The Week Ahead
Two themes are dominating the headlines heading into next week. First, several GOP Senators have come out to say they won’t vote for the Health Bill in its current form. But this is a yawn. Healthcare stocks rallied to end the week pushing past the uncertainty. Congress knows they need to do a good job because Americans are tired of their lack of accomplishments.
Second, everybody is talking about how Amazon will rule the world. Literally, the common question on conference calls now is: “Does your company have any Amazon risk?”. From Capitol Hill to Silicon Valley the bull market is rockin’ and rollin’. What a great time to be an investor. It won’t always be this good that’s for sure.
There is always a bull market here at The Bull Market Report! This week we highlight the following stocks: First Solar, Athenahealth, Tesla, Twilio, Bristol-Myers, and Eli Lilly.
Highlights From The Past Week
Fed Stress test results are in. And everyone passes. On Thursday the Fed released the first phase of its annual stress test which, once again, found that all 34 of the US largest banks "passed", exceeding minimum projected capital and leverage ratios under severely adverse scenarios, based on their projected ability to withstand economic shocks, which shows that "firms are getting the hang of the once-dreaded reviews." The result marks the third straight year all firms cleared the minimum requirements in the exams’ first phase, begging the question just how "stressful" this test truly is. Results covered the "Dodd-Frank Act Stress Test" that measures banks’ capital under stress over the nine quarters. The banking system is very healthy. This is good news for the bull market!
OPEC deal to impact the oil market. OPEC’s production cut deal is unlikely to survive beyond its current deadline in March 2018 many believe. This would result in a huge amount of extra oil to hit the market. OPEC’s most recent deal has not had the cartel’s desired effect on the markets, neither in terms of oil prices nor in drawing down the global glut. Why? OPEC finally decided to cut back production. This should have reduced supply and in turn led to oil prices recovering. But what happened instead? Those darn US swing producers just jumped right back into ramping up production at the opportunity of the void left by the OPEC cuts. Now we are seeing oil prices fall again.
OPEC can’t be pleased with the US nullifying their efforts. The ongoing oil drama is likely to continue. Fortunately, the bull market doesn’t seem to care. We will keep a close eye on the situation just in case as historically, energy boom and busts have had far reaching effects.
BMR Companies & Commentary
First Solar (FSLR: $40, up 11% for the week)
President Donald Trump proposed a solar wall across the Mexican border. And guess who is the likely winner of the contract, First Solar!
At a rally this week in Iowa, Trump announced plans to build a solar wall across the Mexico border.
It appears that the department of Homeland Security has issued 2 RFPs for border wall design prototypes - one for a solid concrete wall and a second for other alternative designs. One of the applicants has submitted plans to construct a border wall with solar panels that would be used for lighting, sensors and patrol stations at the border site as well as to sell excess electricity to the U.S. and Mexican customers. Selection of winning bids is expected sometime this month.
Media reports suggest that the border wall could be about 50 feet tall and would require anywhere between 1.5 to 5GW of solar panels resulting in $10-15 billion of expenditures. While more details have yet to be announced around transmission, permitting constraints, and so on, we expect this announcement to be an incremental positive as it shows that despite pulling out of the Paris accord, the current administration is actually thinking of plans to increase the use of solar and renewables. Moreover, a number of state governments have recently announced plans to promote solar
In terms of actual beneficiaries of the Trump wall, we note that the bidding process would likely involve a number of solar companies but considering the company's established market position, First Solar remain best-positioned to win much of this business opportunity.
BMR Take: Not including the above contract, First Solar EPS is expected to ramp from $0.51 this y ear to $1.34 in 2019, according to consensus estimates. This earnings level is expected off of a revenue base of $2.8 billion this year. You add the potential for a multi-billion dollar government contract and you can see why we like the stock.
Yes, we are underwater on this stock as the firm disappointed investors right after we added it to our Special Opportunities portfolio early last year. It happened fast and we elected to stay with the company through the turmoil. We have noted many times that a turnaround is in full force but it is going to take time, at least into 2018 for the turnaround to be fully successful. It appears to be on track and the stock is on a long slow trajectory to get back to the $60 level and beyond. Last week was a strong statement.
Athenahealth (ATHN: $146, flat)
Would Apple acquire Athenahealth? It might make sense. If Apple were looking to plunge deeper into the digital health market, it would make sense for Apple to buy Athenahealth in order to quickly get some scale. After all, the company’s market cap is less than $6 billion.
CNBC previously reported that Apple is working on ways to turn the iPhone into a way for patients to centrally manage their health data, with connection to a cloud-hosting platform. The idea rings familiar, as it’s the same strategy the company deployed with music.
While the industry continues to make progress, a major issue in Healthcare is adequate interoperability to ensure the seamless exchange of medical data. Apple has more than 1 billion iPhone users, but currently has limited access to clinical systems that capture data in hospitals and physician offices. Meanwhile, Athenahealth has instant access to approximately 10% of the market, 83 million patient records, and roughly half of all U.S. doctors through its health app. Athena’s platform could be a ‘disruptor’ for Apple.
Putting some credibility to the talk, we point out this interested fact - Athena’s CEO & co-founder Jonathan Bush is passionate about making a difference in Healthcare including bringing its technology into the 21st century and according to sources, apparently Apple would be one of few homes for the firm he’d consider.
BMR Take: Athena’s EPS is on track to grow from $0.65 this year to $1.45 in 2019. This growth was good enough for a major activist investor, Elliott Management, to get involved in recent months, which has sent the stock price soaring. But the upside is not done yet. A takeout could push shares much higher.
Tesla (TSLA: $383, up 3%)
Tesla set a new all-time high on Friday at $387, before settling a bit to close at $383. The market cap is $63 billion, as compared with GM at $52 billion and Ford at $44 billion. It’s got a ways to go to catch Toyota at $165 billion, but after you read our BMR Take, below, catching Toyota is not out of the question.
Tesla is reportedly considering launching its own streaming music service. The company has already spoken to the major labels about acquiring the rights to stream songs and albums from the biggest names in the world.
The company may still be a niche player in the auto world, but it is quickly becoming a more serious competitor, and there is no cooler or more in-demand product than Tesla right now.
It is already fairly easy to link a streaming platform and listen to music in a Tesla, but Musk and his employees are clearly interested in upping their offerings, which could make their cars that much more enticing to potential buyers.
Tesla apparently wants to offer several different tiers of this new musical product, all available at different price points. That’s a solid plan that few streaming outlets have been able to master, and few have even tried. If the company can deliver several different options for music lovers looking for different features at different prices, it could give the new service a competitive edge. And by helping it sell more cars, it could generate serious marketing revenue for Tesla.
BMR Take: Tesla is just one of the most innovative companies in the world. Who would of thought of a doing a music service? But they have the resources to pull it off. While Tesla is losing money this year (consensus calls for -$5.80 of EPS), the long term vision and potential here is unrivaled in the Auto sector. If you can’t drive a Tesla, at least ride the stock.
Note that we can foresee another secondary coming in the not too distant future. Tesla goes to the market to raise capital since they are still losing money in a huge way. The have 3.0 billion shares outstanding so selling just 1% of this in new shares, 30 million, would raise over $11 billion in fresh new capital. As we write this we are astounded at the math. No wonder the shorts are getting absolutely destroyed.
Twilio (TWLO: $29.70, up 10.5%)
We see several positive indicators ahead of Twilio. First, Twilio is seeing 20,000 inbound leads per month, up from 5-10,000 at the beginning of the year. Twilio hosted its Signal 2017 Developer Conference in May, which may have helped increase the lead flow. Twilio recently disclosed that it now has 1.6 million developer accounts on its platform, up from 1.0 million a year ago
Second, the sales organization at Twilio remains quite bullish and optimistic about the company’s prospects. According to reports, the long-time sales people at Twilio “have never been more bullish about this company.” Customer reviews show that 85% of reviewers have a positive business outlook about the company, 92% approve of CEO Jeff Lawson, and the overall rating for the company is 4.2 out of 5.0.
Lastly, there is a wisp of hope surrounding the Uber relationship. On the 1Q17 earnings call, management announced that its largest customer, Uber, was “changing the way they utilize and consume communications services.” Twilio said it expects Uber to remain an “important customer…going forward,” but lowered its 2017 base revenue guidance by $11-12 million as a result of the diminishing relationship.
All this aside, some people in the industry are now saying that Uber business might be back. Apparently, after an adjustment period in which Uber implements and executes on its multisourcing strategy, Twilio might be able to see its Uber business return to a growth phase. We sure hope this is the case.
BMR Take: We believe the stock represents an excellent opportunity for long-term capital appreciation. With sales ramping from $275 million a year ago to $360 million this year and heading to $600+ million by 2019, the lucrative 25% top line growth is an impressive feat.
Bristol-Myers (BMY: $57, up 4%)
Bristol-Myers’ stock has doubled the Healthcare sector index since April. While it has taken longer than expected for Bristol, the business outlook is finally starting to improve.
Hospital sales of Opdivo rose 13% in May compared with the 4-month moving average, according to data compiled by Symphony Health Solutions. Opdivo provided 23% of the latest quarterly revenue at the company. This blockbuster drug is having a major effect on lung cancer. It’s great to see these strong growth figures.
BMR Take: Many people continue to speculate that Bristol could be acquired. Recall that famous hedge fund investor Carl Icahn took a major stake in Bristol on this investment thesis and remains one of the company’s top shareholders. But at $93 billion, this would be a BIG acquisition. We don’t think a buyout will happen, but we are a secret admirer of Icahn. After all, he is worth $16 billion. We think he knows a thing or two.
Bristol is a healthcare bellwether. The EPS outlook is $2.90 this year and $3.15 next year, placing the P/E multiple attractively under 20x. With a 2.7% dividend yield, we like the fact that you get paid while you hold the shares. We see substantial upside potential with or without a takeout.
Eli Lilly (LLY: $84, up 2.4%)
As CEO of a 141-year-old Big Pharma company, Eli Lilly’s David Ricks has a fairly good platform for surveying the Healthcare ecosystem. He gave an interview this week and we highlight below some of the key takeaways.
Innovation and productivity are always a challenge for Big Pharma, so the unveiling of Lilly’s new expanded R&D facility warranted some celebration. Right now, the most exciting place is oncology. Something like half of the venture-backed investment is going into oncology companies. That’s because there’s a massive opportunity.
As everyone knows, the battle doesn’t end with an FDA approval. Drug pricing is a heated debate right now and soured sentiment on all of healthcare lingers. Obviously, there’s a lot of frustration with the drug pricing topic. Though one of the core problems is the changing model for insurance design, which is impacting the affordability of medications for people with chronic illnesses. A lot of the cost burden in the healthcare market right now has been shifted to premiums paid by consumers. The high level of premiums being paid today by consumers is not necessary. If political leadership can set new policies that take healthcare back to operating more efficiently, the cost burden currently being placed on consumer can ease up meaningfully.
BMR Take: Lilly is a top franchise in its market. With EPS of $4.10 this year expected to rise 5-10% a year for the foreseeable future, we like the prospects just on this alone. You add upside from innovation in oncology, and the possibility for drug price reform to increase sentiment, and a 2.5% dividend yield while you wait, it adds up to a recipe for investment success.
Upcoming Economic News
Dallas Fed Index
Monday, June 26, 10:30 AM
Period: JUN
Actual: N/A
Consensus: 18.2
Prior: 17.2
Notes: This is an indication of business activity.
Consumer Confidence
Tuesday, June 27, 10:00 AM
Period: JUN
Actual: N/A
Consensus: 116.7
Prior: 117.9
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.
Pending Home Sales Index
Wednesday, June 28, 10:00 AM
Period: MAY
Actual: N/A
Consensus: 110.5
Prior: 109.8
Note: The National Association of Realtor's Pending Home Sales Index is designed to be a leading indicator of housing activity. This index measures housing contract activity.
Personal Income
Friday, June 30, 8:30 AM
Period: MAY
Actual: N/A
Consensus: 0.30%
Prior: 0.40%
Note: Monthly Personal Income and Outlays 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.
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
The week which follows June option expirations (two weeks ago) has historically been one of the worst. But not this year. What we also like is the fact that oil has broken down below $45 per barrel and it hasn't dragged the market with it. Plus, the Fed raised rates AND laid out a plan to unwind its $4.5 trillion balance sheet (which represents its bond portfolio.) We said last week that such a move would likely be a headwind for the market, so one would think that the economy would have to be rather strong for them to approve both moves. It isn't, however, so we are at somewhat of a loss to understand the "exuberance" of the market in light of the statistics that clearly show a "softening" economy as opposed to a strong one:
Wholesale and Retail Inventories Down: Revised wholesale inventories shrunk 0.5% in April, the largest contraction in more than 12 months. The Commerce Department reported that retail sales fell 0.3% in May, marking the largest one-month drop since January of last year. That is just not a signal of a strong and growing economy, particularly in view of the fact that consumers are 70% of our economy.
Housing Data Weaker: U.S. homebuilding fell for a third straight month in May to the lowest level in eight months. Housing starts dropped 5.5% to a seasonally adjusted annual rate of 1.09 million units, which is well below forecasts of a 4.1% increase. Remember, 10,000 people turn 65 every day in the US (and will for the next 10+ years). These folks will eventually move, so homebuilding will have its own demographic headwinds to contend with in addition to the usual economic ones.
Economic Slowdown: The Fed has always targeted 2% inflation, but inflation slowed in April to an annual rate increase of 1.7% year-over-year, down from 1.9% recorded in March and 2.1% in February. Falling oil prices, excessive auto inventories and increasing apartment rental inventories will pretty much put the kibosh on reaching the Fed's target rate of 2% unless there is a dramatic turnaround in the last half of the year. We know that economic growth slowed in the first quarter, with GDP increasing at only a 1.2% annual rate - down from 2.1% in Q416. It's supposed to come in above 2% for the 2nd Qtr, but we'll have to wait for the numbers to come out.
Lower Expectations: Last but not least, the Bloomberg U.S. Economic Surprise Index, which measures whether economic data beat expectations, fell below zero for the first time this year. This signals potential headwinds moving forward.
Many experts believe the market has already priced in some of the new Administration's "growth agenda". However, the "Trump" trifecta (lower taxes, infrastructure spending and healthcare reform) is a nofecta at this point. Unless something gets done before the August recess, the markets will have to face the probability that zero gets done this year. If that happens, we will really need to get excellent earnings to avoid hearing the dreaded sound of air coming out of the market's balloon. And, it will be interesting to see if the Fed moves forward with another rate hike in 2017 in light of the weaker "Big Picture."
Cloudera Update
Cloudera (CLDR: $16.35, down 6%) had another rough week. The stock has gone straight down since we added it three weeks ago. In the earnings report for the June quarter, revenue was $80 million, an increase of 41% from the year ago quarter – a strong showing in our book. They operated at a loss which had been expected, but the market didn’t like this and took it out on the stock. The company went public two months ago at $15 and the firm was able to pocket $250 million in cash, so the company can stand a few quarters of losses, as long as revenues continue growing at this exalted rate.
BMR Take: Nothing has changed in the last three weeks except for the price of the stock. The company is still moving forward dramatically with increased revenues and we don’t expect this to change. Big revenue increases like this always win in the end. But this is not a stock for the weak. It is below our Sell Price, so if it is too painful for you, you should reduce or eliminate your position and watch from the sidelines. We believe in the company but obviously are too early on this one.
Nutanix Update
Nutanix (NTNX: $19.31) had a great week, up 9%. The firm is knocking down new business in bigger chunks lately, with two of its new orders valued at more than $5 million, while 35 deals were more than $1 million each. The firm added 800 new customers last quarter, hitting the 6000 customer mark, and the market is just starting to recognize this and is anticipating another strong quarter ending this week.
BMR Take: Revenues last quarter were big, hitting $192 million, up from $115 million a year ago. That’s 67% growth. We’ll take that to the bank any day of the week. This is still a relatively small firm, with a market cap of just $2.3 billion, so it’s not like investing in a Google at $675 billion, almost 300 times as big. So when you invest in firms that we recommend, do some serious thinking about the relative risk involved. Of course, Nutanix at $19 can go to $38 a lot easier than Google going from $966 to $1932. And for that matter, Nutanix and go to $9.50 a lot easier than Google can go to $483. It’s all relative. Risk vs. reward.
The High Yield Corner
By Michael Foster
Special to The Bull Market Report
The AGIC Equity and Convertible Income Fund (NIE: $19.69) had a relatively flat week despite a fall in price on Wednesday with volumes slightly higher than the fund’s average. That’s helped the fund achieve a 7% year-to-date return on top of the current 7.7% yield, which is in excess of the 6% annualized return since the fund’s inception in 2007. We’ve seen the fund maintain its dividends with no evidence so far that the dividend will be cut. The fund’s NAV has also seen a 9% return year to date, meaning the fund’s discount to its NAV has improved slightly from the start of the year. We like this one.
The PIMCO Dynamic Income Fund (PDI: $30, flat) had a similarly solid week, although the price action here has been more steady. The stock is up 2% in the last 30 days. The fund is currently trading at a 7% premium to its NAV as a result of a strong price appreciation over the last two years. Currently, Pimco Dynamic is up 8% year-to-date and is up 11% from a year ago, which excludes the fund’s 9% dividend yield. Huge.
And keep in mind that this excludes the fund’s special dividends, which have been 3% or more of the fund’s market price in recent years. While it’s too early to make any estimates of what that special dividend will be at the end of 2017, it is evident that we will see another special dividend come to shareholders. Remember last year in the fall and early winter? We talked about it incessantly and guess what? They came through in flying colors, issuing a $1.45 dividend on December 22nd. What an awesome Christmas present.
And now, let’s take a look at REITs. The Bull Market Report High Yield portfolio is heavily focused on a variety of REITs of various types. This week was favorable to all of them.
Digital Realty Trust (DLR: $120, up 4%) has been on a non-stop tear as investors continue to bet positively on the firm’s recent merger with DuPont Fabros Technology (DFT: $65), with synergies from the merger, making this an increasingly valuable reason to buy the stock. Shareholders can rejoice in the 23% gain in 2017.
While the data center space is seeing continued mergers and investor enthusiasm, the Healthcare sector is enjoying a much more low-key run. Omega Healthcare Investors (OHI: $34, up 4%) saw steady price gains for the week. Omega has been an interesting stock for a few reasons. After hitting the current level in April, we saw a pretty heavy dip to bring the REIT to be flat for the year, a rarity in 2017, which has treated REITs kindly. Previously at The Bull Market Report, we have discussed this as a somewhat random outflow of capital with no clear catalyst. The firm’s funds from operations, which is the primary metric when analyzing income and dividend sustainability, is stronger than ever, and the stock’s 7.5% yield is not at risk. So what’s driven the decline? There really is no clear answer, but it doesn’t matter much anyhow; no bad news has come from the firm and it’s since recovered to be up 8% for 2017. Omega Healthcare remains a firm hold for income investors.
Our other Healthcare REIT recommendation has also done extremely well. Care Capital Properties (CCP: $28) is up a whopping 5% for the week, being one of the best REIT performers of the week. That brings Care Capital’s price growth to 10% for the year. This is an eventuality that we have been waiting for for a long time. Care Capital was significantly oversold late in 2016 as a result of market fears that the Healthcare REIT sector would be decimated by President-elect Trump’s plans to overhaul Medicare/Medicaid. But nowadays the news from D.C. has much more to do with politics than policy, and healthcare reforms seem to be sidelined as D.C. focuses on other things. This has helped investors return to Care Capital. As they well should. It’s a solid REIT with over 100% dividend coverage and growing FFO, making us long term holders.
Note that Capital Care is being acquired by Sabra Health Care REIT (SBRA: $25) and it too, had a good week, up 5%.
Government Properties Trust (GOV: $23) was flat on the week with very little volume. In fact, volume has plummeted from a year ago. This may in part be a result of the strong showing the stock has had in 2017 - we’re up 19% already. When The Bull Market Report first recommended this stock, it was yielding 11% thanks to market fear around the company’s pivot towards more private office acquisitions. We did not see a problem with this, identifying it more as a diversification strategy that would lower the firm’s risk profile. The market seems to have taken to this view, as the stock now yields less than 8% thanks to its recent price run-up. Despite the significant capital gains this stock has provided The Bull Market Report REIT portfolio, we encourage investors to hold on to their shares and see what happens at the firm’s late-July earnings call. Any dramatic change in FFO or occupancy rates could make us change our view, but that seems to be an extremely unlikely eventuality.
Finally, a note on AstraZeneca (AZN: $35, up 1.5%). This was one of our big contrarian recommendations last year and we saw the stock fall significantly after our recommendation. Stubbornly, we stuck it out and encouraged readers to hold the company while the market gets its act together and recognizes that dividend coverage is solid thanks to well-managed cash flows, and a pipeline with many promising drugs ensures earnings growth is around the corner. Finally the market has realized its mistakes, and shares are up 29% in 2017. We are now up 17% from our initial recommendation, but more price growth is expected down the road. Again, investors should keep their AstraZeneca shares and enjoy the unrealized gains they’ve had, along with the gains in other High Yield Portfolio holdings. We see more gains coming ahead.
Good Investing,
Todd Shaver, CEO, Founder and Editor
The Bull Market Report
Since 1998