VIDEO: Foxconn Revenue Supports Our Positions in 5 Holdings

In today’s Portfolio video, Chris Versace breaks down what we saw in today’s July ISM Service PMI and why that likely played a role in triggering the market’s late Tuesday morning sell-off. 

Also weighing on the market are the pending Trump tariffs on pharmaceuticals and chips, which should be announced in the coming days. Chris also explains why the Portfolio will be sticking with Eaton ETN shares, and the catalyst for them we’re watching next. He also runs through Foxconn’s July revenue and share why its outlook keeps us bullish on these five Portfolio holdings. 

Transcript

CHRIS VERSACE: Hey, everyone, Chris Versace. It is Tuesday, August 5. And as you can see, we've had quite a bit of developments for the portfolio. We've raised our price targets on Axon and Palantir early this morning. But we're also watching our shares of Eaton fall off, really, in response to the modest earnings miss that we saw in terms of guidance for the current quarter.

For the June quarter, Eaton delivered a very nice earnings and top line beat powered, of course, by the key reason why we own the shares, continuing strength in their electrical facing business with data center orders up 55% year over year. No real surprise, given the strength that we saw in capital spending comments for AI and data center over the last two weeks.

But it was the tariff impact, particularly on Eaton's vehicle business, that led Eaton's updated outlook for the current quarter to fall a few pennies shy of the market consensus. We touched on this in our note this morning. And what we said is that we are going to focus on the more than 90% of the company's business that continues to see positive tailwinds. Yes, AI and data center to a lesser extent, excuse me, aerospace.

And we'll let the shares drift a little bit lower, understanding that the shares have been extremely strong of late. And like we've talked about, it was going to take a beat and raise quarters to power stocks higher. Clearly, this very modest miss relative to the consensus forecast is weighing a little bit on the shares.

But as we come out of the company's earnings conference call, update our expectations, not only for top line revenue growth, but margin expectations, really for the core electrical facing business and aerospace, we will adjust our price target. Currently at 400, but we'll adjust it as necessary. We'll also readjust our pickup point for Eaton shares.

But make no mistake, with data center orders up 55% over a year, we are inclined to remain owners of Eaton shares, potentially using this little stumble here for newer members to pick up some additional shares. But again, we want to get through the earnings conference call first.

The other catalyst that we will be watching as it relates to Eaton is going to be capital spending comments out of key electric utility companies, Dominion Power, for example, Duke Energy, Con Ed, and the like. To the extent that they increase their capital spending plans over the multi-year period that they tend to discuss, that would be a very reaffirming data point for our shares of Eaton.

And over the next several weeks, as we continue to get more details on trade deals and tariffs, we might see a little more clarity on Eaton's vehicle business as well. So we're going to remain patient with Eaton. It's one of our largest positions in the portfolio. So barring a dramatic move lower, we're likely to keep the existing position size. But again, we'll zero in on potential pickup points after today's earnings call for newer members.

But I also want to talk about the other big news that we're getting, which if you were following the market this morning, you notice it was trading higher. And then all of a sudden, right around 10 o'clock, it started to move lower. The reason for that is simply tied to really two things.

One, comments from President Trump that we will be seeing tariffs before too long on pharmaceuticals and chips. But the second was the July ISM Services PMI. And we told you that we would be really focusing in on this report because services accounts for 80%, 85% of total GDP. So what did we see in that report?

Well, the headline services number came in at 50.1. That's down from 50.8. So growing ever so slightly, but at a much slower pace. New orders also fell to 50.3 from 51.3 in June, again, here growing, but at a much slower pace.

The other items that really stood out, though, especially coming off of that July employment report, here, too, we saw that employment fell in the services sector at 46.4, clearly contracting at a faster pace than we've seen in recent months. But at the same time, the prices component in the service sector jumped to one of its highest levels in the last few years, hitting a number of 69.9. That's up from 67.5.

So when we amalgamate the findings of the Services PMI with the Manufacturing PMI, we can clearly walk away with the notion that the economy is a little slower than people had expected. New orders are softening. Prices remain at elevated levels. And employment is also softening. Now, this could very well turn out in the next couple of days to be a bad news, good news situation, bad news for the economy, potentially good news for rate cuts.

A lot of that's going to hinge on upcoming employment data because with the inflation and pricing data remaining at elevated levels, unless we see the economy roll over or employment really soften considerably, the Fed is likely to hold the course as we get more economic data in the coming weeks to determine when is that next rate cut going to be, September or October?

But I will say this, we will want to pay close attention to the Fed speakers that are coming out this week and next week, because next week, we have the July CPI and PPI data. So we're going to continue to watch this evolving roadmap. You know what we're going to do. We're going to continue to follow the data, course correct if we need to, leaning into areas where there is continued strength in the market.

And by that, we're going to follow continued spending either at the enterprise level, the consumers, and other institutions, i.e. government. And we'll continue to look for opportunities in those areas with companies that are benefiting from multiyear tailwinds expected to deliver better than expected and stronger than the S&P 500 EPS growth.

So we're going to continue to dig into the data and pay attention to that. With that, I would just share with you that out this morning, known Apple and NVIDIA partner Hon Hai, sometimes you might hear them known as Foxconn, they reported their July revenue. Up 13% on a month-over-month basis, up more than 7% on a year-over-year basis, which is impressive because the company, in the back half of the year, is going to lap very strong cloud and networking comps.

Now, what did they say about the July revenue? Well, Cloud and networking were strong. And they're expected to remain strong. Really ties back to some of that capital spending comments that we saw from last week. But it's just the latest positive data point for our shares of NVIDIA and Marvell, and we would argue, indirectly for Eaton as well.

But Hon Hai also said that they expect to see the seasonal ramp in connected devices unfolding. Now, that is a nice signal to us about the ramp in the back half of the year about new smartphone volumes, but also PC volumes and other related data points. That should be very good for our shares of Qualcomm and Universal Display, as well as Apple as well.

I know folks have been frustrated with the Universal Display. But remember, we're coming off the seasonally weakest quarter of the year, not only for them, but really for Apple and for Qualcomm as well. As we move through the seasonal ramp in the back half of the year, we should see larger format displays, a greater use of organic light emitting diode displays, not only across smartphones, but other end markets as well.

It's that long-term play. And ultimately, the march towards general lighting as the company continues to commercialize its blue organic light emitting diodes, that's the longer term opportunity that we want to remain with Universal Display shares. That's what we want to capture.

So quite a bit going on this morning. We are going to have more notes coming your way. Of course, we'll have the chart of the day as well. But please be sure to join me between 3:00 and 4:30 PM when I'm over at Yahoo Finance with Josh Lipton, kind of breaking down the key events of the day and looking forward to some things that we'll be watching tomorrow.

And lastly, before we close today's video, quick reminder, please, if you have any questions that you want me to pose to Jay Woods, the chief strategist over at Freedom Capital for this week's Stocks and Markets podcast, please drop them in the comments below. And in the comments below too, I will have an image of today's summary table from the July service PMI courtesy of ISM.

So folks, a lot more coming. Be sure to check your emails, your alerts. We want to make sure you're getting our latest thoughts. And if we happen to make any moves with the portfolio, not something we expect to see today, but if and when we do, we want to make sure that you are right there with us. Thanks for watching.

At the time of publication, TheStreet Pro Portfolio was long ETN.