class A

SBA Communications is a holding company. Through its subsidiaries, the company is an owner and operator of wireless communications infrastructure, including tower structures, rooftops, and other structures that support antennas used for wireless communications. The company's operations are in the U.S. and its territories. In its site leasing business, the company leases antenna space to wireless service providers on towers that the company owns or operates and manages rooftop and tower sites for property owners under various contractual arrangements. In its site development business, the company assists wireless service providers in developing and maintaining their own wireless service networks.

Sprint Corp.

Sprint is a holding company. Through its subsidiaries, the company is a communications company providing wireless and wireline communications products and services to consumers, businesses, government subscribers, and resellers. The company has two segments: Wireless, which provides wireless services on a postpaid and prepaid payment basis to retail subscribers and also on a wholesale basis, including the sale of wireless services that utilize the company's network but are sold under the wholesaler's brand; and Wireline, which provides a suite of wireline communication services to other communications companies and targeted business customers, as well as voice, data and internet protocol communication services.

T-Mobile US Inc.

T-Mobile US provides mobile communications services, including voice, messaging and data, under its brands, T-Mobile and Metro? by T-Mobile, in the United States, Puerto Rico and the United States Virgin Islands. The company provides mobile communications services using its 4G Long-Term Evolution network and its 5G technology network. The company also provides various wireless devices, including handsets, tablets and other mobile communication devices, and accessories for sale, as well as financing through Equipment Installment Plans and leasing through JUMP! On Demand?. The company provides reinsurance for handset insurance policies and extended warranty contracts offered to its mobile communications customers.

Telephone and Data Systems Inc.

Telephone and Data Systems provides communications services to customers with wireless connections and wireline and cable connections. The company conducts its wireless operations through its majority-owned subsidiary, United States Cellular Corporation (U.S. Cellular). The company has three business segments comprised of: U.S. Cellular, which provides service to postpaid and prepaid customers from a variety of demographic segments; and TDS Telecommunications LLC's Wireline and Cable, which provides a range of communications services to both residential and commercial customers.

United States Cellular Corp

United States Cellular provides wireless telecommunications services. The company's customers are able to choose from a variety of national plans with voice, messaging and data usage options and pricing. The company's fourth generation Long-Term Evolution network features smartphone messaging, data and internet services that allow customers to access the internet; text, picture and video message; utilize GPS navigation; and browse and download applications to customize their wireless devices to fit their lifestyles. The company also provides wireless solutions to consumers and business and government customers, including a suite of connected machine-to-machine solutions and software applications.

Provider
Vermilion Research
Vermilion Research

Vermilion Research delivers timely, actionable, and unique research inputs to professional investors. Our research strategists highlight securities which we believe are at major inflection points, based on our various proprietary technical indicators, and offer asymmetric risk/return profiles. We believe our research methodology, which is not limited by industry sector or market capitalization, enables us to deliver superior investment recommendations.

Our process begins by organizing all actively traded stocks into coherent sectors, then into logical industry groups. We then apply our proprietary relative strength tools to identify developing price trends. Once attractive trends are identified within a selected sectors or groups, we screen for individual stocks which we believe offer the best risk/reward profile. Vermilion offers U.S. and global equity market research products. Vermilion’s research team, which has received numerous awards and accolades, has a combined 70 year of experience in the analysis of investment securities.

Analysts
Dave Nicoski

Ross LaDuke

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