The Week Ahead
As the champagne glasses clink in Washington over a record-breaking streak of job growth, the percent of the population employed (aka the labor force participation rate) has slumped. Indeed, the Obama "recovery" has officially been the worst recovery in US history as measured by cumulative real GDP growth. After 32 quarters we are up barely double digits. The standard for an economic recovery is up 15-25%. The great expansions recorded real GDP growth of up 30%, 40%, and even 50% over the cycle. Even worse, we got not just weak results, but added $10 trillion to the national debt in the process. 2017 will be the year of the Orange Swan (aka Trump). Did America pick the right man to lead us back to economic prosperity? Can we get there without geopolitical turmoil?
This week we provide some insights on our latest thinking for Under Armour, Eli Lilly, Microsoft, Alphabet, Apple, Amazon, and Facebook.
Highlights From The Past Week
Tech’s Optimism For Cash Repatriation. Record high-grade US Tech debt issuance has been driven by over $530 billion of offshore cash and investments. The Tech companies can’t get their money back here to the United States so they borrow – at historically low rates. However, the industry’s cautious optimism on a potential 10% cash repatriation centers on gaining access to these funds, which could boost domestic capital spending, M&A, and buybacks. Repatriation would be a windfall for shareholders.
FAANG Stocks Bite Back Adding $85 Billion In Market Cap This Week. Technology stocks have found a cure for whatever was plaguing them during the early stages of the Donald Trump bull market. In especially brisk health is the FAANG block of Facebook, Amazon, Apple, Netflix and Google, which have rallied at 3.8% on average this week, poised for their best performance since October. About $85 billion has been added to their value as investors rotate back into post-election laggards. FAANG stocks were oversold after the election, although there’s likely no real impact from a Trump administration on the highest quality internet names. These five stocks could potentially outperform in 2017, despite pretty clear skepticism among almost all investors, who see a sustained rotation away from growth stocks in the wake of the Trump election. Not us. We are sticking with them. Like glue.
Alphabet (GOOG: $806, up $34)
Apple (AAPL: $118, up $2)
Facebook (FB: $123, up $8)
Amazon (AMZN: $796, up $46)
Netflix (NFLX: $131, up $7)
THE RACE:
[Whereby Apple, Google, Amazon and Facebook are racing with a pure stock price number. Listen – this is not a sophisticated lineup here. It is pure price – nothing to do with percentage increase or market cap increase. We’re just having fun here!]
Converting Apple back to its pre-split price gives us $826, up $14 for the week. Same for Facebook (multiplying by 7) gives us $861, up $56. Wow. Google was up $34 to $801 and Amazon was up $46 to $796.
Clear winner this week? Gotta go with Facebook!
Dismal Year For Brick & Mortar Retail. Disappointing holiday-season sales at Macy's, Kohl's, and Sears underscored the uphill task facing department stores to win back shoppers, who are increasingly turning to online retailers and spending less on apparel. Macy's reported comparable sales fell 2.1% in November and December combined, and the company said it expected a similar decline in 2017. Ouch. Sears and Kmart stores reported a 12-13% drop in same-store sales for November and December - even bigger ouch. The companies are struggling against an overall holiday season that was modestly good. The National Retail Federation estimates that 2016 holiday period delivered sales growth of 3.6% helped by a jump in spending in the last days of December making up for a slow start to the shopping season. By the way, Amazon said it had its "best ever" holiday season shipping more than 1 billion items worldwide -- just crushing it.
BMR Companies and Commentary
Facebook (FB: $123, up 7% for the week)
Facebook is turning to a former television news journalist to help smooth over its strained ties to the news media. It has hired Campbell Brown, a former NBC News correspondent and CNN prime-time host, to lead its news partnerships team, starting immediately. The company does have some seasoned journalists in its ranks. But it does not have any in a senior position working on its newsroom partnerships, contributing to a disconnect between the company and news organizations.
The addition of Ms. Brown comes as Facebook is struggling with its position as a content provider that does not produce its own content — that is, as a platform, not a media company. In the past few months, Facebook has faced criticism for giving too much prominence to fake news; for censoring as offensive an iconic Vietnam War photograph of a naked girl fleeing a bombing attack; and for allegations that members of its “trending topics” team, which is now disbanded, penalized news of interest to conservatives.
BMR Take: The new hires goes a long way to addressing the weak sentiment around Facebook’s content quality and control. Investors can now return focus on the 1.8 billion user franchise and all the possibilities for marketing revenue. We continue to remain long term investors in the company as they move towards their short term goal of 2 billion users, and their next goal of 3 billion. We at The Bull Market Report are starting to use Facebook for marketing the newsletter. Of the 1.8 billion users, we are confident that 100 million+ have an interest in the stock market.
Amazon (AMZN: $796, up 6%)
Prior to the holiday season, it was estimated that Amazon’s Echo device had reached a sales milestone, with a recent report suggesting that the retail giant had sold 5.1 million of the smart speakers in the US since it debuted two years ago. Now reports say the Amazon Echo was among the best sellers this holiday season. Momentum continues building.
Amazon Echo is a hands-free speaker you control with your voice. Echo plays music, provides information, news, sports, and so on. We at The Bull Market Report bought one. We love it, especially for music. We can ask it to play a specific song or symphony and it starts playing within two seconds. We are also big Wikipedia users. Now we don’t have to open our iPhone and punch in the buttons, we just talk to Alexa and ask her to find the information and tell us about it.
We see endless possibilities for the voice control technology. When you give a command to Alexa, a recording of that command is stored on Amazon's servers. Right now on the Echo you can place an order to buy something from Amazon simply by saying the words and the goods will be at your door in two days, if you have Prime. Imagine how this technology could be leveraged across enterprise systems. For instance, perhaps in 10 years when you want to buy a stock you just speak the order to the computer and it executes.
Note that Prime now has over 70 million users, paying $99 a year. That’s $7 billion coming in each year – in cash. More than half of all Amazon users subscriber to Prime. (We love it because it comes with Amazon Music for free. And millions of movies as well. For free.)
The e-commerce giant is hardly done with wooing new potential members - and for good reason. Prime shoppers spent about $1,200 on average last year, compared to about $500 for non-members.
BMR Take: We go back to our initiation report on Amazon, which we discussed the business as not an e-commerce company, but rather an innovation machine. Well, they just did it again!
And don’t be intimidated by the price of the stock. Just imagine that they split the stock 10-1, which they just may do some day. That $800 price would then be $80. So if you don’t have $80,000 for a 100 share order, just buy 10 shares, or 40 shares, or 72 shares. The stock price is IRRELEVANT. What IS relevant is the value of the services the company provides and the profit it makes from the revenue it generates. Amazon just celebrated its 22 year anniversary, but we are here to tell you that they are just in the bottom of the 4th inning in a 9-inning game. They have a LONG way to go. $1000 a share is quite possible this year. $1500 a share? Quite possible next year.
Apple (AAPL: $118, up 2%)
Apple customers’ App Store spending jumped 40% in 2016 - fueled by games such as Pokémon Go and Super Mario Run - to provide a much-needed boost to services revenues, at a time when iPhone growth remains sluggish. Payments to app developers, after Apple took its cut, rose to more than $20 billion last year, with growth accelerating in China. This would suggest that Apple itself produced $8 billion in revenue, as Apple gives 70% to the developers and keeps 30% for itself. Both Apple and the developer community are thriving on this front of the business. Very important.
“2016 was an amazingly great year for the App Store," said Apple's senior vice president of worldwide marketing. "We continue to advance what is available for developers to create. And our catalog of apps grew 20% to 2.2 million." We have always loved this part of Apple’s business. For every iPhone, iPad and Mac that is sold, that new user goes right to the App Store for all types of products, especially music and productivity tools. And that revenue goes right to the bottom line and is recurring. We LOVE recurring income.
Why does it matter? In the early years of the App Store, much of the growth was driven by the increasing installed base for smartphones and tablet. But now as the market is maturing, it is notable that Apple’s success is based on driving increased revenues from its existing users. So we need to see solid fundamental trends out of the service business for the stock to work. And we are.
In recent months, Apple has put a spotlight on revenues from online services such as the App Store, iCloud and Apple Music, in order to counterbalance concerns on Wall Street about the iPhone, which saw its first ever drop in sales last year. The App Store growth figures are another great data point.
BMR Take: Even as unit sales are declining, the total number of people who own and use an Apple device has continued to grow, sustaining the App Store’s momentum. The jump in spending is a indicator of health. We look for the services business to support investor confidence in the stock at unit sales face the realities of a mature growth profile.
Alphabet (GOOG: $806, up 5%)
Google's Android Auto is facing a pushback from automakers led by Ford and Toyota. Ford and Toyota recently said four medium-sized automakers — Mazda Motor, PSA Group, Fuji Heavy Industries and Suzuki Motor - have joined their SmartDeviceLink Consortium, which aims to develop an open-source software platform that app developers can use as an alternative to Apple's CarPlay and Google's Android Auto.
We don’t think the news necessarily spells doom. Google has some of the best technologists in the world. Open-source will allow other talented engineers to be able to compete, but that doesn’t mean they will win.
Google has revved up efforts to integrate their smartphone technologies with auto communications systems. Google and Fiat Chrysler Automobiles, which have teamed on autonomous-driving technology, recently said they would expand their relationship to create an in-car infotainment system using Google's software.
BMR Take: We see Google as a leader in autonomous cars and connected communication software in vehicles. Both are lucrative end markets and support our favorable outlook for the business.
Microsoft (MSFT: $63, up 1%)
A new survey found that enterprises strongly prefer Microsoft’s Azure cloud technology. The survey was conducted in order to gain more knowledge on the "Big Three" cloud providers: Amazon Web Services (AWS), Google Cloud Platform (GCP), and Microsoft Azure.
Nearly 40% of Azure users surveyed identified as enterprises. The trends among enterprises reflect the strength of the Microsoft platform. It goes back to the trust and familiarity issues. Windows Server and other Microsoft technologies are prevalent in the enterprise world. Azure provides the consistency required by developers and IT staff to tightly integrate with the tools that Microsoft-leaning organizations are familiar with.
(This previous paragraph may need to be read again. It is a powerful little piece of information.)
Interestingly, breaking down the Cloud opportunity, the research suggested that infrastructure-as-a-service will reside mainly on AWS, cloud services will be on Microsoft's side, while Google will dominate analytics. While every platform offers each type of service, people will want the best.
BMR Take: We are thrilled to learn Microsoft’s enterprise relationships are healthy and transferring over into the Cloud opportunity. Overall, this looks like a win win win as three of the companies in our portfolio benefit from the Cloud.
Eli Lilly (LLY: $76, up 3%)
Eli Lilly announced a series of changes to its organization and leadership structure to better align them with the company's growth opportunities. Lilly begins 2017 with a clear view of its opportunities for growth in the years ahead. The adjustments announced to pharmaceutical therapeutic and geographic business areas are designed to maximize the potential of the late-stage pipeline and newly launched medicines, while improving productivity.
The organizational changes are expected to increase productivity and simplify Lilly's global commercial organization. These changes also result in a reduction in leadership positions. In December, the company announced reductions to its US field force in anticipation of patent expirations for key products later this year and in response to clinical trial results on solanezumab.
With new medicines recently launched - and potential new medicines in development for cancer, diabetes, autoimmune diseases, neurodegeneration, and pain - Lilly is in the early stages of a new growth period. Now is the time to make sure that the organization is set up to make the most of these opportunities. With clear priorities and the right structure, achieving growth while improving productivity will go hand-in-hand.
BMR Take: We are excited to see these leadership changes be announced. Eli Lilly is in a turnaround situation. Change is warmly welcomed.
Under Armour (UAA: $30, up 5%)
Under Armour revealed a new revolutionary sleep and recovery system including the brand's first-ever Athlete Recovery Sleepwear powered by TB12™ and a new UA Record™ app experience, both designed to improve sleep and overall athlete performance. UA Athlete Recovery Sleepwear was developed in collaboration with Under Armour athlete Tom Brady, who credits sleep as one of the most important components to his training regimen.
Through the new UA Athlete Recovery Sleepwear, Brady and Under Armour aim to provide all athletes with the off-field support that will maximize their ability to perform. Under Armour has incorporated the bioceramics technology - used and validated by TB12 - into a pattern lining the garments, which are designed to maximize comfort and fit. The pattern includes special bioceramic particles that absorb infrared wavelengths emitted by the body and reflect back Far Infrared, helping the body recover faster while promoting better sleep.
By using the Athlete Recovery Sleepwear and UA Record together as a system, athletes will be able to accelerate recovery time and gain a deeper understanding of their sleep. As part of the system, Brady also helped develop six steps to better sleep to further educate athletes, which will be incorporated in retail packaging and available on UA.com/TB12.
Under Armour's science-backed approach to sleep and recovery is strengthened by a new collaboration with Johns Hopkins Medicine centered around tracking, understanding and analyzing sleep patterns. Under Armour has engaged a team of sleep experts at Johns Hopkins Medicine who are working to study the effectiveness of sustained patterns in improving overall sleep behaviors. This in-depth evaluation on sleep comprises the first scientific study powered by the Under Armour Connected Fitness platform and will help shape the brand's sleep products and UA Record user experience.
BMR Take: There is a big opportunity in health data analytics. Under Armour is well positioned to win it. The news of this sleep product is just the tip of the iceberg. Stay tuned. And stay tuned for a higher stock price in 2017. This stock WAY underperformed in 2016. This year the company will outperform.
Upcoming Economic News
THURSDAY, JANUARY 12
Import Price Index – December
Time: 8:30 am
Forecast: 0.8%
Rising commodity prices can lead the December Import Price Index to the biggest gain in seven months. Yet even with frequent monthly gains throughout last year, the yearly decline of 0.1% for the Import Index in November hints that price pressures on consumers and businesses have not been overly burdensome.
FRIDAY, JANUARY 13
Producer Price Index – December
Time: 8:30 am
Forecast: 0.3% overall, 0.1% core
Higher fuel costs can lead the Producer Price Index to the second straight substantial monthly gain in December. The PPI now points to an end of a disinflationary period, rising at the two-year high rate of 1.3% yearly to November. That trend gives the Federal Reserve some confidence that it can tighten monetary policy.
Retail Sales – December
Time: 8:30 am
Forecast: 0.4% overall, 0.5% ex auto
Rising incomes and higher gasoline costs can lead a solid gain for retail sales in December. Sales have shown some uplift of late, rising 3.8% yearly in the three months ending November - the best such result in seven months. But while the rate of retail sales and personal income point to healthy consumer trends, they fall short of the more dynamic growth periods of the recent past when these items rose in excess of 5%.
Business Inventories – November
Time: 10:00 am
Forecast: 0.3%
Business inventories are projected to expand in November at the fastest rate in eight months after sliding in the previous month. The inventories-to-sales ratio of 1.37 in October is the lowest in 15 months. A positive sales trend is now lifting the corporate outlook.
University of Michigan Consumer Sentiment – January
Preliminary Time: 10:00 am
Forecast: 99.0
Consumer sentiment in the Michigan survey may reach its highest level in over a decade as postelection optimism persists. Higher fuel costs may have a key role in influencing sentiment in the months ahead. Though more expensive fuel can weigh a bit on confidence, it can also lift consumer inflation expectations from their record lows.
Some Recent Upgrades for Apple ($118).
1/5/2017 Longbow Research set its Price Target to $140
1/4/2017 Nomura Securities set its Price Target to $135
1/4/2017 Guggenheim initiated coverage with a Buy and a Target of $140. (Where have you been all these years Guggenheim?)
1/3/2017 Drexel Hamilton reiterated a Buy rating of $185.
Remember, Apple’s all-time high is $134 – only $16 away. We have been predicting that this record will fall. Wait until Trump starts talking repatriation of all the cash that is overseas.
Opko Health News
Two interesting events popped up in the insider trading report for Opko Health (OPK: $9.38, flat). Executive VP for Administration, Steven Rubin, purchased 2,000 shares at $9.17 a week ago Friday, and CEO Philip Frost has continued his open market purchases too - 25,000 shares the same day.
Interestingly, Rubin owns 5,573,000 - and yet he is still buying more. Let’s hope they know something positive is coming.
A Word from Gary Jefferson of UBS Securities
Jefferson Financial Group
First Vice-President, Investments
2017 won't be any different from any other year in that it will bring unlimited challenges and opportunities for investors. The new year also always brings with it a "market opinion", which provides the basis for building or adjusting portfolios around that investment outlook. Additionally, when there is a change in market sentiment, it’s usually also time for a change in portfolio direction. For example, during the past few years the sentiment favored deflation. After the election, it clearly favors inflation.
The market has just experienced a post-election melt-up which is utterly opposite of what was predicted by nearly every expert. Because it is the same elites and mainstream media who now are predicting a strong bull market ahead, we are going to take a slightly more cautious approach. We are bullish, but it is simply too early to know whether this rally is the start of a new bull market or just a big sigh-of-relief rally that will eventually fall back into a wait-and-see market. The "what-ifs" are still here, and are too many to just shrug off with abandon. Some of these include: 1) What if the repeal of Obamacare bogs down? 2) What if there is a serious breakdown in China trade relations? 3) What if the Fed raises rates too fast? 4) What if Brexit creates disorder in the European markets? And we could go on and on. (And don’t forget about black swans. Black swans are events that happen that NO ONE thought about beforehand.)
That said, we are optimistic about the US markets for the primary reason that corporate earnings are expected to rise by double digits in 2017 and again in 2018. As long as we have reasonable expectations of earnings growth, we believe the market will rise higher on those expectations. We will remain somewhat cautious so that we can better adjust to any "What-ifs" that may occur, but we enter 2017 with a confidence we didn't have the past two years when we were in an earnings recession. This new "Trump Revolution", as some are calling it, could be a once-in-a-generation changing of the guard that will have a powerful impact on domestic policy, geopolitics and the American economy. It has the potential to provide a powerful tailwind for the US stock market over the coming years and, at this juncture, we are excited about the potential that 2017 and beyond holds.
Twilio Update
A reader, Rob Jolly, wrote us and mentioned a negative article about Twilio from one of our competitors. We find this company to be very superficial sometimes. Here is what we wrote him back.
Hi Rob –
There is nothing new in this report. It is just an advertising puff piece. What IS new is the lower stock price. It is very distressing and we really won’t know anything until earnings come out on February 2nd or so. It is torture waiting for this date though, especially after last week’s showing. The earnings release will show if Twilio is still on track for great things as we expect. But the stock dropping like this can cause great upset.
Todd Shaver
Twilio Consensus Ratings
There are six Hold Ratings and six Buy Ratings on Twilio (TWLO: $28, down 4%)
The Consensus Price Target is $41.
1/5/2017 KeyCorp has a Price Target of $36
1/5/2017 Pacific Crest - $36 Price Target
12/19/16 Drexel Hamilton initiated coverage with a Buy and a $45 Target
A Review: (Some of this may be dry to you, but if you can wade through it, you may see the potential in this company like we do.)
Twilio offers Cloud Communications Platforms. The Company enables developers to build, scale and operate real-time communications within software applications. Its Programmable Communications Cloud software enables developers to embed voice, messaging, video and authentication capabilities into their applications via its Application Programming Interfaces. The Super Network is its software layer that allows its customers' software to communicate with connected devices globally. It interconnects with communications networks around the world and continually analyzes data to optimize the quality and cost of communications that flow through its platform. The Programmable Communications Cloud consists of software products that can be used individually or in combination to build rich contextual communications within applications. The Programmable Communications Cloud includes Programmable Voice, Programmable Messaging, Programmable Video, and Add-on Marketplace.
The Options Corner
Buying LEAPS
What are LEAPS? They are options that expire in January that have a least six months of life. Thus we are looking at January 2018, January 2019 and occasionally January 2020.
Why LEAPS? They allow you to control a stock for 20-40% of the cost of buying it outright. Also, it allows you to buy an $800 stock for $100-200 or less.
Here’s an example: Say you want to buy Google because you think it is heading to $900. The stock closed at $806 on Friday, but let’s round this to $805. You could buy the January 2018 700 LEAP for $145 a share, or just 18% of the stock price. Let us explain. That gives you control of the stock at $700 a share. In other words, the option gives you the right to buy the stock for $700 a share for the next year. But as you can see, there is a cost to that. The option is WORTH just $105. Do you see that? If you can buy the stock for $700 and it is trading at $805, then the option is WORTH $105 (intrinsic value). Since the option is trading for $145, what is the rest of the cost? TIME VALUE. And that time value will go away between now and the expiration on the 3rd Friday of January, 2018. Is it worth it to you to do this? Well, that is the age-old question.
Let’s look at some scenarios. Let’s first look at the bullish argument and then the bearish argument. Oh – By The Way (BTW), OPTIONS ARE RISKY. Consult your advisor before jumping in.
OK – let’s say the stock goes to $900 by expiration. Is that possible? Well, it sure is. It’s like a $81 stock going to $90 in a year. Is that possible? Sure.
Now, if the stock goes to $900, the option HAS TO TRADE for at least $200. Why? Because you have the right to buy Google at $700. Do you see this? If not, go back and re-read the above. You could sell the option then and take your profit. (Keep in mind that options are mostly fairly liquid, so unless there is a market panic, there is a market for the option, meaning you can sell it whenever you like.)
How about a negative scenario. If the stock goes to $700 by expiration guess what the option will be trading for? ZERO. And here’s the rub: If you own the stock, you have lost 13% - it went from $805 to $700. But if you bought the LEAP, you have lost 100%. The good thing is you only had 18% of the value of the stock invested.
SELLING OPTIONS AGAINST THE LONG LEAP
Since about $40 of the cost of the LEAP in the above example is TIME PREMIUM which goes away a little every day (wasting asset), it is a wise idea to SELL an option against the LEAP in order to get the cost of the options down. If you owned the stock and sold options against it, it is called a covered call. In this case it is a covered LEAP.
Example: Using the same option above, you could SELL an option on Google. You could go out to June and SELL the 850 call. That would bring in about $28 per share. Since you paid $145 for the call, your cost has just been lowered to $117. If the stock stays below $850, the 850 call will expire worthless and then in June you can do this again – you could sell a December or January call and bring in another $28-30, further reducing the price of the LEAP to around $90. If the stock stays above $790 you will make money from this trade. In fact, if the stock goes to $900, you would more than double your money (Cost - $90, LEAP would be worth $200.)
There are endless strike prices and expiration dates for options. The January 2019 700 LEAP for example trades for $180. More expensive than the example above, but you have one more year that the 2018 option, giving time for Google to rise AND to sell options against the LEAP. The January 2019 800 call trades for $120. This gives you another year, but most of it is time premium. Ah – so many choices and decisions!
There is so much more to write about trades like these. And there are many ways that things can change during the year, that this is not for the conservative investor. But if you are aggressive, I think you can begin to see the potential benefits of options. And the risks!
The High Yield Corner
Last week was one of the strongest weeks for high yield assets in the last year. That’s saying a lot. We’ve seen double-digit returns yields on many of our picks and throughout various high yield sectors and asset classes. The fact that this strength is continuing deserves some consideration.
Keep in mind that mainstream media outlets have pounded the table with a clear warning: “Interest rates are going to go up, and high yield assets will lose favor as a result. Investors will sell corporate bonds, municipals, and other high yielders in favor of better-yielding U.S. Treasuries.” This warning has been in the air since 2011, but there’s real bite to it now. The Federal Reserve has hinted that three rate hikes are coming in 2017, and they even more recently asserted that a path towards higher interest rates is “appropriate” for America’s economy today. It seems clear that interest rates are bound to rise.
Yet high yield assets are not selling off as expected. There are several reasons for this, which we discuss below. But before we get into that, it’s important to put this in perspective. We have been hearing for half a decade that higher interest rates will cause massive selling of high yield assets. We saw those sell-offs in 2013 and 2014 when the Fed postponed rate hikes. Now the Fed is raising interest rates - and the high yield assets aren’t selling off. Is the market just too slow to respond?
Of course not. A slow market would provide arbitrage opportunities for hedge funds. The reality is more mundane - and more predictable.
The mainstream media outlets are wrong.
They are wrong that high yield assets will sell off in a rising interest rate environment because: They are working on the overly simplistic assumption that people who are buying REITs, junk bonds, etc. will jump into U.S. Treasuries en masse. While we must expect some migration, the question is how much. A spread between those yields and U.S. Treasury yields must exist - but as long as it exceeds the expected risk of those asset classes, people will still demand REITs, junk bonds, and so on.
Right now the spread between high yield assets and Treasuries is about 4%. We are nowhere near the peak levels of 1997 and 2007, when the spread was less than 3%. If we get to that point, we may see a serious high yield selloff, and that will encourage us to be less bullish on high yield assets. Until that point, however, we are maintaining our high yield recommendations with conviction.
The UBS Etracs BDC ETF (BDCS: $23) was an exceptional performer, rising 3% this week on little news but continued optimism about inflation and demand for financial activity. Remember that many BDCs finance firms in the infrastructure sector - and that sector is poised to get a lot of demand if President-elect Trump’s promised spending plans actually materialize. The market is betting on that, driving the sector higher.
The SPDR Barclays High Yield Bond ETF (JNK: $37) was the weakest high yield asset class this week, up a mere 1%. The fact that a 1% weekly increase is the worst performer demonstrates the serious strength in high yield assets, and steels our resolve to hold on to both our favored high yield bond funds and high yield assets in general.
The Alerian MLP ETF (AMLP: $12.81) saw a near 2% rise this week, driven in part by higher oil prices. There is renewed confidence that OPEC will succeed in its oil production cut, which in turn is driving energy stocks up all over the place. However, the impact of higher oil prices on MLPs is unclear, since many deal in natural gas and most don’t benefit from higher oil prices in any direct manner. This leaves us cautious about jumping into this sector as always; it remains uncertain whether MLPs will continue to shoot up this year even if oil prices go up. We will need to see fundamentals at MLPs improve first before recommending this sector.
The SPDR Dow Jones REIT ETF (RWR: $95) was the biggest winner this week, rising over 3%. There are two reasons for this strength. First and most important, REITs are still recovering from their oversold correction in late 2016. Again, rising inflation and higher infrastructure spending will have a positive impact on many REITs, both in and out of the infrastructure sector. Commercial REITs and REITs that lease retail shops should see a benefit from the increased spending, as well as renewed consumer confidence. And that confidence seems to be coming. Hourly wages rose 2.9% according to the government’s last study - a very strong increase indeed, and one of the best readings we’ve seen in a decade. What this means for REITs is simple: More money in Americans’ pockets will mean more spending at retail shops, which will mean more demand for retail space. The benefits for REITs across the board are clear, which is why the market is finally realizing it made a big mistake selling these stocks and is buying them back at a quick pace. This purchasing is likely to continue for a few weeks.
With this bullish activity, our picks had a great week.
Digital Realty Trust (DLR: $98) rose nearly 6% in just one week. Our resolve to hold onto this high growth REIT has paid off, and we are enjoying the 3% dividend yield and appreciate the highly sustainable income that is set to grow. We expect one very large dividend increase from DLR this year, or possibly two small ones; with that in mind we are not considering selling even after the surge last week.
Similarly, Kimco Realty (KIM: $26) rose over 4% as the strength in REITs swept this firm up in its tide. It’s a topsy-turvy world. Kimco is a larger, slower-growth REIT yet its dividend is over 4%, significantly higher than Digital Realty’s. This will not last. We expect Kimco to rise significantly in price this year until its yield falls lower than Digital Realty. For this reason, our strategy with this stock is a bit different: We’re waiting for enough price appreciation to warrant selling. For this reason we are lifting our target price to $35, which is above its 52-week high. This would be a great exit point for Kimco, and we expect it to reach that price either this year or next.
Municipal bonds are continuing their recovery, giving us more confidence in our soon to be added stock: Invesco Municipal Trust (VKQ: $12.42) to the High Yield Portfolio. The Trust rose 2% in the last week and is now over 4% above its 52-week low. We like its price right now for more purchases, and we expect it to keep rising in the coming weeks as the Municipal Bond market returns to reality. This fund is down nearly 3% in the past year, giving us plenty of room for capital gains in the short term. With this in mind, there is a good reason to bet heavy on municipal bonds, and this is a great fund to do it.
Look for the Research Report Tuesday morning.
Additionally, we saw the Nuveen AMT-Free Municipal Credit Income Fund (NVG: $14.70) rise over 3% last week. That’s helped the fund go positive on a year-over-year basis, excluding payouts.
That’s all for High Yield this week and for this week's newsletter.
Good Investing,
Todd Shaver
CEO and Founder
The Bull Market Report