Bullseye Brief presents three thematic, actionable investment ideas every other week. My goal is to help identify only those opportunities most worthy of your time… by analyzing data, distilling complexity and sharing insights from a deep network of experts. I love what I do and invite you to join me. Bullseye Brief Members and Subscribers receive the following: 1. Bullseye Brief Twice a Month: 3 actionable ideas every 2 weeks 2. Bullseye View: What’s happening in key markets 3. Week Ahead Preview: Sunday night email on alternating weeks 4. Podcast: Thoughtful conversations about money and life bi-monthly 5. Access: Call or email Adam directly, anytime, with questions or comments

Adam Johnson

Adam Johnson anchored several business programs at Bloomberg Television over five years, interviewing CEOs, heads of state, and Nobel laureates. His daily video investment blog, Insight and Action was sponsored by a major U.S. lender. Previously he managed global risk assets for ING Furman Selz and Louis Dreyfus, trading oil futures, listed equities and equity options. Adam began his career at Merrill Lynch with a degree in economics at Princeton.

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All the King’s Horses

Shales Winners vs. OPEC Losers

  • OPEC member compliance with production quotas appears near an all-time high 90%
  • Lower OPEC production since November merely offsets lower seasonal demand globally
  • U.S. producers have added rigs drilling for new oil and gas reserves in 23 of the past 25 weeks
  • Record hedges imply E&P is maturing from Boom/Bust cyclicality to Cash/Asset predictability

OPEC got its first accord in 8 years, and oil hasn’t even budged… but why would it? Cartel export cargoes hit a 4-year high in January as member countries desperately shipped every last barrel before cuts took effect. OPEC members don’t really want to cut, plus Russia and the U.S. are only too happy to make up the difference. They now rank as the world’s #1 and #3 producers respectively, so every incremental barrel not sold by OPEC is like found money for them. Sorry Saudi Arabia! Not all the king’s horses, nor all the king’s men can put Humpty Dumpty back together again. OPEC no longer dominates supply, and good ole American ingenuity has figured out how to squeeze operating profits out of shale down to $35/barrel. In fact, for the handful of well-capitalized shale producers with high quality assets, $50-something oil might actually be the new sweet spot… sweet enough for investors to trade a predictable range and simultaneously write options for income.

February 25, 2017

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Unstoppable & Uncorrelated

Deal or No Deal… The One to Own

  • Qualcomm’s $47B tender offer for NXP Semiconductor is the sector’s largest ever
  • M&A transaction price of $110 is highly accretive to Qualcomm
  • Boards/Shareholders have already approved merger as companies await regulatory sign-off
  • NXPI has little downside were the deal rejected given reasonable valuation and strong growth

I initiated NXPI Semiconductors NV (NXPI) as a BUY in May at $82, and in October Qualcomm Inc. (QCOM) announced a tender offer for all outstanding shares at $110. It was a glorious moment and I sold my shares. Now I want back in. NXPI currently trades at a discount of $8 to the tender price as global regulatory authorities evaluate this record $47B transaction. Qualcomm is the world’s third largest semiconductor manufacturer, and NXPI dominates the global market for secure chips in smartphones as well as sensors in cars… think park assist, automatic braking and ultimately autonomous driving. As NXPI Sr. V.P. Peter Kelly told investors last spring, “We don’t want to be number one in the market, we want to be number one and at least 50% bigger than the next guy in the business.” I LOVE comments like this, but regulators get a little itchy. Part of me is upset NXPI sold itself at just 15.7 times 2017 earnings, but at this valuation and an $8 discount, I’ll happily buy back my shares. If the deal goes through, I make triple the risk-free rate. If it doesn’t, I own the best-in-breed maker of semiconductors transforming how people live –and NXPI has nothing to do with Trump, tax reform or whether the stocks are expensive.

February 25, 2017

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Tea Leaves & Train Tracks

Earning 27% South of the Border

  • Mexico is the 3rd largest trading partner of the U.S. with $1.5B of daily bilateral commerce
  • Trade outlook improving on diplomatic meetings and Congressional resistance to border tax
  • Kansas City Southern earns 30% of revenue from cross-border shipments and 18% within Mexico
  • KSU CEO sees “no change” in Mexico sourcing from US industrial customers

I love data. Numbers invariably tell a story, and if you really want to get to the bottom of something, just follow the money. I also recognize there are times when “softer data” becomes necessary to fill in the blanks. 18th century Europeans, Chinese traders and even ancient Greeks claimed to find answers in their tea cups, interpreting the shapes of loose leaves left behind as symbolic omens of what might lie ahead. Okay, this may be a little too loose for our purposes, but I will admit there are a lot of unknowns related to taxes and trade under the new Administration, and data alone won’t provide the answers. Several weeks ago I interpreted some diplomatic tea leaves on Mexico, and my EWW recommendation has since risen 11%. I think this trade has more to run, and I’d like to suggest a second Mexico-related opportunity: Buying the U.S. railroad which gets 48% of its business South of the Border, coupled with selling high-priced options around the stock to capture an annualized 25% return. It’s a potent brew, and I think the tea leaves look like dollars.

February 25, 2017

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