The Week Ahead
Is the bull market long in the tooth? Nah. In the past year, many fundamental and technical arguments have been offered to explain why the now eight-year-old bull market in U.S. stocks is due for at least a solid correction. And yet the stock market has gained ground in recent months, casting some doubt on these metrics but again suggesting the market is long in the tooth. Even news events that pro-market measures such as tax reform might be imperiled – or at least delayed – haven’t hurt stocks at all. So stay invested!
There is always a bull market here at The Bull Market Report! This week we highlight the following stocks: Nutanix, Twilio, The Blackstone Group, Splunk, and Tesoro. And a special report on Tesla.
Highlights From The Past Week
Short Sellers Resist Covering as S&P 500 Retakes Record Last Week It usually doesn’t work this way: Stocks vaulting to records, and bearish traders getting more aggressive. Lately, it has. The S&P 500 Index has climbed 8% since January, including its biggest gain since April in the just-completed week. Just one week ago, stocks suffered their worst rout in eight months as concerns over Trump’s presidency surfaced. Yet the loss was quickly erased and the S&P 500 rose seven straight days to reach a record high. It rose 1.4% to 2,416 last week, finishing with the best gain in a month. The Dow Jones Industrial Average added 279 points, or 1.3%, to 21,080, and closed just 3 points from its record high set Thursday. Technology shares continued to outperform as the Nasdaq 100 Index jumped 2.0% to close at a record high.
Short interest as a proportion of total shares outstanding has expanded, rising by 0.3 percentage point to 3.9%. Not since 2008 has an equity advance as big as this year’s occurred simultaneously with more short sales. It’s not hard to see why bears are standing firm, when any mishap from President Donald Trump could wreak havoc in a market where valuations sit at levels not seen since the dotcom era.
Fed's Williams doubtful of 3% economic growth. San Francisco Fed President John Williams said fiscal policy will not matter much to monetary policy over the next several months. He expressed doubt economic growth will rise sustainably to 3%, as assumed in President Donald Trump's budget proposal, because of certain possible changes in tax rates or policies. A giant jump in productivity growth is required to reach growth that much above the 1.50-1.75% range he thinks is currently sustainable. Williams supported gradual rate hikes and sees no pressure to do more than the two further hikes this year expected by most Fed officials, citing softer inflation readings. You may recall that Williams previously advocated 3-4 rate hikes this year. As to the Fed's balance sheet normalization*, Williams said details have yet to be decided, but promised a blueprint in coming months. Once the trimming begins, the Fed will not tinker with the plan unless there is a significant shock to the economy, emphasizing the process should be gradual and fundamentally on autopilot. In previous statements, Williams suggested the time horizon could be about five years.
* Normalization is the reducing of the size of the Fed's balance sheet. They bought a lot of assets in the Financial Crisis. Now it’s time to unwind that.
BMR Companies & Commentary
Nutanix (NTNX: $19.59, +22%, all changes in this newsletter are for the week)
Nutanix is a United States-based company that markets an enterprise cloud platform that converges silos* of server, virtualization, and storage into an integrated solution.
*An information management system that is unable to freely communicate with other information management systems. Communication within an information silo is always vertical, making it difficult or impossible for the system to work with unrelated systems. It occurs when departments or management groups do not share information, goals, tools, priorities and processes with other departments. The silo mentality is believed to impact operations, reduce employee morale and may contribute to the overall failure of a company or its products and culture.
The company delivered a great quarter highlighted by large-deal momentum. Nutanix reported fiscal 3Q17 EPS of -$0.42 versus the consensus -$0.45 on revenues 67% higher, year over year, of $192 million versus the $187 million expected. Management indicated Nutanix built up a significant backlog of deals that booked but did not ship in the quarter. Nutanix revenue topped analysts’ expectations, and produced a smaller-than-expected loss, and beat comfortably with its outlook for this quarter’s revenue. For the current quarter, the company sees revenue of $215 million to $220 million, and a net loss of 38 cents, better than consensus for $205 million and a 39-cent loss
There were three key takeaways from the quarter: (1) the sales transition toward large enterprise is progressing nicely (2) management's F4Q17 guidance implies billings growth of 32% Y/Y, compared to consensus of 24%, driven by continued confidence in the North American sales organization, large deal momentum, and a significant backlog buildup; and (3) we believe the momentum in large deals, combined with adoption of new technology (shipped on 23% of nodes compared to 9% in year-ago quarter), support the favorable thesis that Nutanix is becoming the preferred next-gen data center platform for enterprises.
The most exciting thing happening is that the shift to larger accounts is bearing fruit. As management indicated on its January-quarter earnings call, Nutanix is undergoing a transition to build a named account sales organization that targets larger enterprises. We think results in the April quarter demonstrate that the transition is now on a positive track and is generating noticeable returns. Management indicated its North American sales organization, which experienced sales execution issues last quarter, snapped back, with the region posting the best sales productivity since F4Q16, a period in which billings accelerated to 120% Y/Y growth.
We believe the better productivity was, in large part, driven by strong momentum in the large enterprise, where Nutanix has increasingly focused its sales efforts. Management indicated business from the world’s largest customers reached record levels in F3Q17, as they were 50% greater than any quarter in the company’s history. Nutanix landed 13 deals that were greater than $2 million in bookings in the quarter for a total of $45 million, compared to only four deals in F2Q17 over $2 million. We believe it has been an ongoing goal to move upmarket and we view the strong performance in the quarter as clear validation of the opportunity for Nutanix in that market.
CEO Deeraj Pandey said the results “reflect our continued focus on the global 2000, as well as a measurable improvement in the number of larger deals in the quarter, particularly in North America."
They ended the quarter with 6,200 customers, adding 800 new customers in the quarter, and ended the quarter with $350 million in cash and equivalents with no debt.
Nutanix shares still have 'significant upside,' says Piper Jaffray. They believe Nutanix has a strong competitive advantage and kept an Overweight rating on the name.
BMR Take: We feel Nutanix is undervalued, trading at 2.6x the consensus 2018 sales forecast, with sales growth of 70% this year and 35% next year.
Twilio (TWLO: $25, flat)
Founded in 2008, Twilio is the leading cloud platform for communications. Similar to Amazon Web Services, Twilio plays a critical role for software developers by allowing them to easily and securely build services such as voice, messaging, video, and authentication into their software applications and then scale those services globally.
We have a mix of good news and bad news to report from a major industry conference called SIGNAL 2017 that Twilio attended this week. The good news is that Twilio is doing the right things to win in the company’s addressable market, including: (1) building high quality, reliable technology services that have 99.99% availability that customers love; (2) introducing new features and products at a rate of one every 3.5 days, a rate competitors are hard-pressed to match; and (3) rapidly adding developers to its community, including 600,000 in the last 12 months, double the amount added in the prior 12 months, resulting in a total of 1.6 million developers on Twilio’s platform. (We find this hard to believe, but we have verified these numbers. Astounding.)
The bad news came from Airbnb, which indicated in its presentation that it is pursuing the same kind of multi-sourcing strategy that led to Uber significantly reducing its spending on Twilio in 1Q17.
BMR Take: Consensus estimates call for 2017 EPS of -$0.29 on revenue growth of 30% and for 2018 EPS of -$0.09 on revenue growth of 27%. Twilio currently trades at a 2018 price to sales multiple of 5x, which is cheaper than many other high growth internet companies. We hope Airbnb sticks around as a customer, but if they don’t, some part of the negative impact is already factored into the current lower valuation.
The Blackstone Group (BX: $33, +9%)
What a great week Blackstone had. Finally! Founded in 1985 as an M&A boutique, Blackstone has grown to become one of the largest and most broadly diversified global alternative asset manager in the world. Blackstone manages $370 billion of assets, roughly equally divided across four segments: Private Equity, Real Estate, Credit, and Hedge Fund Solutions.
This week Blackstone Group announced an investment management agreement in conjunction with CF Corporation’s acquisition of Fidelity & Guaranty Life (FGL), which we believe could represent an interesting longer-term opportunity. In addition to the agreement, Blackstone’s Tactical Opportunities and GSO businesses are investing capital alongside CF Corp. in the deal.
Upon the closing of the transaction, which is expected in 4Q17, Blackstone will earn roughly 20 bps on total assets ($28 billion today), which equates to $55 million of fees (around 1% of 2018E EPS). Not a bad little boost to the bottom line!
Over time, we believe the bigger opportunity for Blackstone will revolve around FGL’s ability to grow within CF Corp. (which we suspect is a big focus), which will drive incremental fees to Blackstone. While the near-term financial impact is small under conservative assumptions, we view the announcement as a positive, given the long-term strategic implications.
BMR Take: Blackstone has made some exciting announcements recently between FGL and the $40 billion infrastructure deal. Plus, the stock is inexpensive, trading under 11x 2018 EPS estimates with a juicy 7% dividend yield.
More Blackstone News
Saudi Arabia joined the parade of investors into U.S. public works by pledging a record investment with Blackstone Group. The country’s Public Investment Fund agreed to commit $20 billion to Blackstone’s new infrastructure fund in the latest push around the world by large investors to buy up airports, pipelines and other public projects, particularly in the U.S. Blackstone said the kingdom’s money would seed an investment fund that whose goal is to reach $40 billion and reach $100 billion with added debt, and by raising money from investors like sovereign-wealth funds, public pensions and rich families. With assets of $370 billion as of March 31, Blackstone manages nearly twice as much as its closest competitor, Apollo Global Management. Each of Blackstone’s four platforms - real estate, private-equity, hedge funds and credit - are among the largest investing businesses of their kind.
Our Thoughts on Things Going on in the World as it Relates to Our Stocks
We don’t talk much about world politics and the US administration here at The Bull Market Report. We watch it closely, but we understand that you are coming to The Bull Market Report for financial news, not mass murders, or the upsetting changes in the status quo in Washington DC. We know that that Trump does have an effect on the markets – we are not stupid or naïve. But the stock market is concerned with revenues and profits, and companies will do everything in their power to produce same, despite what Trump does. As we have seen, he has little effect on most of the things he campaigned about, and the S&P 500 and all the small companies in this country are focused on growing revenues and earnings. We like it that way. We believe in the financial health of America.
Splunk (SPLK: $63, -5%)
Splunk provides software solutions that enable organizations to gain real-time operational intelligence in the United States and internationally. By leveraging a proprietary technology to turn machine data into real-time operational intelligence, Splunk is benefitting from its position as a pioneer and leader in the world of machine data with its core software platform, Splunk Enterprise.
Starting off FY:2018 on the right foot, Splunk reported 1Q:FY18 revenue of $242 million (up 30% YoY) that exceeded the Street’s estimates at $234 million, and a loss per share of a penny that beat the Street at a loss of 4 cents. The company added more than 500 new enterprise customers during Q1. They lifted its revenue outlook for the fiscal year to $1.2 billion. Revenues for the past three years are $450 million, $670 million and $950 million. We’d say they are the right track. They have $1 billion in cash and no debt.
The tone of the call was positive for the seasonally weakest quarter of the year. We continue to believe that Splunk is very well-positioned to benefit from the Big Data wave in the coming years. Splunk is chasing down a big market opportunity and the company raised its total available market opportunity at its analyst meeting in January to $55 billion from the $45 billion.
BMR Take: After a strong performance in the seasonally weakest quarter of the year, we would be buyers of Splunk on any weakness. Despite Splunk more than tripling its revenue between FY:2014 to FY:2017 and consistently beating analyst expectations, the stock is 37% below the peak made in 2014. Now is a great time to take a closer look if you have not already!
Tesoro (TSO: $83, flat)
Tesoro is an independent refiner and marketer of petroleum products. Tesoro, through its subsidiaries, operates seven refineries in the western United States with a combined capacity of 900,000 barrels per day.
We are pleased that Tesoro announced that the waiting period applicable to its proposed acquisition of Western Refining has terminated. This satisfies one of the final conditions to the closing of the pending acquisition. Tesoro therefore expects the closing of the acquisition to occur on June 1, 2017. This news means the deal is highly likely to now close!
As a reminder, why do we like the Western Refining deal? The synergies of putting the two companies together are big. At first glance, we think the originally announced target synergies for the merger – including savings of $350-$425 million – look overly conservative. We believe there is opportunity to reach further into Tesoro’s legacy operations to optimize the retail business, and we believe the overall footprint in the Bakken could be sold for a lot. This is all just the low hanging fruit. Opportunities to optimize logistics in the Permian region could be another leg of upside over time. In summary, not only does Tesoro become an even larger franchise in the sector, but EPS is expected to go from $4 to $7 over the next few years.
BMR Take: We continue to see compelling value in Tesoro shares. The stock trades at a massive discount to post-merger net asset value estimates of $120-140 per share. In comparison, Berkshire Hathaway owns a 15% stake in Tesoro’s competitor Philllips66, which the market values at a premium to net asset value. With several big name institutional investors recently taking large positions in Tesoro, we can’t help but be excited about the prospects for this investment.
Note to our Readers:
We are well aware of the problems on our website getting current prices and data. We get our data feed from Yahoo and they have just informed us that they are discontinuing that service. Needless to say we are not pleased and we are working on the issue. We should be up and running with a solution this week.
Note: Just after we wrote this, we have a solution. Everything should be up and running perfectly Tuesday morning. Yea!
Upcoming Economic News
Consumer Confidence
Tuesday, May 30 10:00 AM
Period: MAY
Actual: N/A
Consensus: 119.5
Prior: 120.3
Note: The Conference Board's Consumer Confidence Survey is a monthly measure of the public's confidence in the health of the U.S. economy.
Personal Income
Tuesday, May 30, 8:30 AM
Period: APR
Actual: N/A
Consensus: 0.4% over last year
Prior: 0.2%
Note: Monthly Personal Income data are published by the U.S. Bureau of Economic Analysis. Personal income measures total pretax income earned by individuals, non-profit organizations, and private trust funds. Wages and salaries are the largest component of personal income.
Chicago PMI
Wednesday, May 31, 9:45 AM
Period: MAY
Actual: N/A
Consensus: 57.9
Prior: 58.3
Note: The Chicago Business Barometer provides an overall gauge of business activity as published in the NAPM - Chicago monthly Business Report. An index reading above 50% indicates that economic activity is generally expanding; below 50%, generally declining.
Pending Home Sales M/M
Wednesday, May 31, 10:00 AM
Period: APR
Actual: N/A
Consensus: 0.6% over last year
Prior: -0.8%
Note: The National Association of Realtor's Pending Home Sales Index is designed to be a leading indicator of housing activity. This indicator measures housing contract activity. It is based on signed real estate contracts for existing single-family homes, condos and co-ops. A signed contract is not counted as a sale until the transaction closes.
ISM Manufacturing
Thursday, June 1, 10:00 AM
Period: MAY
Actual: N/A
Consensus: 54.7
Prior: 54.8
Note: The Manufacturing ISM Report on Business is based on data compiled from monthly replies to questions asked of purchasing and supply executives in over 400 industrial companies. The PMI is a composite index based on the seasonally adjusted indices for five of the indicators with varying weights: New Orders; Production; Employment; Supplier Deliveries; and Inventories. An index reading above 50% indicates that economic activity is generally expanding; below 50%, that it is generally declining.
Nonfarm Payrolls
Friday, June 2, 8:30 AM
Period: MAY
Actual: N/A
Consensus: 175,000
Prior: 211,000
Note: This is survey data measuring nonfarm payroll employment. Employees on nonfarm payrolls are those who received pay for any part of the reference pay period, including persons on paid leave.
Average Workweek
Friday, June 2, 8:30 AM
Period: MAY
Actual: N/A
Consensus: 34.4
Prior: 34.4
Note: This is survey data measuring the average workweek for production or nonsupervisory workers on private nonfarm payrolls.
Is Tesla Where Apple Was 10 years Ago?
We read a great article in Business Insider about comparing Tesla and Apple which was written by Gene Munster of Loup Ventures. Formerly he was a senior research analyst at Piper Jaffray. Some excerpts:
Apple (AAPL: $153, flat) is the world’s largest company with a market cap of $800 billion. Tesla (TSLA: $325, up 5%) s an automaker with a market cap of $53 billion. There are many parallels between Apple about a decade ago and Tesla today, market cap being one of them. In 2005, Apple’s market cap was close to where Tesla’s is today. A decade from now, we think we’ll look back at Tesla and realize it was the next Apple. After all, the Tesla story is just getting started.
There are five major similarities to Tesla today and Apple in the mid-2000s:
1. Brand
2. Visionary leadership
3. Integrated hardware and software
4. Halo effect
5. Reshaping a market
Brand
Tesla has a great brand so far. Tesla owners love their Teslas, just as Apple users love their iPhones and Macs. 90% of Tesla owners state they would “definitely” buy their cars again, the highest rating of any automaker. The next two closest automakers are Porsche at 84% and Audi at 77%. By comparison, Tim Cook stated last year that the iPhone had a 97% satisfaction rate.
Tesla has built a brand around being a different kind of automaker. Not only because its vehicles are powered entirely by electric, but also because they don’t use model year numbers, and treat software updates more similar to updating an iPhone app than a car. The company has done this all while squarely placing itself in the conversation with BMW as one of the best-engineered cars in the world. Tesla is taking a new approach to the car market.
Visionary Leader
Elon Musk and Steve Jobs share similarities in that they are visionary entrepreneurs that simultaneously operated multiple groundbreaking companies. Musk with Tesla and SpaceX and Jobs with Apple and Pixar. However, both seem to have different guiding lights.
Where Jobs seemed to be singularly focused on developing the absolute best products he could to delight customers, Musk appears to be driven to save the world, from developing alternative energy products, to exploring space, to protecting humanity from AI. They both recognize the importance of quality to be successful.
Musk may be the biggest wild card in the comparison between the two companies. The drive to create great products is eternal from a business standpoint.
Obviously, the move to sustainable energy is a multi-decade opportunity. From an investment standpoint this may not matter, but from a philosophical standpoint it’s apparent that the world needs many things and Musk is convinced he can affect positive change.
He's already involved in Tesla and SpaceX as CEO. It was recently announced that he would also be CEO of Neuralink, a brain-computer interface company that creates a neural lace to enhance the human brain. Musk is also involved with The Boring Company, which is currently experimenting with tunneling under Los Angeles to reduce the traffic burden. Finally, Musk is involved with OpenAI, which is dedicated to creating open IP in artificial intelligence.
There will always be those capable of breaking conventional rules, in this case the importance of a laser focus. Musk is obviously one of those people. The only question may be if his desire to save humanity ultimately pulls him in too many directions. Musk has shown an ability to surround himself with great talent, enabling him to better leverage his own time.
Integrated Hardware and Software
Tesla, like Apple, produces its own hardware (cars) and its own software. Their integrated approach allows them to have complete control over the product experience, which is important because a car is a constant user experience when you’re in it.
Perhaps more importantly, Tesla has a multi-year head start over other automakers in terms of features like over-the-air updates and autonomous driving. As autonomous driving functionality becomes a requirement for modern auto buyers, Tesla holds an advantage in that its constantly improving self-driving software is an update away. Tesla's cars get wireless software updates that add new features to the car.
Looking at product categories beyond transportation, Tesla’s proven ability to integrate hardware and software will continue to set it apart from competitors looking to introduce real innovation. Their ability to control the product experience from end-to-end is an innovator’s advantage over the incumbents in industries that Tesla will address in the future.
Halo Effect
Perhaps more than any company in history, Apple has used the halo effect to its advantage. The company’s iPod represented a product that appealed to the masses, where the Mac computer line did not. Once customers adopted iPods and experienced Apple’s attention to detail in design and simplicity of use, it convinced customers to buy Macs.
The iPod also laid the groundwork for the iPhone. Combining the iPod with a phone had long been a topic of discussion, and those two features, combined with an Internet connection, were the iPhone’s features at launch. Now we see the halo effect in full with many iPhone owners also owning Macs, iPads, Apple Watches, and AirPods.
Tesla has a similar opportunity to create a halo effect through its cars. With the Model 3 starting at $35,000, a large audience of entry level luxury car owners are going to experience Tesla for the first time, and at a 90% satisfaction rate, they will be happy to join the club.
Aside from cars, Tesla also offers the Powerwall energy storage product ($5,500), as well as the Solar Roof and solar panels. We believe that Tesla owners will want to add other Tesla products to further reduce their dependence on traditional energy.
Tesla has taken over 400,000 pre-orders for the Model 3. For context, if you assume another 100,000 Tesla owners of Model S and Model X for a total of 500,000 Tesla owners in total by 2018-19, a 10% attach rate of Tesla owners buying the company’s Powerwall or solar products, and $30,000 in revenue from those products, there is an incremental $1.2 billion business opportunity in the near term due to the halo effect.
Reshaping A Market
Tesla’s stated mission is to accelerate the world’s transition to sustainable energy. The company is attacking two major industries - automotive ($1 trillion in US new vehicle sales in 2016) and electric utilities ($400 billion in US revenue in 2015). These industries make sense. Transportation accounts for 70% of total US oil consumption. 65% of electricity in the US is still produced by coal or natural gas. Tesla is creating a platform for sustainable energy from your vehicle to your home. Just as Apple captured significant value from the chain of industries it disrupted, we think Tesla can do the same.
As Tesla pursues its mission, it has a path to be one of the most valuable companies in the world. For the past 10 years, the largest company in the world as measured by market cap has been either Apple, Exxon Mobil, or Petrochina. Going back 20 years, the only other additions are Microsoft and General Electric. Therefore, either a consumer electronics company, an energy company, or a conglomerate represented the biggest company in the world. Tesla is all three.
Tesla’s cars are effectively consumer electronics, albeit expensive ones, that reduce our dependence on oil. Tesla’s acquisition of Solar City and introduction of the Powerwall and Powerpack are next-generation energy plays driving toward the replacement of coal and gas. Doing both makes it a conglomerate.
Tesla is not a car company. It's an operating system for sustainable energy that combines a powerful brand, a visionary founder, integrated hardware and software, and a halo effect all with the purpose of transforming a combination of large markets. Tesla might be the next Apple, as Tesla will forge its own path and the world will be better for it.
BMR Take: Wow. What a story. If this bullish scenario plays out and becomes reality, Tesla is a screaming buy - $1000 a share? $2000? If they run out of capital and have to be bailed out by a GM, Ford or Toyota, the stock is headed towards $100 and lower. But isn’t this the case with any new venture? Risk and reward. The stock market thrives on this.
We are in the bullish camp. We are Elon Musk believers and when the company starts producing cars in quantity in 2018 and 2019 and the world sees how great they are, then revenues and profits will accrue. What a story. We want to be a part of it.
Mazor Robotics (MZOR: $41, down 4.5%)
We are well aware of the price of the stock these past few days. The stock has been downgraded by a few firms due to valuation. Hmmm. What does that mean? It means the stock has gone up, perhaps higher than they ever thought. And yes, we know the stock has gone up. We are way up on the stock since we added it in the teens last year.
Needham restated a hold rating in a research report on May 11th. First Analysis downgraded shares from an overweight rating to an equal weight rating and boosted their target price for the company from $28 to $38 in a research report on the same day. Wells Fargo downgraded shares from an outperform rating to a market perform rating in a research report on May 11th as well. These aren’t stellar reports but they aren’t that bad either. As is common on Wall Street, they are just protecting themselves.
The recent downgrade was May 17th, 10-11 days ago, with nothing new since then. The stock is volatile and traded as high as almost $46 on the 18th, $45 on the 19th, and $43 on Monday of this week. It wasn’t until Tuesday that the stock sold off a bit. But it came right back later in the week. Note that the stock was at $35 a month ago. The point is that it’s not the end of the world. HOWEVER, we don’t know where the stock is going. We know where the COMPANY is going, but not the stock. We believe the COMPANY is doing well. Super well. But maybe the market will drop the stock to $35 or $30 and that would be devastating.
So what to do from here is up to you. We are going to stick with it a little bit longer and watch for it to get back on track. If it doesn’t we will exit with well over 100% gains.
The High Yield Report
By Michael Foster
One of the biggest events of the week was the big drawdown on Thursday of Omega Healthcare Investors (OHI: $32, down 6%), which is causing quite a bit of panic among high yield investors. The panic is in some ways compounded by the fact that this decline came on no news. Omega released their earnings back on May 3rd, with a slight miss on revenues that grew 9% year over year and in-line FFO, with reaffirmed full-year earnings guidance. This means that Omega’s dividend is covered by 135% - a very big number and unquestionably enough to not only support the current payouts but to even boost them higher. Since Omega has increased dividends every quarter since 2011, higher payouts aren’t too shocking.
That doesn’t mean Omega gets much love from markets. The stock has been range bound since shooting up in 2013, meaning its yield has gotten steadily higher thanks to those continual dividend hikes. But shares have remained below their all-time high in early 2015, and are now trading 16% below their 52-week high. Those metrics, combined with the recent sudden selloff, could cause panic in some investors’ eyes.
However, panic is unwarranted. The cause of the selloff is unknown (most likely one big institutional investor exited), but there’s no evidence that the long-term income growth behind this company is impeded by anything at all. What’s more, Omega shares are now at the upper end of their historical range, and will yield over 8% soon enough thanks to the company’s continual payout increases. This makes Omega a pretty good contrarian REIT play right now.
There’s just one problem: this company's been a good contrarian play for a few years now. Will Omega ever break out of this range and start to deliver capital gains?
There are a few reasons to think so, but let’s not get into that now. Instead, let’s think a bit about why you would want to buy Omega now or over the last six years. With increased dividends and ample dividend coverage, Omega has been a strong investment for anyone who wants capital preservation and a reliable income stream. Omega is a stock that reliably delivers about $65 per month in income for every $10,000 invested - and without loss of capital. It’s been doing that for years, which makes it a reliable play in a broader high yield portfolio.
So instead of asking whether Omega will earn us capital gains now or in the future, we should instead focus on the income stream. Is it in danger? Is there any reason to believe the dividend hikes won’t keep coming? Right now the answer to both questions is “no.” And for as long as it remains “no,” this is a stock worth considering for any high yield-focused investor.
Elsewhere in the high-yield world, the markets have been relatively quiet. The UBS BDC ETF (BDCS: $23, up 1%) and the SPDR Barclays High Yield Bond ETF (JNK: $37, flat) saw a modestly strong but mostly uneventful week. This is largely a result of a continually complacent credit market. Defaults are not spiking (despite harried tales of dying shopping malls and the end of retail commerce as we know it - this isn’t impacting corporate bonds to any significant scale.) And the future pace of Federal Reserve interest hikes is modest enough to not cause companies any big problems in repaying their debts. Also, as we have mentioned over the last few weeks, corporate profits are rising at large firms, which is making solvency more common and even encouraging more companies to take out more debt. In short, the corporate lending world is doing fine.
And beyond Omega Healthcare, REITs are fine too. The SPDR Dow Jones REIT ETF (RWR: $93, flat) had a decent showing this week thanks to the relative calm in many REITs, including the triple-net lease firms whose retail shopping focus was a cause for concern over the last couple of weeks. We’re also seeing a continual run-up in the tech-focused REIT world, a once sleepy and high-caution sector that is quickly turning into a market favorite. Digital Realty Trust (DLR: $118, up 3%) had yet another stellar week, bringing its yield even lower. We aren’t yet at a point where the tech REIT world is an overly crowded trade, but we are definitely inching in that direction every week.
Another big theme of the week has been OPEC, with the Saudis again doing all they can to put a floor on oil prices. They tried this back in November last year and failed miserably; oil prices fell after their oil production freeze, although that agreement spanned far beyond OPEC and reportedly had unusually high compliance. The high compliance and the multinational signatories indicates there is a lot of desperation among oil producers to do all they can to fight American shale. While it’s easy to interpret OPEC’s panic as a sign that oil prices will crash, that’d be overkill.
In reality, it looks like the range we’ve seen for crude oil futures will remain. That means oil companies who have gotten accustomed to this new price environment should be okay, and it also means companies that rely on energy to operate (i.e., just about everyone) won’t see input costs balloon. For high yield, this again is a good sign for seeing lower corporate defaults, but it also means MLPs aren’t as risky as they were in 2014 or 2015. The Alerian MLP ETF (AMLP: $12.16, flat) had a quiet week as a result, and MLPs haven’t seen either a panic selloff or an exuberant buy in the last year.
A quick word on Bull Market Report's diversified fund picks: The AGIC Equity and Convertible Income Fund (NIE: $20, up 1%) and the PIMCO Dynamic Income Fund (PDI: $30, up 1%) had a solid week thanks to NAV increases and higher demand for closed-end funds in general, while a sleepy municipal bond market meant Invesco Municipal Trust (VKQ: $12.70) and The Nuveen AMT-Free Fund (NVG: $15) saw little change. We are still waiting for more investors to realize the value in muni bonds, but with low volatility and market complacency, it may take a while for more investors to rotate back into munis and out of riskier stocks and corporate bonds. But it will happen - it’s just a question of when.
Good Investing,
Todd Shaver
Editor in Chief and CEO
The Bull Market Report
Since 1998