The Weekly Summary
Talk of “fire and fury, the likes of which the world has never seen” aimed at North Korea spooked anybody listening. The markets have been calm for so long and then BOOM, the VIX (^VIX: 15.45) spiked 44% in one day and 60% in two days of trading this week. Our take is that we had been in an unsustainable lull of inactivity. These things happen and you have to be prepared for them. But in the long run, they work themselves out and things get better. Stay the course. If you are worried, consider dialing back your exposure to some of the more aggressive equities out there in favor of looking toward our REIT and High Yield portfolios, where the income stream of dividends offers greater downside protection.
But no matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks/funds: Shopify, Apple, The Carlyle Group, Sabra, AstraZeneca, AllianzGI Equity & Convertible Income Fund, Twilio and Amazon.
BMR Companies & Commentary
Apple (AAPL: $158, up 1% - all prices are for the week)
Apple is hard at work sublet shifting its brand. Everybody knows Apple. But Apple isn’t the name of its products. Apple's greatest hits over the past 30 years don't have "Apple" in their name: Macintosh, PowerBook, iTunes, iPod, iPad, iPhone, Siri. The newer stuff that does carry the Apple moniker -- Apple Watch, Apple Music, Apple TV-- have been either outright disappointments or solid but not wildly popular businesses.
But Apple is as good a brand as any. Think Proctor & Gamble, Ford, General Electric - you get the point. It's hard to transition from a corporate brand to additional brand franchises, but if you can do it, the future is bright!
CEO Tim Cook is working hard to make it happen. The Apple brand speaks to the firm's culture and reputation to employees, shareholders and governments. A product brand communicates a specific message about the item's quality, design, or function to consumers. There is so much potential.
BMR Take: Apple is just one of the companies that always figures it out - just as we are seeing them do now with the focus on services revenue and rethinking the brand.
We remain very bullish. The stock is trading at 17x this year’s consensus EPS of $9.00. The Services business is on pace to double over the next few years. Our Target of $155 has now been breached. Yea! We hereby raise our Target Price to $170. This will bring the company close to a $900 billion valuation, now at $813 billion. Our Sell Price remains the same: “We would not sell Apple.”
The Carlyle Group (CG, $21, flat*)
Carlyle is really a master of the universe. The company’s private equity investments are behind so much of the world’s underlining economic activity it’s ridiculous. The latest example is with McDonald's.
This week McDonald's announced the successful completion of a strategic partnership with CITIC Capital Partners and The Carlyle Group. Ramping up a new era of growth and innovation, the partnership will operate and manage McDonald's businesses in mainland China and Hong Kong, leveraging combined expertise and strength to drive an expansion strategy.
The transaction has obtained China's regulatory approval and was completed on July 31st, creating the largest McDonald's franchisee outside of the United States. The sale to the new McDonald's China franchisee includes McDonald's existing businesses in Mainland China (2,500 restaurants) and Hong Kong (240 restaurants).
The new partnership announced a series of development initiatives for mainland China. Termed "Vision 2022," this strategy aims to drive double-digit sales growth in each of the next five years by increasing the number of restaurants from 2,500 to 4,500 by the end of 2022, bringing unparalleled convenience to Chinese customers. The opening pace of new McDonald's restaurants in mainland China is expected to progressively ramp up from approximately 250 per year in 2017 to 500 per year in 2022 under the new partnership. Vision 2022 also includes an increase of "Experience of the Future" restaurants to over 90%, which will enable the brand to offer a digitalized and personalized dining experience to more customers.
BMR Take: We believe Carlyle is heading to $30. Consensus is looking for a solid dividend of $1.80 next year and $2.15 the following. EPS is running closer to $3. Few institutional investors can buy the stock because the K1 tax structure creates issues. But that will change and when it does, look out on the upside.
* The stock was down 40 cents this week, but CG paid a 42 cent dividend on Thursday and when a stock pays a dividend the stock always opens that day down the amount of the dividend. Thus Carlyle was flat this past week.
Shopify (SHOP: $92, down 5%)
Shopify’s plan is to let half a million merchants run their business via Alexa and bots. Shopify wants its 500,000 merchants to be able to run their businesses almost entirely through the use of bots or voice apps like Alexa.
At F8, Facebook’s annual developer conference, Shopify announced plans to launch a Facebook Messenger bot, named “Kit”, the first commerce platform to do so. Through conversations on Facebook Messenger or SMS, Kit can do things like place a Facebook ad or start an email marketing campaign.
The development roadmaps of voice apps like the Shopify Alexa* skillset and text bots like Kit will begin to converge, so that the same merchant analytics available today by voice will become available in a text interface, and the same actions to run your business available today through text will someday be available with your voice.
* Shopify Alexa is a partnership with Amazon to use Alexa.
The Shopify Alexa skill first became available in January, but was launched with no marketing or promotion in order listen to the queries put forward by merchants to better understand the kinds of questions they want the skill to be able to answer. Before merchants are given the ability to run business operations in a conversational interface, a few other features will be added first.
Based on merchant feedback, more long-term business performance insights are on the way, and work will continue with engineers to ensure the bot can handle the range of questions a merchant has and understands the variety of ways a merchant may ask a question.
BMR Take: When we look at the core building blocks of how this company is advancing its growth potential of Total Addressable Market (TAM) is expanding. In addition, we see opportunities in international, in new merchant solutions and apps, and building scale with Shopify Plus, the company’s enterprise-focused solution. In our view, the valuation is supported by the long runway and expanding TAM given Shopify’s lower relative market share, still less than 5%. We reiterate our bullishness on the stock. The stock is currently trading at about 9 times the estimate of next year’s sales. This valuation is rich but justified.
Sabra Health Care REIT (SBRA: $21.45, down 7%)
We have decided to take our chips off the table in Sabra. Two reasons. First, the core senior housing portfolio growth is essentially flat so it’s hard to see any organic upside from the business. Second, the pending merger with Care Capital is being fought creating noise and possibly more risk.
Regarding the latter, two activist investors are urging Sabra to drop the Care Capital deal. They say shareholders of the healthcare-focused real estate investment trust should reject the merger at a shareholder meeting next month. Why? Sabra was overpaying for Care Capital's assets by up to 30%, the hedge fund said in a presentation. Ouch.
Consensus for Sabra Healthcare REIT:
1 Sell Rating, 6 Hold Ratings, 1 Buy Rating
BMR Take: We like to listen to the market and to other shareholders invested in the stocks we own. Especially when the other shareholders do great research and make objective points. We added the stock at $24 in May and are down a bit, but with the dividend, it wasn’t a great loss. Let’s move on to the next one.
AllianzGI Equity & Convertible Income Fund (NIE: $19.79, down 2%)
This fund seeks total return with capital appreciation and high current income through investment in convertible equity, income producing securities and through utilizing an options strategy. It’s top holdings are Microsoft, Apple, Amazon, Facebook, and Google. It does not use leverage. It does not hold fixed income.
60% of the stocks it holds are in the largest giant companies, and 37% in large cap companies. The Funds PE ratio is 19 versus the 17.2 benchmark, but sales, EPS, book value, and cash flow growth is all better than the benchmark.
See more discussion in The High Yield Report later in this newsletter.
BMR Take: Sometimes it is nice to own a fund and have some help picking all the right places to be. We like AllianzGI with its 7.7% yield. You can buy right now at a discount to the net asset value of $21.75, a very opportune entry point.
AstraZeneca (AZN: $29, flat*)
Fierce pharma rivals collaborating on cancer treatments are increasing the competitive landscape, hurting AstraZeneca. But we believe we must stay the course. AstraZeneca reported disappointing results for its clinical trials examining Tremelimumab combined with Imfinzi for the treatment of lung cancer. The market has become crowded with checkpoint inhibitors and immunotherapy drugs, which means that the number of such potential combinations of treatments is growing. Pharma rivals are now cooperating -- last week Merck bought half the rights to AstraZeneca's Lynparza, and in July Eli Lilly said it would out-license or co-develop one-third of its oncology pipeline.
BMR Take: Healthcare has been a minefield for months now. AstraZeneca has been beaten down. Analysts have been upgrading the stock on valuation. It is very cheap versus expectations for around $2 of EPS for next few years. Consider the 3% dividend yield on top of that. It’s a classic value here as the stock is truly undervalued. Our Target remains $42, and our Sell Price of $32 has been breached, so please make a decision with your own portfolio as to whether you personally wish to stay the course. We are trying to be patient here to give the company more time to perform.
*A dividend was paid on Wednesday of 45 cents.
Upcoming Economic News
Retail Sales
August 15th , 8:30 AM
Period: July
Consensus: 0.40%
Prior: -0.20%
Housing Starts
August 16th, 8:30 AM
Period: June
Consensus: 1,220,000
Prior: 1,215,000
Initial Claims
August 17th, 8:30 AM
Period: Through August 12
Consensus: 240,000
Prior: 244,000
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
Stocks finished mostly higher again the week before last, mainly because of good corporate earnings, a stronger-than-expected Jobs report, solid GDP performance, healthy Consumer Confidence and a little better than expected Export & Import numbers. Is it all "too good to be true?" [Well, indeed it was!]
According to the latest American Association of Individual Investors survey, individual investors are now holding their lowest cash allocation since 2000. They are now among the most invested in financial markets since 1988. The three other time periods with the lowest cash allocations were in 1998, 2000, and 2015, and all of these preceded times when investors probably wished they had more of a cushion.
We certainly do not think we're on the brink of another 1999 dotcom bubble or a 2008 financial crisis crater. But one thing's for sure, stocks don't always go straight up forever. There will be volatility and pullbacks as Fed-tightening continues. According to recent news reports, there is now a 50/50 chance the Fed will raise rates again in December. Whenever a pullback occurs, it is not going to be unexpected. It's overdue and as natural to the market as hot dogs are to ball games. With a backdrop of really solid earnings, we expect any pullback to be fairly brief in duration. If earnings keep growing and the job numbers keep getting stronger, pullbacks will just be setting up the next move higher. If Congress grows up and we get tax relief and corporate tax reform, investors will be saying, "Laissez les bon temps roulez".
Note what UBS has to say in their latest report on the Equity Markets: The bottom line: stocks are not cheap, BUT ARE NOT in "bubble" territory.
Amazon Update (AMZN: $968, down 2%)
The stock got hit last week as the rest of the market had some tough times as you know. There is an ongoing discussion over valuation with this company. We had a heated argument with a very astute investor who thinks the stock is overvalued saying that the company will NEVER report substantial earnings; that Bezos will ALWAYS have a new project in mind that will cause him to spend, spend, spend on new infrastructure.
We agree to a certain extent, but disagree with the profit story. As you know, we have said many times revenues are the key to all success in the market. Amazon had revenues of $89 billion, $107 billion and $136 billion in the last three calendar years. This year? Hard to say, but it looks like at least $175 billion? This is just huge of course. We remain bullish for as far as we can see forward.
We hereby raise our Price Target from $1000 to $1100 and leave the Sell Price at $900.
Twilio (TWLO: $31, up 7%)
Twilio had a huge week after reporting blowout revenues as we reported via News Flash on Tuesday. Total revenue – $96 million, up 49% from the second quarter of 2016 and 10% sequentially from the first quarter of 2017.
Loss from operations – $7 million, compared with a loss of $11 million for 2Q16.
And we love this stat: 43,000 Active Customer Accounts as of June 30, 2017, compared to 31,000 Active Customer Accounts as of June 30, 2016.
Profits are still at slightly below breakeven, but as you know, we are banking on the huge revenue gain.
Here is the consensus on the Street:
2 Hold Ratings, 15 Buy Ratings
Price Targets:
8/8/2017 Canaccord Genuity $38
8/8/2017 Robert W. Baird $39
8/8/2017 J P Morgan Chase $40
8/8/2017 Mitsubishi UFJ Financial Group $35
7/17/2017 Summit Redstone $36
BMR Take: We love this company and think it can be a monster. An Apple? A Microsoft? Hard to predict the next 10-15 years, but watch this one closely.
Wall Street Consensus for United Parcel Service (UPS: $111, up 1% in a very tough week, and after an 83 cent dividend on Thursday)
Consensus: 10 Hold Ratings, 5 Buy Ratings
Price Targets:
8/8/2017 Citigroup $128
7/3/2017 Sanford C. Bernstein $127
SNAP (SNAP: $11.83, down 13% - still at a $14 billion market cap)
Don’t buy SNAP
Don’t buy SNAP
Don’t buy SNAP
Revenues: $182 million up from $72 million
Loss: $443 million up from a loss of $116 million last year. WOW! (How is this actually possible?)
Don’t Buy SNAP
Don’t Buy SNAP
A Letter from a Subscriber about Netflix (NFLX: $171, down 5%)
From: Stan Makovsky [mailto:stan@stanxxxx.com]
Sent: Wednesday, August 09, 2017 3:11 PM
To: 'Todd at The Bull Market Report'
Subject: Netflix
Hi Todd,
Disney pulling out of Netflix seems to be a big deal for both stocks. Your thoughts please?
Best Regards,
Stan Makovsky
Our Response:
Hi Stan –
I am not really concerned too much. The market is getting slammed today as I write this [Wednesday] and Netflix is down just $4. If it were down $20 I’d be a little concerned. But I believe Disney needs Netflix more than Netflix needs Disney. Netflix is a force now and as you know is spending billions of dollars a year on programming. They will be just fine. The scary thing about Netflix is their profit level – which is tiny. This needs to change.
Todd Shaver
Founder and Editor in Chief
The Bull Market Report
A Powerful Financial Newsletter
Since 1998
@BullMarketRept on Twitter
The High Yield Report
By Michael Foster
Special to The Bull Market Report
It’s been a long time coming, but we finally see a bit of fear entering the market.
For high yield investors, this is a concern because downturns and mini-corrections tend to be amplified in high yield investments. The S&P 500 slid over 1% last week but many high yield investments fell much more, especially closed-end funds (CEF). The AllianzGI Equity and Convertible Income Fund (NIE: $19.80) fell nearly 2% over the last week due to a considerable decline in the fund’s NAV, which fell over 1% in a single day of trading last week. In many cases, a market correction will result in CEFs’ discounts widening as investors sell off the fund. Surprisingly, however, holders of the AGIC fund have been surprisingly calm, resulting in the discount staying less than 10% by the week’s end. Recently, the discount had shrunk to less than 9%, so this is definitely not as good as it has recently been. But it’s surprisingly not as bad as it could be.
Of course, if the selloff continues throughout the coming week, it would be more than reasonable to expect Allianz to see a larger discount as slower and more risk-averse investors finally get around to selling this and other closed-end funds. What does this mean for you? Well, we maintain a bullish outlook for the economy and for stocks, with corporate profits continuing to rise year-over-year and the Allianz fund in particular maintains a strong portfolio of respected and strong-performing stocks. There’s no reason to sell off amongst the fearful, but anyone with extra cash on the sidelines who wants a sustainable near-8% dividend stream could consider picking up some of this fund.
Similarly, The Bull Market Report’s second CEF pick, the Pimco Dynamic Income Fund (PDI: $29), had a rough week during the market’s selloff, falling over 4%, after paying out a 22 cent dividend on Wednesday. This has resulted in PDI’s premium price falling slightly, and now the fund trades at slightly over a 2% premium to NAV.
After the sell-off, investors may be eager to buy more of the Pimco fund and capture that 9% dividend yield plus the potential upside of special dividends at the end of the year. Before rushing to buy, however, there are a few things to consider. The fund’s NAV has risen 10% so far this year even after accounting for dividend payouts, which means the fund’s payout remains sustainable. However, this is a relatively weak performance compared to its past performance. Part of the reason for that is the growing burden of its promised payouts. Because it trades at a premium, it has been significantly harder for the fund to pay out dividends than to earn the comparable income in the open market. Since the fund’s premium rose to as much as 10% earlier this year, those dividend payouts were particularly burdensome for Pimco’s managers. Now that the premium is at its lowest point since November last year, that dividend is going to be slightly easier to pay.
Easier, but not easy. The real problem with this fund is that it has years and years of a solid track record thanks to its contrarian nature. The fund invested heavily in mortgage-backed securities (MBS’s) after 2008, when they were synonymous with financial ruin. In reality, however, many of these assets were extremely undervalued because of investor fear, and Pimco had the chops to find the good ones and buy them. Hence the fund’s massive outperformance.
However, 2008-2009 is becoming a fainter memory, and the market is finally realizing the huge mistake it made in avoiding many quite valuable MBS’s. As a result, more capital is coming into that market and creating more competition for Pimco. Ultimately, that means diminished returns for investors holding this fund.
Unfortunately, this has also happened as more investors have discovered the fund’s tremendous returns. Holding this fund has become a crowded trade. Back in 2013-2015, the fund almost always traded at a discount; in late 2015, shortly before The Bull Market Report recommended it, its discount fell to 11%. But now a flood of capital has come in and driven the fund to a consistent premium, while earning superior returns through MBS’s is getting harder for the fund.
This doesn’t mean you should sell the Pimco Dynamic Income Fund. But it does mean one has to wait before buying more and instead choose other strong dividend payers like the AllianzGI fund.
Finally, let’s briefly discuss REITs. These were a mixed bag, with pretty much all REITs down and some down much more than others. Omega Healthcare Investors (OHI: $30) fell 2% over the week alongside the broader market, with its greater volatility amplifying losses. Yet the similarly volatile Government Properties Trust (GOV: $18.13) fell about 1% over the same period, even beating the market. There are a couple of pretty obvious reasons for this. For one, Government Properties Trust’s big decline earlier this month means it’s found a bottom and can’t plunge much lower. Obviously this means buying now makes sense. Omega, however, hasn’t exactly found its bottom yet and only went negative YTD at the end of last month. There’s no fundamental reason for this – there is sustainable income, the dividend is still rising, and Omega’s expansionary plans are on track. But there is a lot of fear in the market, and that is reflected in the rapidly fluctuating price of this stock.
While buying Omega now is buying a bargain, investors should be prepared for more volatility. Government Properties, while not exactly strong, seems to have found a floor that is limiting further downside, making it a more appealing buy right now. But no matter what you do right now, selling is not a good idea. There is no fundamental reason to fear for the future of equities or high yield assets, so ignore the panic selling. It will be intense but brief-lived, as always.
Good Investing,
Todd Shaver, Editor, CEO and Founder
The Bull Market Report
Since 1998