by Scott Martin | Apr 13, 2025 | Weekly Newsletter 7pm Sunday
The Bull Market Report
Probably the Best Financial Newsletter in the Country
Market Summary
After teasing a possible special edition of The Bull Market Report last week, we'd like to give you a little insight on what we've seen in the market and how investors can position themselves. So here we are. The mood remains extremely anxious, especially with Treasury bonds selling off contrary to the conventional wisdom where money flows into the safety of U.S. government debt when the economic outlook gets gloomy. While we aren't exactly shocked (correlations between stocks and bonds have gotten tighter in recent years than a lot of now-outdated textbooks taught), it can be harrowing to watch all major U.S. asset classes go over a cliff. Even the dollar is on the run, down 11% from its recent peak and circling lows last seen in the 2022 bear market.
But cut through the surface turmoil and the signs of resilience are clear. The volatility index or "VIX" is still extremely elevated, but dropped 23% last week as investors shook off the initial tariff shock. If the initial announcement had been as toxic as the market reaction suggests, the economy would already have collapsed and we would not be here talking about stocks. That's a lot better than a catastrophic worst-case scenario. Furthermore, developments in the past couple of days prove that trade policy isn't inflexible nor an ultimatum. Instead, there's a lot of room here for negotiation and compromise: timelines can be extended to give corporate leadership more time to react, some essential import categories can receive favorable treatment, and so on.
We've already seen tariffs on most countries delayed for 90 days, which gives purchasing managers until July to pivot their supply lines to the countries with the best odds of making a deal that works. And just over the weekend, we've seen tariffs on semiconductors and other computing components pulled back for adjustment, which takes the pressure off companies like Apple and Nvidia for the time being. Granted, the threat of additional trade barriers remains real. But the prospect for relief is real also. Right now, relief is winning. The trade war may be painful but at least it wasn't immediately fatal.
And stocks that were priced for the end of the world now look worth buying. Major benchmarks exploded on Wednesday when the 90-day pause was announced, with many of our stocks leading the way back. Our Early Stage recommendations, as small and theoretically vulnerable as they are, rebounded close to 30% in the last three trading days. On the other end of the market scale, giants like Apple, Amazon and Microsoft have recovered 8-10% from their lows while Nvidia bounced 15%. We could keep listing names (Meta, Broadcom, Reddit, Dell, Duolingo, Zscaler, Palo Alto Networks) but the deeper message is as simple as it gets: when 80-90% of all stocks move hard in the same direction, all that's required to get 80-90% of all stocks moving in the other direction is for the Wall Street tide to change.
That's what happened here. We are not exactly swimming in calm waters by any means, but the waves went our way this week. Money will likely keep flowing out of the bond market. Where will it go? We suspect a significant amount of capital will come back to stocks, which may be volatile but offer investors hope for better than a 3-5% return in the long run. Capital will also park in the ultimate safety of gold, where our SPDR Gold Shares (GLD) remains a real bulwark of our overall coverage universe. It's good to have a hedge when the world gets unsettled. Gold is the place.
Meanwhile, earnings season is underway, with the banks giving us pretty good numbers on Friday. JP Morgan and Citgroup don't see an immediate disaster unfolding. While we're early in the season, warnings and negative guidance revisions are NOT multiplying at too fast a speed yet. Executives might not like watching their supply chains and manufacturing costs get tangled, but they aren't surrendering either. They're fighting hard. And they think they have a handle on the situation. If they didn't, they'd warn us now and look like heroes in three months when they beat their own pessimistic forecasts.
The next few months will remain volatile, with bond yields back where they were two months ago and the VIX well above "normal" no matter where you draw the statistical boundaries. But at this stage, corporate earnings will probably come in 7% higher this quarter than they were a year ago and the growth trend still points up into 2026 and beyond. Remember, profit margins are relatively high by historical standards, so there's room for a shock or two without rocking the comparisons too much. And remember that interest rates have dropped significantly in the past year, with the Fed poised to cut again on any sign of economic damage more threatening than persistent inflation. Lower short-term rates are supportive. They're a net positive. And we don't recommend Treasury bonds here, so higher long-term rates are not our problem and should not be yours either.
What we're left with is an environment where 70% of the stocks in the S&P 500 are in correction territory and a full 40% are in the grip of a fresh bear market. Apple, Alphabet and Amazon are down 24% from their recent peaks. Nvidia and Meta are down 27%. And the list of great stocks at depressed levels goes on, both on the BMR buy lists and in the broader market. Walmart down 12%. ExxonMobil down 19%. Classic "defensive" names like Johnson & Johnson down 11%. This is classically an entry point, a chance to buy quality at a deep discount, provided that you aren't convinced that the world is about to end. Wall Street has faced every crisis that history could throw at it so far and gone back to breaking records. This time is no different.
Key Market Indicators
Good Investing,
Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998
by Scott Martin | Mar 23, 2025 | Weekly Newsletter 7pm Sunday
The Bull Market Report
Probably the Best Financial Newsletter in the Country
IN THIS ISSUE
Market Summary
The Big Picture
Netflix
C3.ai
VanEck Semiconductor ETF
Zscaler
Dexcom
iShares Oil & Gas Exploration & Production ETF
Range Resources
Ally Financial
Welltower
The Bull Market High Yield Investor
- Invesco Municipal Trust
Market Summary
We'll count this as a win. While our stocks still have a little ground to recover before we wipe out the last YTD losses and start moving forward again, at least we've started moving fast in the right direction. Broad market benchmarks, on the other hand, still look more than a little stalled, with the S&P 500, Nasdaq and Dow Industrials down 2-3% from where they were two weeks ago. What's changed in the world? Not much at all. Trade policy remains unsettled, the Fed is still on hold and earnings season is effectively over until the next cycle gets underway in mid-April.
However, the recent "flash correction" (seventh-fastest in history, we're told) managed to attract buyers back to a market that felt slightly overpriced relative to the amount of uncertainty out there. A few months ago, investors seemed confident holding onto stocks valued at 22X earnings. Now, while the outlook has weakened a little, investors seem willing to accept roughly 20X as a viable entry point. If that proposition holds in the longer term, this will go down in history as a bottom and not a hard ceiling on the market's ability to keep rallying despite all apparent threats.
After all, the collective corporate bottom line is not going down. It's only going up a little less fast than we hoped a few months ago. We'll talk about this in greater detail in The Big Picture but the executive summary really boils down to the fact that all the apparent threats haven't triggered any kind of earnings recession. All they've done is curbed the most enthusiastic growth forecasts. We're in more realistic territory now. And if investors will pull cash off the sidelines and pour it into stocks with the market at 20X, then that's the world we find ourselves in.
There are at least two key lessons here for BMR subscribers. First, our approach to diversification may superficially hurt us when the bulls are running at full froth, but the minute the market mood turns sour, a little extra exposure to income-oriented stocks and funds goes a long way. These investments rarely have a lot of growth on their side. The underlying businesses are steady cash generators but management is more focused on returning cash to shareholders than pouring it back into corporate expansion initiatives. As a result, while they're rarely sexy, they have a lot of staying power. Our Healthcare portfolio is up YTD. So are most of our REITs, most of our Financials and, in a shock to some, Energy. Yes, the Energy portfolio is up 5% YTD despite all the nattering about the world economy and falling oil prices. Never forget that in a true economic upheaval, it's strategically useful to have a stake in the companies that collectively keep the world's lights on and the trucks running. (We've been loving our SPDR Gold Shares for similar strategic reasons: up 15% so far this year!)
The second lesson is that over time the most dynamic companies will outperform. They rally harder in the good phases and while they might correct almost as hard in the downswings, you just can't keep a good stock down. The rebounds are more robust than the retreats. In some cases, you can't even see the retreat. We're pleased to have names like Netflix (up 8% YTD), Meta Platforms (up 11%, beating everything else in the "Magnificent 7") and Zscaler (up 16%) to both buoy our overall results and demonstrate our expertise. From cycle to cycle, having stocks like this on our list is how we keep outperforming.
Do the allocation math. We currently cover 55 stocks and funds. Unlike top-down passive portfolios, our "BMR Index" is equally weighted to allow smaller names the same shot at the spotlight as the giants. Otherwise, small stocks like Recursion Pharmaceuticals (market cap $2 billion) would vanish in the face of a single Apple ($3.8 trillion). They'd lose all their impact. Netflix accounts for about 1.4% of our equal-weight universe so its strength this year shows up a lot more clearly than it does in index funds that track the S&P 500, for example, which weight the stock at barely half that level. Zscaler, with a relatively lofty $31 billion valuation, doesn't show up in the index fund at all. Those investors are locked out of success stories like this until the stocks have already succeeded. Even then, it takes trillions to add up to more than the percentage point or so of attention we give every single recommendation.
Granted, the last few weeks haven't been kind to a lot of these companies and the rest of our recommendations have taken a significant step back. But we've always said that while Wall Street's moods come and go, the fundamentals always assert themselves as the ultimate arbiter of shareholder value. Or as Warren Buffett's mentor Benjamin Graham once said: "In the short run, the market is a voting machine, but in the long run, it is a weighing machine." The fundamentals remain robust. As long as that situation doesn't change, the votes should ultimately swing back in our direction.
That's how we outperform, with a strong defensive line against the storms and a stronger offense when the skies clear. Let the Fed do whatever it wants. Let Washington swirl. One way or the other, we're in position to ride the wave. And this week in particular, that edge shows up in our tangible results, both recent and YTD.
There's always a bull market here at The Bull Market Report. We've spent a lot of time looking back at trailing earnings reports lately, so it's past time we opened up The Big Picture to what investors actually need to know: our take on the future and whether that projection is bright enough to justify buying (and holding) stocks at this point. Since the Fed met, you can guess what The Bull Market High Yield Investor is all about. And as always, we need to update you on stocks in our favorite sectors.
Key Market Indicators
The Big Picture: Substance Over Shock
A packed news cycle has a lot of investors on edge. We get it. But in our experience, flinching from every hypothetical shock practically ensures that you'll miss out on a lot of opportunities, even if you're not a "trader" looking to sell out ahead of periods when stocks underperform or go down. After all, most of the nightmare scenarios we can imagine simply don't come true, and the ones that happen are rarely as bad as the worst projections suggest. Unless you can't roll with a few rumors, you'll find it challenging to reach for the upside.
And we're in luck because there's one news cycle we can always anticipate and the next one starts in a few weeks when the big Banks start to release their quarterly numbers. Unlike all the speculation about trade policy or taxes, for example, earnings season is a scheduled event. We can all see it coming. Most of the bigger companies let us know weeks in advance when exactly to expect the numbers. They also provide some sense of what to expect from the numbers, which is all "guidance" really means. Of course this advance glimpse at how the cash is flowing is not official or perfectly accurate, but it's the best sense the executives running the operation have of where the trends point.
While that logic might seem intuitive and even basic on the surface, it's worth letting it sink in through all the anxious chatter currently choking the market. Guidance gives us a pretty good sense of earnings, revenue and other key metrics for the current quarter and often the full year as well. At the very least, it's as good as the numbers the executives see every day as they guide the business around short-term threats and toward long-term goals. When something emerges as a real risk factor, they'll mention that they're watching it. If they don't volunteer that information, odds are extremely good that one or more of the analysts on the conference call will raise the question.
Those risk factors are built into every company's projections. When emergent threats have a material negative impact on those projections, a smart management team will acknowledge the pain early and warn Wall Street that the corporate sky has gotten cloudy. Normally somewhere between 55 and 65 members of the S&P 500 will issue this kind of warning at this phase of the quarterly cycle. We're currently tracking 66, which is only a fraction above average. Needless to say, "average" means normal. It isn't elevated. It isn't extreme.
Don't get us wrong: those warnings have a cumulative chilling effect. Our sense of earnings growth across the S&P 500 for the full year (2025) has come down about 3 percentage points in the last two months, which is roughly when the warnings started stacking up. Revenue growth is coming on 1/2 percentage point lower. This does not suggest that either the top or bottom line for America's corporate giants is going down, only that it is rising a little less fast than we hoped. All in all, we are still looking for 11% more profit this year than last and well above 5% higher sales numbers as well. Does that look like a looming crash to you? Remember, executives play a challenging game: when they guide our expectations lower, their stocks go down in the short term, but if they don't warn us at all, the stocks drop hard when we get the results. That's when the real "shocks" that matter happen.
We don't buy the S&P 500 as a whole, so all these numbers are really only relevant when it comes to gauging the overall market's mood. So who is feeling the chill? Materials producers are hurting hard. We don't recommend them. Tesla is hurting hard, with growth forecasts dropping as sales and sentiment falter. We don't recommend them right now either. The Industrials are reeling. Not a lot of that in our portfolios. Walmart warns? We don't cover it.
What we like (and what we overweight) is growth at the right price. That means a lot of Technology, a handful of Finance and Communications companies that effectively double as Tech and a surprising amount of Healthcare. Healthcare is booming, with earnings across the sector on track to expand 18% this year, right in line with traditional Tech. Some of these stocks have rallied so hard that they've gotten ahead of their realistic growth curves, but others have the dynamism to validate their valuations.
Here's the basic barometer: the S&P 500 might give us 11% growth this year and trades at 20X forward earnings. While that's not great by historical standards, it gives you a sense of what a vanilla "stock investor" would get in an index fund right now. Across the Tech sector, that growth rate might come in around 19% and Wall Street is paying 25X for that accelerated trajectory. Again, not great calculations by historical standards (back in the E.F. Hutton era, Tech would need to drop another 25% or so to qualify as a screaming buy) but not exactly bad enough to dump existing positions and start over. We'd call it a "hold" at worst. Healthcare looks much better at 18% growth and 17X forward earnings. Yes, that is that E.F. Hutton era "screaming buy," and it's why we are so happy with so many of our Big Pharma names.
Growth isn't everything, either. We have always preferred some sectors and industries (Real Estate, high-yield Financials and lately Energy) because they satisfy different investment criteria, the main one being the ability to lock in decent current income as the dividends accrue. Energy, as you know, is a boom-and-bust cycle. Right now these stocks are far out of favor with earnings stalled this year, but management feels comfortable forecasting 17% growth next year and we find no reason to disagree. At that point, Energy will be expanding faster than Tech. Investors who buy that story now at barely 14X current earnings will feel pretty smug in that scenario. That's exactly how all of this works. Buy clarity, don't flinch until it's clear that the bad headlines are actually headed into your lane.
BMR Companies and Commentary
Netflix (NFLX: $960, up 5% last week)
LONG TERM GROWTH PORTFOLIO
Streaming giant Netflix is riding high on the blockbuster success of its new tiers, content, and initiatives, and Wall Street, too, is taking notice with a string of bullish price targets in recent weeks. The most prominent take comes from MoffettNathanson which states rather definitively that ‘Netflix has won the streaming wars, case closed’ as its content and engagement metrics are miles ahead of competitors.
The stock released its fourth quarter results recently, reporting $10.3 billion in revenue, up 16% YoY, compared to $8.8 billion a year ago. Profits came in at $1.9 billion, or $4.27 per share, doubling from $940 million, or $2.11. We believe that the streaming giant’s profits are only just beginning to scale as it begins to unlock value from its massive worldwide landed base of 300 million paid subscribers.
The platform now reaches an audience of over 700 million viewers, or a little under a tenth of the world’s population, putting it right alongside the world’s top media conglomerates. The company’s much-publicized foray into advertising and its new powerful ad suite are all aimed at unlocking the billions in untapped value that comes from having so many eyeballs on you each evening.
The company’s relentless focus on engagement and customer satisfaction is paying off and is not slowing down. There was a time when its original content was hit-or-miss, but the company has finally cracked the content game and is now on par with the big studios such as Disney and Paramount. The move into live sports has flourished similarly in recent months, driving millions of fresh sign-ups.
Since the beginning of streaming play, Netflix's goal has been to have as many people spend as much time on the platform as possible. Having attained this goal, gears are shifting toward monetization. We expect advertising to become a major contributor to profits over the following months and years, in addition to several new content and pricing tiers.
In 2024, Netflix had more shows ranked #1 in the ‘Top 10 Streaming’ charts than the other streaming platforms combined. The Jake Paul vs. Mike Tyson boxing match last year was the most-streamed sporting event in history, and with the Christmas Day NFL Game, WWE Raw Pro, and the Screen Actors Guild Awards, it is now an entertainment powerhouse. Talk about streaming—Netflix’s profits will keep flowing in, and they’re already impressive, with $1.9 billion in profit on $10.3 billion in revenue.
Our Target for Netflix is a hefty $1300, and We Would Not Sell Netflix. We believe we have one of the highest targets on The Street. We can see a 10-1 stock split in the company’s future. Wouldn’t that be nice?
C3.ai (AI: $23, up 5%)
EARLY STAGE PORTFOLIO
Enterprise AI company C3.ai released its third quarter results recently, reporting $100 million in revenue, up 26% YoY, compared to $78 million a year ago. The loss during the quarter stood at $16 million, or $0.12 per share, against $16 million, or $0.13. Still, the company had a spectacular beat on consensus estimates at the top and bottom lines, giving investors renewed confidence in its future performance.
Subscriptions led the way at $86 million, up 22% YoY, followed by professional services at $13 million, a big 62% over the prior year. This was an eventful quarter for the company, with 66 new agreements, up 72% from the preceding year, made possible by its expanding global distribution network comprising several heavy-hitters in the cloud, AI, and professional services.
C3.ai signed 28 agreements spanning 9 industries via its partnership with Microsoft alone. It is now entering into similar partnerships with Amazon’s AWS and McKinsey QuantumBlack, which is focused on spearheading digital and AI transformation across large enterprises. The company realizes that such partnerships are key for seamless reach and execution at the leading edge of enterprise AI and tech.
We saw several new and expanded agreements from well-known brands during the quarter, including Sanofi, Nucor, ExxonMobil, and Coca-Cola. C3’s federal business continues to scale with similar agreements with the Department of Defense, US Air Force, the CAE USA, and the Missile Defense Agency, alongside 21 different state and local government wins during this period.
While investors remain concerned about the company’s persistent losses, profitability is approaching. Management aims to be profitable towards the end of 2026. In the meantime, we cannot ignore that this is one of the few companies to have succeeded with productized AI for large enterprises, which is bound to accrue value.
The markets, however, have been unable to look past the losses, with CEO Tom Siebel’s health issues* also weighing on their concerns. The stock is down 35% YTD, but we believe in this beaten-down speculative stock and its underlying tech platform. It has the resources to stay afloat till it turns profitable, with $720 million in cash and just under $5 million in debt.
*Siebel has been diagnosed with an autoimmune disease that is impairing his vision. The company has made specific accommodations, and he remains in charge of the day-to-day operations; however, when traveling for treatments, Jim Snabe, the former co-CEO of SAP and chairman of Maersk, Allianz, and Siemens, will be in charge. So, we know that things remain on course even as he battles this unfortunate condition.
Our Target is $50, and our SP is $30. The stock is way below our Sell Price. Perhaps it is time for you to get out, especially with the government cutback going on in Washington. We will hang in here for a few weeks and watch events unfold.
VanEck Semiconductor ETF (SMH: $225, down 1%)
HIGH TECHNOLOGY PORTFOLIO
As the name suggests, the VanEck Semiconductor ETF allocates its assets to the various high-fliers of the burgeoning semiconductor and AI industries. The well-known heavy-hitters in the Fund include Nvidia (NVDA), Taiwan Semiconductor Manufacturing (TSM), Broadcom (AVGO), and ASML Holding (ASML), along with several under-the-radar picks such as Lam Research (LRCX) and KLA (KLAC), among 20 other stocks that it deems crucial for this computing revolution that is upon us.
The Fund hasn’t had a great start to the year, with most of its holdings struggling with high valuations and uncertainties regarding the trade wars. We’ve seen an 8% pullback YTD, and while this pales in comparison to the 120% rally since 2022, investors are perplexed about the future of this Fund and industry, particularly in the near term. We, however, have no such qualms, and neither should you.
Leaving aside all the hue and cry surrounding geopolitics, trade wars, tariffs, technicals, and valuations, what truly matters is the underlying demand for chips and the growing use cases for AI across sectors and businesses, which show no signs of slowing down. We’re trying to say that the secular trends of AI, cloud computing, 5G, and electric vehicles are here to stay and will continue to grow dramatically.
A key feature of the Fund is its concentration across many stocks, but as we’ve discussed in the Newsletter, it’s a double-edged sword. With nearly 40% of its assets allocated to just three stocks, Nvidia, Taiwan Semiconductor, and Broadcom, it captured the phenomenal upside in these stocks during the AI frenzy in 2023 and 2024. But now, as the market has pulled back a little, it is facing the downside, with no diversification to come to its aid.
A recent earthquake in Taiwan caused a pullback in Taiwan Semiconductor, though the company claims it had minimal impact on production. However, the VanEck Semiconductor ETF took a hit, as smaller holdings like Lam Research and Applied Materials—due to their limited allocations and long sales cycles—were unable to offset the losses from larger stocks.
During its recent earnings release, Nvidia CEO Jensen Huang claimed that advanced reasoning AI models require 100 times more computing power than the current models. This matters to us, as it means that we’ve barely scratched the surface so far. The VanEck Semiconductor ETF is one of the best vehicles to ride this trend, with a robust track record and a low expense ratio of just 0.35%.
Our Target is $300, and our Sell Price is $230; as you can see, the stock is below this. We added the stock at $270 last summer, so we are undoubtedly underwater. Should we sell and move on, or hold and hope? Good question. No one knows if the overall market will move higher from here, but if it moves lower, we can be sure that the Fund will fall even more. We’re going to stick with it for the next few weeks.
Zscaler (ZS: $205, up 4%)
HIGH TECHNOLOGY PORTFOLIO
Cloud security giant Zscaler released its second-quarter results two weeks ago, reporting $650 million in revenue, up 23% YoY, compared to $520 million a year ago. Profits during the quarter stood at $130 million, or $0.78 per share, against $100 million, or $0.63, beating estimates at the top and bottom lines, coupled with strong guidance for the third quarter and full-year, lifting the stock following the results.
The company’s calculated billings - contractual revenue yet to be realized - stood at $740 million, up 18% YoY, followed by deferred revenue at $1.9 billion, up 25% YoY. Zscaler continues to ride the rising demand for Zero-Trust architecture and security solutions in an increasingly digitalized world. It fulfilled the promise of simplified enterprise security, which has long been the dream of this industry.
Zscaler now sports a customer retention rate of 115%, which is impressive for a SAAS company of this size. It has nearly 3,300 customers with annual contract values over $100,000 and 620 with ACVs greater than $1 million. During the quarter, we saw several new marquee logo adds, including a Fortune 50 energy company, a Global 2000 manufacturing giant, and a nation-state.
The big story is its new Zero Trust Everywhere Initiative, which bundles its security solutions, helping consolidate tools and services while transferring enormous savings to enterprise customers. This gives it a powerful competitive moat, leaving newer entrants and even a few established players at a disadvantage, unable to match Zscaler’s scale and pricing in enterprise security.
The company is making strides by combining Zero Trust with AI, which many companies are scrambling to access, given the risk of data loss when using AI tools such as ChatGPT and Microsoft Copilot. Zscaler checks data streams going to and from tools like ChatGPT, ensuring no leakage in between. This is a critical solution for enterprises looking to fast-track their AI adoption and workflows.
The stock is up 13% YTD and shows no signs of slowing as the company outperforms and outwits peers. Over the years, it has built remarkable moats that the industry is just starting to notice. With the amount of data it tracks and trains its models on, no new entrant can offer similar solutions at scale. It ended the quarter with $2.9 billion in cash, $1.2 billion in debt, and $900 million in cash flow. Our Target is $280, and the SP is $170. We added the stock at $85 in 2019, so we’d like to see it return to its peak in 2021 at $375.
Dexcom (DXCM: $74, up 4%)
HEALTHCARE PORTFOLIO
Medical devices company Dexcom released its fourth quarter results recently, reporting $1.1 billion in revenue, up 8% YoY, compared to $1.0 billion a year ago. It posted a profit of $180 million, or $0.45 per share, down from $200 million, or $0.50 the prior year. For the full year, the company reported $4.0 billion in revenue, up 11% YoY, with a profit of $670 million, or $1.64, against $620 million, or $1.52.
The decline in profits during the quarter was primarily due to a one-time charge of $21 million due to certain mistakes by Dexcom’s shipping partner. Besides this, the company’s new build configurations took a toll on its production yield and gross margins, which stood at 59%, down from 64% a year ago. Management is taking all necessary steps to get production and margins back on track.
Dexcom’s global user base now stands at an impressive 2.8 million, up 25% YoY, with its newly launched over-the-counter solution, Stelo, already adding 150,000 users within four months of launch. This comes amid growing concerns about competitive and substitutive headwinds among investors. Starting with the popularity of GLP-1 drugs, followed by the entry of Abbott and Medtronic in this segment.
As we’ve covered before, the entire premise of GLP-1 drugs reducing demand for continuous glucose monitoring (CGM) devices is flawed. Regarding the competition, Dexcom is addressing this head-on by rehauling its sales and distribution strategy. It has dedicated enormous resources to training sales reps while expanding existing relationships with medical equipment distributors, which are key to this business.
In addition, it is vying for deeper penetration in existing markets while executing aggressive expansions overseas. During the quarter, the company got three of the largest pharmacy benefit managers (PBMs) to cover its products and is now working to onboard other PBMs. It gained similar coverage in New Zealand and France and is set for more wins across Canada, Germany, and others.
In 2025, the company projects $4.6 billion in revenue and 14% YoY growth. The stock didn’t have a great year last year and is down 50% from its all-time high in 2021, but we expect things to turn around soon. The company has barely scratched the surface of the multi-billion-dollar diabetes industry and ended the quarter with $2.6 billion in cash, $2.6 billion in debt, and $1.0 billion in cash flow.
Our Target is $90, and our SP is $70. We have faith in this company and believe that, given a few more months, it will come out on top in its quest to be the best in its class in this great business of continuous glucose monitoring (CGM) technology. Dexcom has built a reputation for accuracy, ease of use, and innovation, making it the gold standard in CGM technology. With expanding adoption beyond Type 1 diabetes and strong financial growth, Dexcom remains the leading player in the space.
iShares Oil & Gas Exploration & Production ETF (IEO: $93, up 2%)
ENERGY PORTFOLIO
As the name suggests, the iShares Oil and Gas ETF is a fund that provides exposure to the high-fliers of the energy industry. However, note that the fund steers clear of the industry's diversified, vertically integrated giants, such as ExxonMobil and Chevron. It allocates most of its assets to pure-play oil and gas producers, allowing it to track commodity prices more closely.
The fund holds a basket of 51 different securities in the energy space, with its top three holdings, ConocoPhillips, EOG Resources, and Phillips 66, constituting 35% of total assets. So far, this year looks to be a mixed mag for the industry, with supply tightening in key regions of the world such as Iran and Venezuela, but things looking up in the US with a new fossil-friendly White House administration.
However, several geopolitical factors are at play, the most prominent of which are tariffs and trade wars by the US government. Most recently, India agreed to buy more oil and gas from the US instead of Russia, Iraq, and Saudi Arabia. This has sent ripples across the industry and bodes well for the US domestic players and, by extension, the IEO fund.
The US government will likely try to reach a similar deal with Europe. With Russian supply still under sanctions, the path is clear for American companies to dominate the global energy industry. US LNG supplies to Europe have already risen over 3,700% since 2017 and will go higher with Russian gas transit through Ukraine now blocked and Europe looking to wean itself off Russian energy entirely.
Asian markets have been out of reach, mainly due to the distances involved and partly the high fees levied by the Panama Canal. The Trump administration is now dealing with the latter, which would be a win for US oil and gas giants. Of course, in the long run, how the industry fares depends a lot on whether the US keeps sanctions on Russia.
The iShares Oil and Gas ETF didn’t have a great year in 2024 and is flat YTD, but things are looking up for its constituents, at least in the mid-term. There are several reasons to love this fund, with a few prominent ones being its low expense ratio of just 0.40%, annualized yield of 2.5%, and an illustrious track record going back nearly two decades. Over the past five years, the fund has returned 320%.
Our Target is $120, and our Sell Price is $95.
Range Resources (RRC: $40, up 4%)
ENERGY PORTFOLIO
This company is one of the largest natural gas producers in the world and released its fourth quarter results recently, reporting $630 million in revenue, down 34% YoY, compared to $940 million a year ago. It posted a profit of $160 million, or $0.68 per share, against $150 million, or $0.63, performing admirably despite bottom-tier gas prices, with results hinting at strong cost controls and execution excellence.
For the full year, the company reported $2.4 billion in sales, down 28% YoY, compared to $3.4 billion a year ago, with a profit of $560 million, or $2.30, down marginally from $570 million, or $2.40. Production averaged 2.18 billion cubic feet equivalent of natural gas per day, coming in ahead of estimates, with 68% being natural gas and the rest comprising natural gas liquids and crude oil.
The company took a hit at the top and bottom lines during the quarter, owing to comparatively lower realized prices. Natural gas realizations stood at $2.36 per million cubic feet equivalent, down from $2.40 last year. Natural gas liquids, however, saw an uptick to $26.43, compared to $24.91, while its negligible crude oil output saw a decline in realizations at $59 per barrel, down from $68 last year.
However, realizations were well ahead of Henry Hub averages, owing to the company’s efforts in marketing and exposure to better-priced markets in the Midwestern and Gulf regions. Even as domestic prices remain under pressure, Range has executed well enough to benefit from prevailing dock constraints and global demand tightness, which we expect to persist.
Range Resources is known for its operational efficiencies that allow it to keep its head comfortably above water even during harsh conditions. Throughout the year, it ran a 2-rig, 1-frac crew operation, which means only two rigs were operational at any given time, with one completion crew digging 800,000 lateral feet across 59 wells, with an average of 14,000 lateral feet per well, thus maximizing efficiencies.
The company is also renowned for its capital allocation. During the quarter, it used its $450 million cash flow to pare down its debt by $170 million while returning $140 million to investors through buybacks and dividends. All-in capital expenditures for the year stood at $650 million, and its balance sheet continues to grow more robust, with $300 million in cash and just $1.8 billion in debt.
The stock has been a solid investment for us - we added it at $28 in 2022. It would be nice to see it at $90 like it was in 2014. Our Target is $41, and our Sell Price is $27, which are moving today to $50 and $33, respectively. It’s a relatively small firm, clocking in at just under $10 billion in market cap, and it is certainly a buyout candidate. With higher crude prices later this year or early next, we can see this stock back up to the $50+ level.
Ally Financial (ALLY: $36, up 7%)
FINANCIAL PORTFOLIO
Banking and auto finance giant Ally Financial released its fourth quarter results recently, reporting $2.1 billion in revenue, up 5% YoY, compared to $2.0 billion a year ago. It posted a profit of $250 million, or $0.78 per share, against $120 million, or $0.40 the prior year. Despite bearing the brunt of a $560 million credit provisioning against bad loans, this also hints at a phenomenal year ahead.
The company originated $10.3 billion of auto loans during the quarter, up 7% YoY, with a weighted average yield of 9.6% and 49% of originations in the higher credit quality tiers. This is down a bit from their yearly average of 10.4% in response to falling interest rates. Still, the company’s net interest rate margins hold steady at 3.3%, leaving plenty of cushion to deal with uncertainties.
Ally’s insurance business continues to grow, with $370 million in written premiums during the quarter, up from $330 million a year ago. Retail deposits stood at $143 billion, up from $142 billion across 3.3 million customers, and an average retention rate of 95%. During the fourth quarter alone, the company saw retail deposit growth of over $2.0 billion. The company is a top-tier banking services provider.
The big story during the quarter concerns the sale of its credit card business, which, despite being a good business, allows Ally to focus all of its efforts and resources on its core offerings, banking and auto financing. It called to cease mortgage originations, which only offer 3% yields, so this move is expected to free up capital for other high-yielding loans and investment opportunities.
Ally has been restructuring its operations, which involve extensive workforce reductions, resulting in savings worth over $60 million annually. The sale of its credit card business is expected to dampen net interest margins in the medium term, as the segment yields over 20% annually. Still, it will minimize future credit costs and operating expenses, and this restructuring should help offset the loss of revenue.
The stock was flat last year and continues to be range-bound so far this year, but things are turning around for the company as all of its restructuring efforts start to pay off. The company did not buy back any stock during the year, but its dividend yield has increased to 3.3%. It ended the quarter with $10.3 billion in cash, $18.3 billion in debt, and $4.5 billion in cash flow.
Our Target is $52, and our Sell Price is $35.
Welltower (WELL: $147, down 1%)
HEALTHCARE PORTFOLIO
Leading healthcare REIT Welltower released its fourth quarter results recently, reporting $2.3 billion in revenue, up 29% YoY, compared to $1.7 billion a year ago. It posted a profit, or FFO, of $720 million, or $1.13 per share, against $530 million, or $0.96. For the year, the company reported $8.0 billion in sales, up 20% YoY, with a profit of $2.6 billion, or $4.32 per share, against $1.9 billion, or $3.64.
Welltower had a strong quarter on the operations front, with same-store operating income growing 24% YoY, marking its ninth consecutive quarter of 20-plus percentage gains. The occupancy rate stood at 87%, rising by an impressive 310 bps YoY and 120 bps sequentially, which management noted was during the time of year when move-ins often moderate, hinting at a growing broad-based momentum.
The company has over 750 healthcare facilities in the U.S., Canada, and the U.K.
During the quarter, Welltower deployed $2.4 billion across 21 different transactions, with $2.2 billion in acquisitions and loan funding and $230 million in development funding. This is a 20% decline YoY from $3.0 billion a year ago, but it marks an end to a tremendous year of investment activity, with YTD acquisitions totaling $7.0 billion, up 19% YoY, compared to $5.9 billion during the same period last year.
The company is also off to a great start this year, with $2 billion in gross commitments under contract within the first six weeks. Management attributes this to favorable market dynamics, with the over-80 population rising quickly and limited new supply owing to high interest rates and rising material costs, coupled with a new immigration policy making it harder for competitors.
Welltower is pursuing a renewed approach to capital allocation, focusing on ‘Local Clustering,’ which involves ‘going deep, not broad.’ Thus, the company will allocate more capital in each region, aiming for more properties and density instead of diversifying across many areas. This allows for plenty of cost synergies, which can be beneficial as the new RIDEA structure gains steam.
The RIDEA structure allows Welltower to participate in the operating profits of its facilities, as opposed to merely earning rent. This can be a game-changer for the entire industry, particularly senior housing. The stock is off to a great start, rallying 17% YTD, and the firm maintains a robust balance sheet as it enters a lucrative period, with $3.5 billion in cash, $16.8 billion in debt, and $2.3 billion in cash flow.
Our Target is $155, and our Sell Price is $115. It hit $157 a few weeks ago and has pulled back an inch. We’re raising our SP to $130 and can’t wait to raise the Target to $180 in another few weeks as it passes $150.
-----------------------------------------------------------------------------
The Bull Market Report High Yield Investor
Fed meetings has gotten shorter and sweeter lately: no change in interest rates, thus minimal reaction from the market. Once again, Powell and company hit "pause" while they wait to see what trade policy does to consumer prices. If inflation edges up a bit, that pause will lengthen or force the Fed to tighten again in response.
But if the economy takes a sharp enough downturn to shake the job market, you can bet that the rate cuts will start up again fast and furiously. That's never been far from Powell's mind or commentary in recent years. He's willing to tolerate a mild recession in order to kill inflation but anything that aspires to the catastrophic levels of 2008 or 2020 will trigger massive retaliation.
As it is, the now-notorious "dot plot" that telegraphs the Fed's sense of its next moves remains clear. Three months ago, Powell and company thought the economy would expand at a healthy 2.1% rate this year. Now that GDP growth number has come down to 1.7%, which is not "better" but still a long way from the apocalypse. The Fed doesn't really think that growth will get much lower or much higher than this in the long run, so this is roughly as good AND as bad as it gets. This is normal.
Likewise, the Fed doesn't see unemployment rising or falling much from here. Again, in their view this is normal. Remember, they get all the macro data the government produces. When they make a forecast, it's usually pretty good. And they see inflation going down on its own, which gives them leverage to make as many as two rate cuts this year and then another two next year. Not a quick race back to the zero-rate world, but guess what? That world, created in the long shadow of the 2008 crash, was never normal. From here, rates may edge up and down but barring an extreme economic surprise, this is the world we live in now.
In this world, cash is unlikely to pay more than 4% and even long-term Treasury yields may have peaked. To earn a higher rate of return, you need to reach beyond the federal bond market into areas that have been neglected or even actively shunned. Muni bonds, for example, have been under serious pressure as some regions of the country teeter closer to recession and maybe even default, but that's an opportunity if you know how to pick the people who can pick the best bets in the field. Here's one of our favorites:
Invesco Municipal Trust (VKQ: $9.73, down 1%. Yield=7.3%, the equivalent of 10.3% taxable)
HIGH YIELD PORTFOLIO
The Invesco Municipal Trust is a closed-end fund that primarily invests in tax-free municipal bonds, making it very appealing to conservative, income-seeking investors. The fund still goes the extra mile in the relatively risk-free muni space. Further, it diversifies its holdings while actively managing and rebalancing them to drive additional value for investors, making it perfect for risk-averse investors.
Muni bonds had a modest year in 2024, with total returns of just 1.05%. It was an election year with major consequences for the debt markets and started with relatively high interest rates. We saw a jump in late 2024, right after the election, in anticipation of pro-growth policies by the incoming administration, with high-yielding munis ending the year with over 6% in gains.
In 2025, the year has been a mixed bag for the segment, starting with yields dipping in January in response to cooler inflation readings. However, this was followed by rising yields in February and March, with new issuances pressuring muni prices. Right now, yields are at their highest in over 2 years, with the Fed’s ‘higher-for-longer’ policy bias keeping volatility in the segment elevated.
Last year, we saw record new issuances worth over $500 billion, which marks a YoY increase of 36%, and most analysts expect the market to surpass these figures in 2025. The good thing is that there is plenty of demand for muni bonds to soak up these new issues, with the asset class now being deemed the most attractive among its fixed-income peers when weighing it on an absolute yield basis after tax.
With plenty of uncertainties surrounding global equity markets and the potential implications of a trade war and other geopolitical tensions, munis are a much-needed safe haven that will see billions of dollars in new inflows over the next few months. As long as their tax-exempt status remains, we expect the asset class to continue going strong with plenty of new issuances and inflows.
One of the reasons for the uptick in activity is the ongoing talks of altering the tax-exempt status of munis in Washington. This has led to the front-loading of issuances before any such policy changes. However, we firmly believe that any such changes will be fairly limited, such as capping the deductions for wealthy investors. None of this should matter for long-term investors, especially with a fund such as the Invesco Municipal Trust, given its illustrious track record for several decades.
Our Target is $13, and our Sell Price is $9.
Good Investing,
Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998
by Scott Martin | Nov 17, 2024 | Weekly Newsletter 7pm Sunday
Market Summary
The Bull Market Report
From an earnings standpoint, the quarterly confessions are practically over, with only Retail and a few stragglers (not to mention mighty Nvidia, Wednesday) still scheduled to report. The season has been solid. The S&P 500 managed to raise the bottom line 5% from last year, which is actually a full percentage point better than either we or Wall Street dared to dream a few months ago.
The election is over too, with the results widely being interpreted as business friendly. Taxes will almost certainly go down instead of up. Regulations will weaken. This is an opportunity for strong corporate leaders to achieve their goals and for shareholders to come along on the ride to glory. Even so, the narrow majority in Congress suggests another few years of partisan gridlock and limited policy progress. Once again, when Washington is absorbed in internal debate, Wall Street gets a free hand to innovate and excel.
And another Fed meeting has come and gone. Jay Powell and his colleagues gave us another rate cut and remain open to more down the road. Unfortunately, the persistence of inflation leaves them without much room to put their talk into practice. While interest rates may still be high enough to gradually starve price pressure, they might be approaching a point that's too low to keep inflation under control, much less give the Fed what it needs to declare victory once and for all. Add all that up and this is the cloud on the market horizon as we look toward the end of the year.
For now, performance has been bullish across the board. Investors have finally stopped fretting about whether their gains are "real" or just a figment. Instead, the mood has swung back to envy when we're all nominal winners but some do better than others. We felt the sharp side of that story this month with our recommendations giving back a little room in the aggregate, taking our YTD performance back below the major benchmarks.
In our view, this is a feature of our diversification posture and not a problem in the long term. Yes, our strong defense holds us back in the good times: High Yield and the REITs have struggled and Healthcare has turned more than a little icy amid concerns over policy in the new administration, but when the mood turns again, these sectors will demonstrate their usefulness as strong shields against the weather. And in the meantime, at least they keep paying dividends from quarter to quarter, justifying our continued attention with a little regular cash every three months.
But the real stars remain our core Stocks For Success, up 29% YTD, beating the S&P 500 and the Nasdaq by several percentage points. And then there's Long Term Growth and High Technology, which are doing even better. Special Opportunities, often a weak point in recent years, are matching the broad market right now. This is great stuff. The "full" half of the glass is more than half full. The "empty" portfolios will fill us up later. We're excited. We hope you are too. Either way, our conviction carries a high price in terms of diligence, forcing us to cut a few recommendations now and then when they don't work out. We'll do that this week.
There's always a bull market here at The Bull Market Report. As we wait for mighty Nvidia to weigh in with the last Mega Tech numbers of the season, The Big Picture provides a refresher course on what "guidance" really is and why it moves the market more than what each company reports about the trailing quarter. We might not trust management to have a 100% accurate crystal ball, but their views on the future are a whole lot more interesting than their take on the past. Speaking of the future, The Bull Market High Yield Investor is where we tell you some sobering things about the Fed's anticipated glide path in the wake of recent inflation reports. Now is the time to pivot away from bonds into more interesting yield investments like the ones we recommend. And as always, we want to keep a few stocks and funds on your radar.
Key Market Indicators
The Big Picture: Why "Guidance" Moves Stocks
Obsessing over the earnings outlook has become a staple in the financial world, a regular ritual accompanying every quarterly earnings report. But this seemingly modern practice of companies predicting their future performance is actually an age-old tradition dressed up in new clothes. So, is it truly a crystal ball for investors, or just smoke and mirrors? Let's break down what earnings guidance is, why it matters, and why some companies are starting to buck the trend.
Simply put, earnings guidance is a company's public prediction of its upcoming financial performance. Think of it as management's best guess of what the current quarter or the coming year will look like. Investors and analysts cling to these pronouncements, using them to adjust their expectations and decide whether to buy, sell, or hold a company's stock. But there's a catch: these figures are far from foolproof. They can be missed, manipulated, or simply misunderstood.
Before the days of the Internet and instant information, earnings guidance existed in a murkier form — the "whisper number." This was an era when select analysts received privileged insights from companies, giving their clients a potential edge. The SEC put a stop to this selective whispering with Regulation Fair Disclosure (Reg FD) in 2000. Now, companies must broadcast their predictions to the entire world simultaneously, ensuring a level playing field for all investors.
Regardless of how the information circulates, the outlook plays a vital role in the investment process. After all, who knows a company better than its own management team? They have the inside scoop on everything from sales trends to upcoming product launches. Guidance, in theory, bridges the information gap between companies and investors, contributing to a more efficient market where stock prices accurately reflect a company's true value.
However, the cynics among us argue that guidance is just a tool for manipulation. In booming bull markets, companies might inflate their forecasts to attract eager investors looking for high-growth stocks. Conversely, during bear markets, they might lowball expectations, making it easier to "beat the number" come earnings season. Managing to the quarter is a terrible way to run a company in the interest of long-term shareholders, which is why a growing number of companies have decided to ditch earnings guidance altogether. Warren Buffett's Berkshire Hathaway is a prime example.
But does eliminating guidance actually solve the problem? Critics argue it merely raises the odds of the quarterly numbers coming as a complete shock, potentially increasing volatility around the report and conference call. Without guidance as an anchor, analysts' estimates become more dispersed, leading to wider variances from actual results. Imagine a stock swinging wildly because a company missed earnings estimates by a few pennies! This increased volatility could make the market a more turbulent place.
Analysts rely heavily on earnings guidance as a starting point for their own financial models. They dissect management's assumptions, scrutinize industry trends, and conduct their own independent research to arrive at their own earnings forecasts. Without guidance, their task becomes more challenging, potentially leading to less accurate predictions.
What investors do is use guidance to make informed investment decisions. We're just as wary of blindly following management's predictions as we are when it comes to using "consensus" as our benchmark. Savvy investors dig deeper, considering factors such as the company's track record, industry conditions and overall economic climate. That's how we do it at The Bull Market Report. And while we've focused a lot on the trailing numbers, we'd love to get back to reporting our sense of what each company's next quarterly report will look like, provided of course that management has been clear on its own internal expectations in the past.
After all, that stuff is a matter of public record, even if it revolves around pronouncements in the future. And that's where we all spend the rest of our lives, right? Leave the past to the past. Focus on the outlook.
-----------------------------------------------------------------------------
BMR Companies and Commentary
Energy Transfer Partners (ET: $17.29, flat last week. Yield: 7.4%)
ENERGY PORTFOLIO
BMR FEATURED STOCK
Energy Transfer Partners, a leading player in the midstream energy segment, released its third-quarter results two weeks ago, reporting $20.8 billion in revenue, flat compared to $20.7 billion a year ago. It posted a profit of $1.1 billion, or $0.32 per share, more than doubling from $470 million, or $0.15. You have to like that!
Volumes across the company's extensive list of assets continue to hit new records, with crude oil transportation and export volumes growing 25% and 49% YoY, respectively. The company achieved a 6% increase in midstream gathered volumes and a 26% increase in midstream produced volumes. Furthermore, natural gas liquids transportation and fractionation volumes grew by 4% and 12%, respectively.
Energy Transfer is a prominent player in the energy industry, operating a vast network of pipelines and energy infrastructure. The company plays a crucial role in transporting and storing natural gas, natural gas liquids, and crude oil.
Key Business Segments:
- Natural Gas Pipelines: Energy Transfer owns and operates a substantial network of natural gas pipelines, facilitating natural gas transportation from production basins to major consumption markets.
- Crude Oil Pipelines: The company's extensive crude oil pipeline system enables the efficient movement of crude oil from production sites to refineries and export terminals.
- Natural Gas Liquids Pipelines: Energy Transfer transports NGLs, such as propane, butane, and ethane, to various markets, including petrochemical plants and export terminals.
- Storage and Terminals: The company owns and operates a network of storage terminals for crude oil, NGLs, and refined products, providing flexibility and efficiency in the energy supply chain.
The company boasts an extensive network that spans approximately 125,000 miles across the United States, with roughly 90,000 miles dedicated to natural gas pipelines and the remaining 35,000 miles for crude oil pipelines. This network allows the company to connect major production basins to key consumption markets, ensuring a reliable and efficient supply of energy resources.
There were several strategic highlights during the quarter, starting with the completion of the $3.25 billion WTG Midstream Holdings acquisition, which brought an additional 6,000 miles of gas-gathering pipelines into the company’s fold. It inked a new partnership with Sunoco, combining their respective assets in the Permian Basin, with Energy Transfer as the operator.
The company has plenty of catalysts and long-term tailwinds in its favor, the most prominent of which is the rising demand for natural gas and new power plants being set to fuel the increasing energy demands of data centers. Many data centers could soon have their own captive gas-fired power plants, supplied directly via pipelines built and owned by the company, creating a massive runway for growth.
Similarly, the incoming Trump administration is another catalyst that will help ease up on regulations holding the sector back and allow it to proceed with long-awaited LNG export projects. The stock is up 25% YTD while still offering a delectable yield of 7.4%, which is expected to grow. The company produced $10.2 billion in cash flow.
We expect big things from the company in the future. Management has big plans for the future and continues to be very acquisitive. ET is the largest natural gas pipeline company in the United States, with 84,000 miles of pipe and a market cap of $60 billion. The 2nd largest is DCP Midstream, a private company with 55,000 miles. Kinder Morgan (KMI) has 51,000 miles, also a $60 billion company, but only pays a 4.2% dividend.
Our Target is $18, and our Sell Price of $12 is hereby changed to We Would Not Sell Energy Transfer. We are raising our Target today to $20.
Blackstone (BX: $181, up 2%)
STOCKS FOR SUCCESS PORTFOLIO
Alternative asset manager Blackstone released its third-quarter results recently, reporting $2.4 billion in revenue, up 5% YoY, compared to $2.3 billion a year ago. It posted a profit of $1.3 billion, or $1.01 per share, against $1.2 billion, or $0.94, beating estimates at the top and bottom lines, owing to growing assets under management and robust investment activity following the much-needed Fed rate cut.
Like most other PE firms, high interest rates had been a drag on Blackstone’s performance for several quarters. Still, the weight has been lifted, albeit marginally following the September rate cuts, with more expected to follow suit. As a result, the firm’s private equity and infrastructure funds had their best performance in three years, growing 6% and 5%, followed by credit and real estate at 3% and 1%.
Blackstone is seeing broad-based acceleration across its business units, spurred by an increasingly robust macro climate. It deployed $34 billion for new acquisitions during the quarter, up from $12 billion a year ago, with $16 billion earmarked for just one major deal, Australia-based data center company AirTrunk. The firm also acquired enterprise work management platform SmartSheets in an $8.5 billion deal.
It realized proceeds of $23 billion during the quarter, up from $15 billion a year ago, as IPOs and M&A markets have started to come back following over three years of dormancy. Investments in its funds, too, are picking up pace, with $40 billion in inflows, bringing total assets under management (AUM) to a mind-boggling $1.1 trillion, of which $820 billion is fee-earning AUM, with $430 billion perpetual AUM. (Perpetual capital strategies are real estate core-plus, infrastructure, insurance solutions, and private credit.)
The stock is up 41% YTD, hitting an all-time high of $183 this week and taking Blackstone’s market capitalization to $220 billion. The company is known for rewarding investors generously, and this quarter was no exception, with $1.2 billion in stock buybacks and dividends during the third quarter and $5 billion YTD. The total dry-powder, or liquid capital, hit $170 billion, with $2.5 billion in cash, $12.8 billion in debt, and $4.2 billion in cash flow on its balance sheet.
Our stock blew through our Target of $150 a month ago, so we are raising it today to $220. After all, they are the largest asset manager in the world, clocking in at $1.1 trillion. Do you think they will be satisfied to stop here at this level? Neither do we.
We would never sell this great company.
Zscaler (ZS: $201, up 3%)
HIGH TECHNOLOGY PORTFOLIO
Cloud security giant Zscaler released its fiscal fourth quarter (which ended July 31) results a few months ago, which means Wall Street has already digested every detail and moved on to anticipating the next quarterly report in early December. Nonetheless, we think it's important to review what we know about the previous period: $590 million in revenue, up 30% YoY compared to $460 million a year ago, and a profit of $140 million ($0.88 per share) against $100 million ($0.64) a year ago.
Everything we've laid out so far beat consensus estimates, but the stock took a steep pullback following the results, owing to a weak forecast for 2025. This was an overreaction, as the company still guided 20% YoY sales growth, and the stock has recovered in the weeks since. After a decade of consistently posting a CAGR of 50%, this was, in some ways, long-coming, with the company falling victim to the high expectations that it had set. We believe this was a remarkable quarter for the company in more ways than one.
Calculated billings are up 27% YoY to $910 million, with deferred revenue following suit at $1.9 billion, up 32% YoY. Currently, 570 customers use the platform with annual contract values (ACVs) greater than $1 million and 3,100 with ACVs of $100,000 or more. It maintains a healthy dollar-based retention rate of 115%, meaning that for every dollar of revenue generated from a customer, the company generates $1.15 in revenue from that customer in the following period. This is a significant number.
Zscaler’s FedRAMP-approved Zero-Trust architecture is now the gold standard for government and industry. The federal vertical continues to make gains, having already landed 13 of the 15 cabinet-level agencies and other lower-ranked federal bodies. The company notes that its Federal landed base represents a 20x upsell opportunity, making it a key driver of growth over the next couple of years.
Having hit the milestone of $2.5 billion in annual recurring revenue during the fourth quarter, the company has set its sights on $3.0 billion in 2025 and is on its way to hit $5 billion over the next few years. Zscaler doesn’t have buybacks or dividends, but this could be coming soon, given its rising cash flows at $200 million and strong balance sheet, with $2.0 billion in cash and $1.2 billion in debt.
Our Target is $240, and our SP is $170. This is one volatile stock. It hit $260 in February and proceeded to drop to $155 by May, rising to $208 by July, dipping to $153 by September, and now over $200. Let’s go back and look at revenues: $1.1 billion in fiscal 2022, $1.6 billion in 2023, and a shade under $2.2 billion in 2024. To review, Zscaler is a leading cloud security company that provides a comprehensive suite of security solutions to protect businesses from cyber threats. The company's core business is to secure access to applications and data, regardless of where users, devices, or applications are located. The broader global cloud security market is projected to reach approximately $200 billion by 2029, growing at a compound annual growth rate of over 22% from $73 billion in 2024.
First Trust Nasdaq Semiconductor ETF (FTXL: $86, down 8%)
REMOVING FROM COVERAGE
The First Trust Nasdaq Semiconductor ETF is a renowned name in the semiconductor space, providing investors with a balanced exposure to this burgeoning industry. Despite having exposure to high-fliers such as Nvidia, Axcelis, and Broadcom, among others, the fund’s performance over the past year has been rather uninspiring, with a YTD return of just 9.2%, trailing both the Nasdaq and the S&P 500.
The fund has also lagged behind other semiconductor ETFs, such as VanEck Semiconductor ETF (SMH; $240), which has posted a YTD gain of 42%, which we also have in the High Technology Portfolio. This, however, has everything to do with differing philosophies on diversification, with First Trust allocating assets to 31 stocks. At the same time, VanEck includes just 26 while being remarkably top-heavy, with its top 5 holdings constituting 50% of total assets.
First Trust’s underperformance can be attributed to its significant stake in Intel, at 9.5% of total assets, while the stock has declined nearly 50% YTD. We believe management has missed the boat and are extremely disappointed. We would move our money to VanEck Semiconductor ETF.
We added the stock at $103 in July; our timing couldn’t have been worse when it comes to diversifying our core semiconductor holdings. This one proves that diversification has a downside when the managers overweight the wrong stocks. We live, we learn. And we're happy to be overweight NVIDIA (NVDA) across the board.
iShares US Oil & Gas & Production ETF (IEO: $98, up 1%)
ENERGY PORTFOLIO
The outlook for global energy prices appears bleak, with factors like increased US domestic production and slowing Chinese demand contributing to a potential supply glut. A strengthening US dollar could further exacerbate this trend. However, pure-play US oil and gas exploration and production companies are set to get better from here.
The iShares Oil and Gas ETF offers exposure to the US domestic upstream energy sector without investing in large-cap giants like ExxonMobil or Chevron. This ETF provides an opportunity to participate in the growth potential of smaller, more dynamic companies in the industry. While it allocates 22% of its assets to the midstream segment, it steers clear of vertically integrated firms, eliminating redundancies.
Leaving aside the rest of the world’s problems, US energy markets look remarkably robust, with multiple rate cuts over the next few years helping spur consumption and a favorable new administration in Washington for the industry. Given the growing energy demand from data centers and the role of natural gas as a transition fuel for renewable energy, we further see strong mid-term tailwinds.
There are several other mid-to-long-term catalysts for both crude oil and natural gas, and barring certain geopolitical events that could result in spikes, the G7 plan to phase out all coal-fired power plants by 2035, will increase demand for natural gas, again as a base-load energy source. Also, the US Strategic Reserve supports prices at current levels, which will incentivize the industry.
The fund is up 4% YTD and a remarkable 360% since its all-time low during the pandemic in 2020 while still trading at an attractive valuation and offering a 2.9% annualized yield. With an extensive track record of 18 years and coming from Blackrock’s illustrious lineage, the fund is perfect for investors seeking exposure to the energy sector, especially considering its low expense ratio of just 0.40%.
Our initial recommendation in 2022 has earned 22% so far from a base of $80. The Target is $120, and the SP is $95. We’re tight to the Sell Price now, and due to uncertainty in the world today, we will hold to this and book our profit if it moves to that level.
Occidental Petroleum (OXY: $50, down 1%)
ENERGY PORTFOLIO
Warren Buffett's favorite hydrocarbon giant released its third-quarter results last week, reporting $7.2 billion in revenue, down 3% YoY, compared to $7.4 billion. It posted a profit of $980 million, or $1.00 per share, against $1.1 billion, or $1.18, the prior year, with a cautionary outlook for the coming year, owing to tough macro conditions and depressed energy prices.
The better-than-expected results, despite lower commodity prices during the quarter, were largely the result of its robust production performance, at 1.4 million barrels of oil equivalent per day. In addition, the integration of CrownRock has started to pay off, with substantial operational and efficiency gains already, with more to be realized over the coming years.
As always, the oil and gas segment led the way with $5.7 billion in sales, up 2% YoY, despite a 6% YoY decline in realized crude prices at $75.30 per barrel. Natural gas liquids came in at $20.47 per barrel, down 4% YoY. Natural gas realized prices were down 26% from the prior year, offset by a 16% increase in production.
Other segments, namely OxyChem, generated $1.2 billion in sales, down 8% YoY. The midstream and marketing business brought in $440 million, a decline of 20% from the prior year. Occidental plans to generate an additional $1 billion in annual cash flow from these two non-oil segments and its innovative new carbon capture and storage segment.
The company has done a remarkable job at reducing debt, with 90% of the $4.7 billion reduction target already achieved. It still has a substantial $28 billion in debt on its books, which will continue hammering downwards. Management is clearly driven to excel, closing the quarter with $1.8 billion in cash and an impressive $11.3 billion in cash flow. However, Occidental has been hammered (to re-use a good word) since April when it was trading at $69. Once a "value" stock, this is now a super-value stock. Our Target is $90, which appeared reachable when the stock was at $70 but is quite a distance higher now, as you know. We will lower it today to $70 with a SP of $50. We can’t see exiting the stock at this level; we would accumulate more here at $50. That's what Warren is doing.
Moderna (MRNA: $37%)
REMOVING FROM COVERAGE
Biotech startup Moderna released its third-quarter results last week, reporting $1.9 billion in revenue, up 2% YoY, compared to $1.8 billion a year ago. It posted a profit of $13 million, or $0.03 per share, against a loss of $3.6 billion, or $9.53. The stock pulled back due to several issues brewing in the background.
The company produced better-than-expected COVID-19 vaccine sales at $1.8 billion, and the launch of the new RSV shot, which generated $10 million in US sales and has since received approval from Qatar, Norway, the European Union, and Iceland. Another key factor behind the return to profitability was the decision to cut the R&D budget by $1.1 billion two months ago.
Yet, the stock remains under pressure, which began ever since the cut in R&D spending was announced. This signaled a lack of confidence in its ability to generate strong revenues and the efficacy of its pipeline, which saw five programs being cut as a result. This is particularly concerning for a company whose valuation is heavily reliant on its research and development efforts.
The new RSV vaccine faces tough competition from GSK’s Arexvy and Pfizer’s Abrysvo, both established candidates from deep-pocketed players, leaving Moderna at a significant disadvantage. To make matters worse, the possible appointment of Robert F. Kennedy Jr, an outspoken critic of childhood vaccinations, to head the Department of Health and Human Services does not bode well for the company and other firms in the space, like Eli Lilly.
The stock is down 36% over the past month and 67% YTD, and while we believe in the robust underlying mRNA technology and the impressive product pipeline, we’re tired of waiting and believe that the time frame for the promised revenues and profits has been moved out as well. It is time to call it quits. Moderna is not a sinking ship; far from it. Still, while it works towards a long, drawn-out course correction, our money can do better elsewhere at significantly more attractive valuations.
We added the stock at $193 in 2023; needless to say, we did not heed our Sell Prices. Live and learn.
-----------------------------------------------------------------------------
The Bull Market High Yield Investor
When you live on hope that the Fed will be your friend and lower interest rates whenever it gets an excuse, it feels like a betrayal when the inflation reports take that excuse back off the table. That's exactly what happened in the last few weeks. Jay Powell and company gave us another rate rollback to feed the post-election euphoria, but then, days later, hints of stubborn price pressure in the economy shook a lot of traders' confidence in an extended stream of additional cuts ahead. At this point, we might consider ourselves lucky if the Fed relaxes one more time in December and then takes at least a brief break early next year to make sure they haven't once again let the inflationary demon out of the bottle.
What this means is that overnight lending rates are already about halfway to the lowest point we'll see in the next 12 months. There's still some room for the Fed to move, but the odds are good that in a few weeks we'll get our first taste of what will become the next "new normal" in the rate environment for the foreseeable future. This is more or less how life will work: not quite as much pressure or pain as when the tightening cycle was at its peak, but not a lot more reason ahead to relax. And as the overnight end of the rate curve stabilizes for the first time in years, all the uncertainty in the bond market starts feeding into the other end where long-term yields go.
If the mood around the economy remains decent, money will flow into stocks instead of bonds, pushing yields higher as the curve steepens to reflect a healthy continued economic expansion. And if the mood goes sour, we'll see long-term yields drop. We'll also see the Fed revisit its easing posture in order to shield Main Street from a serious recession. That's not great for bond investors either because they'll have to settle for even lower coupon rates than the 4-4.5% they're getting now.
Either way, we always recommend investments that are not quite so rock-solid reliable as Treasury debt but have the proven potential to pay a lot more. Otherwise, you're practically asking inflation to take your money away. Here are a few:
Ares Capital (ARCC: $22, flat. Yield=8.9%)
HIGH YIELD PORTFOLIO
Ares Capital is a leading business development company that offers financing to private equity and real estate developers. The company released its third quarter results recently, reporting $780 million in revenue, up 18% YoY, compared to $660 million a year ago, with a profit of $360 million, or $0.58 per share against, against $290 million, or $0.59, beating estimates at the top, but missing at the bottom. During the quarter, Ares issued and sold 14.7 million shares of common stock under its equity distribution agreements, with net proceeds totaling approximately $300 million.
Ares made commitments of $3.9 billion, up 140% YoY, compared to $1.6 billion last year, along with $2.6 billion worth of exits, up 100% YoY, across 74 different transactions during the quarter. Investments at fair value now stand at $26 billion, up from $22 billion last year, aided by rate cuts and improving macro conditions in recent months.
The portfolio is more diversified than ever, with allocations across 535 different companies, 53% in first-lien senior secured notes, and 70% of all loans are floating-rate investments. Non-accrual loans, or loan accounts that have failed to receive any payment for 30 days or more, stood at 0.60%, down from 0.70% the prior quarter, which was already relatively low and well within generally accepted risk frameworks to begin with.
Two months ago, the cut in interest rates spurred a flurry of activity in capital and debt markets, with Ares benefiting from a flood of new originations and investment gains. Â Of course, the drop in rates was on the short end of the curve, and longer rates have increased. Despite the various moves in rates, Ares' balanced portfolio and strategic approach, including fixed and floating-rate investments, help mitigate these risks.
The stock is up 7% YTD while offering a well-covered annualized yield of 8.9%, and this comes at a time when most other BDCs struggle to cover payouts. With a perfectly balanced portfolio and an investment-grade credit rating, it is well-positioned to weather the dynamic economic landscape. Ares ended the quarter trading at a 9% premium to book value.
This is a very steady stock over the years, but note that it is trading a whisker from the all-time high of $22.35 set in 2021. We've successfully reached our $22 price target for the stock, which we initially purchased at $17 in 2021. But this stock is going higher. We are raising our Target to $24, which would be nice to see in 2025, an event we find quite promising. The Sell Price of $19 is raised today to $20. What a great company.
And if you are worried about the volatility in the markets lately, this one is non-correlated to the overall stock market. It has a beta of 0.42, whereas a beta of 1.0 would move exactly with the market. We like low-beta stocks for our high dividend-producing stocks. We want it nice and slow, paying that big 8.9% dividend, not worried about what the overall market is doing as measured by the S&P 500.
Realty Income (O: $57, down 2%. Yield=5.6%)
REIT PORTFOLIO
Realty Income, one of the largest investors in free-standing, single-tenant commercial properties, released its third-quarter results last week, reporting $1.3 billion in revenue, up 26% YoY, compared to $1.0 billion a year ago. It posted a profit, or FFO, of $860 million, or $0.99 per share, against $740 million, or $1.04, beating consensus estimates at the top but missing on the bottom line.
The company saw strong occupancy rates of 98.7%, alongside a 105% rent recapture rate across 170 renewed leases, which refers to a 5% bump in rents across the renewed leases. This was an eventful quarter, with $740 million in fresh deployments, with a weighted average yield of 7.4%, and $250 million in proceeds from the disposition of 92 properties.
Same-store rentals came in flat at $1 billion, and the bump in earnings was primarily the result of its $9.3 billion acquisition of Spirit Realty. We expect more efficiencies to be unlocked, alongside certain synergistic gains to be realized over the next few years. The all-stock merger brought an additional 2,000 properties into its fold, perfectly positioning it for tailwinds ahead. Founded in 1969, the company invests in diversified commercial real estate and has a portfolio of 15,500 properties in all 50 U.S. states, the U.K., and six other European countries.
Speaking of tailwinds, the recent rate cuts were perfect, helping spur consumption and bolstering brick-and-mortar retail, which makes up a large part of the company’s tenants. We expect more rate cuts over the next couple of months, which will help REITs in more ways than one, including making their yields more attractive relative to treasuries, CDs, and other fixed-income funds and investments.
Realty Income is now diversifying beyond freestanding retail to include consumer-centric medical, industrial, data center development, and gaming centers. The total addressable market across these sectors is $5.4 trillion in the US alone, leaving plenty of room for growth.
The company ended the quarter with $410 million in cash, $27 billion in debt, and $3.4 billion in cash flow. Our Target of $70 looked like it would be tested in the middle of October, as it ran from $53 in July to $65, but the stock has faltered a bit, giving us all an excellent opportunity to buy stock 12% off its yearly high. The stock has been higher, hitting $82 in 2020 before the pandemic hit (it was cut in half a month later) and then rising steadily to $75 in 2022. We have confidence in the business plan, in management, and in the fact that they are acquisitive. We believe the company will reach 20,000 properties sometime in 2026 or 2027.
Talk about a low beta. It comes in at 0.05, down from 0.60 in June. This is not a misprint. We would expect the stock to move higher if the overall stock market decides to take a break and move lower.
FS KKR Capital (FSK: $21, up 1%. Yield=13.2%)
HIGH YIELD PORTFOLIO
FS KKR Capital, another BDC run in partnership with FS Investments and PE giant Kohlberg Kravis Roberts, released its third-quarter results last week, reporting $440 million in revenue, down 5% YoY compared to $470 million a year ago. Profit per share was steady at $0.77, while beating consensus estimates on the top and bottom lines. The slight dip on the bottom line doesn't concern us so much as the ability to cover its $0.70 dividend and have a little left over. Based on these numbers, there's little need for concern.
The company has been on a fiery streak when it comes to originations, at $1.1 billion, up from $500 million a year ago. Exits and repayments, however, were higher at $1.3 billion, nearly doubling from $680 million. As such, the fair value of investments declined 5% YoY, to $13.9 billion, down from $14.7 billion a year ago, which has helped reduce its non-accruals from 2.5% to 1.7%, a significant improvement.
FS KKR has done a remarkable job at improving credit quality and bolstering the balance sheet over the past couple of years. This includes $4.7 billion in liquidity, up from $4.2 billion in the prior quarter, and a reduction in debt YoY at $8.1 billion, compared to $8.2 billion a year ago. All of this bodes well for the company as we enter into a strong business environment that is set to extend well into 2025. There is less likelihood of a recession over the next couple of years and fewer chances of their portfolio companies defaulting on their borrowings. Moreover, with nearly 70% of assets in secure first and second-lien loans, the company will be first in line to recover its assets if things go awry. This and its extensive diversification make it a rather safe bet despite the high yield it offers.
The stock is up nearly 5% YTD and is positioned very lucratively relative to other BDC players, trading at an 11% discount to book value while offering an impressive yet well-covered annualized yield of 12.1%. This, alongside the company’s improving fundamentals, makes it perfect for income-seeking investors. It ended the quarter with $370 million in cash, $8.1 billion in debt, and $1.1 billion in cash flow.
We added the stock at $20 in September and placed a Target of just $21. It has reached that level, and we are raising it to $22. Our Sell Price remains the same at $18. This stock has a beta identical to Ares at 0.42. The stock has been about this price for the last three years. Very calm and steady, slowly paying out 13.2% a year.
Nuveen AMT-Free Municipal Credit Income Fund (NVG: $12.86, flat. Yield=6.2% tax free, or the equivalent of 8.2% taxable even if you're "only" in a 25% earned income bracket)
HIGH YIELD PORTFOLIO
Given its secure, tax-free yields, this fund has long been the vehicle of choice for conservative, income-seeking investors. The closed-end fund has been on a hot streak recently, owing to the cut in interest rates and an aggressive hike in distributions. The possibility of more rate cuts by the Fed, alongside favorable conditions for munis, makes it a compelling investment for income seekers.
Despite the rate cuts, Treasury yields have risen owing to the Presidential election and the uncertainties surrounding the same. Due to this, munis were unable to shine all that much in recent weeks, but things will start turning now. Aside from this, several other tailwinds favor munis, such as if the Tax Cuts and Jobs Act were allowed to sunset in 2025, making tax-exempts more attractive.
Another reason behind suppressed yields is the surge in new issues during this year's second and third quarters. This mainly constituted issues that were backlogged due to execution issues, alongside those that were moved up to get ahead of the Presidential elections. Either way, these are all done now, and the time is indeed ripe for munis to start shining once again.
Following a crash in munis and the broader bond market in 2022, there are plenty of reasons for bonds and funds to rally back to their previous highs. Nuveen’s funds are known to perform significantly better relative to peers and the market, given their use of leverage to amplify returns. This strategy works exceptionally well during a low-interest rate environment when the cost of said leverage is lower.
The fund still trades at a 6% discount to book value, a figure that has narrowed considerably from 14% last year. With sturdy municipal balance sheets, low supply, and dropping yields elsewhere, munis are perfect for income-seeking investors who don’t want to risk much, and the Nuveen fund is the ideal vehicle to gain exposure to the same, given its extensive track record.
Good Investing,
Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998
by Scott Martin | Jun 2, 2024 | Weekly Newsletter 7pm Sunday
Market Summary
The Bull Market Report
The last two weeks were a tale of one stock. We spent a few days waiting for NVIDIA (NVDA) to release its quarterly results, leaving Wall Street almost literally breathless in the meantime. Then we watched money crowd into NVIDIA after the SEC filing, swelling the stock to lofty levels ($2.7 trillion, more than the entire German market). And finally, investors tired of scrutinizing this AI giant found a distraction in the form of a potentially threatening uptick in bond yields. We're happy we have NVIDIA in our High Technology portfolio. It's already soared close to 140% in the last six months for us.
But we'll never be satisfied with exposure to just one stock, no matter how strong it is in the moment. If that were the case, we'd have cut everything but Apple (AAPL) or Berkshire Hathaway (BRK-B) long ago, and had to live with the day-to-day consequences of that decision. In our world, a balanced portfolio of themes will win in the end. When Technology is triumphant, we have plenty of those stocks scattered around our universe. When Silicon Valley hits a wall, our Financials or Energy or Real Estate holdings tend to benefit as the pendulum of sentiment swings in their favor. And throughout the cycle, our High Yield recommendations keep paying dividends.
How has that paid out for us in the last two weeks? NVIDIA obviously did extremely well on its own, but its success sucked all the air out of the Technology portfolio and cut big holes into our results in the Stocks For Success and Long-Term Growth portfolios as well. Only mighty Apple managed to rise above the tide on the Stocks For Success side. First Solar (FSLR) was an absolute triumph and helped buoy Long-Term Growth. See below.
What's more interesting is the way the Early Stage recommendations were split between a 12% gain in the past two weeks for C3.ai (AI) and a 12% loss from Recursion Pharmaceuticals (RXRX), leaving the portfolio neutral for the period. A lot of our portfolios sat out the NVIDIA cycle close to neutral. This was a non-event as far as they were concerned. Now that Wall Street's attention has moved on, we expect them to recover their momentum and get back to work.
For now, this was a "rebuilding" period for our stocks. The Dow Industrials lost more ground but the Nasdaq, overweight NVIDIA as it is, held up better than the BMR universe in the aggregate. That's okay. Ordinarily our "equal weight" system for accounting for our performance plays out in our favor. This time, the single standout name was so strong (and nearly everything else was so tentative) that only portfolios that were heavily concentrated in NVIDIA managed to do well. One way or another, earnings season is over. It was a good one. We can afford to let the AI giant hog the spotlight. After all, we own it too.
In our view, bond yields are a sideshow. They sting, but the real story is what the Fed said two weeks ago. It's going to take serious pain in the Treasury market to feed back into our stocks. And get serious: that kind of pain in the Treasury market is not going to entice smart investors to pull their money out of stocks and flood into the "safety" of bonds paying less than 5% a year. That kind of pain is not enticing. It's scary. And it feeds on itself. Stocks like ours may even look defensive in that scenario. But in our view, the scenario is unlikely. The bond market corrects itself. When yields are attractive to the people who want bonds, you'll know. Otherwise, we focus on stocks.
There's always a bull market here at The Bull Market Report. With earnings season on the books, The Big Picture tackles the question of whether stocks have gotten ahead of their growth rates, while The Bull Market High Yield Investor sets the scene for the next Fed meeting And as always, we can't resist updating you on our latest thoughts on our favorite recommendations.
Key Market Indicators
-----------------------------------------------------------------------------
The Big Picture: Record Earnings, Record Stocks
Despite the persistent drag from the Fed on the short end of the yield curve and a weakening bond market on the long end, the economy remains resilient and the largest corporations in the world are making more money than ever. With 98% of S&P 500 companies reporting results, the index is on track for a healthy 6% growth in earnings per share. This surpasses analysts’ earlier forecasts of 3.2% growth, marking the biggest year-over-year increase since mid-2022 and quite the upside surprise. So far, nothing in the recent past has provided even a speed bump, and guidance suggests that things get even stronger in the current quarter and beyond.
When earnings hit records, stocks deserve to hit records too. That part is inevitable. The only question is how far investors' comfort zone will stretch to accommodate stronger fundamentals when valuations across the market are already on the high side of recent memory. After doing the math, we aren't especially worried that stocks have gotten ahead of their growth trend.
Think about it. Yes, the S&P 500 is currently priced at 20.3X forward earnings, which is significantly elevated when you consider that across the past decade the market only commanded a 17.8X multiple. However, it's barely a notch above where it's averaged out over the last five extreme bear-and-bull-and-bear-and-bull years. And because growth shows every sign of accelerating in the coming year, we wouldn't be shocked next summer to see the market as a whole at least 15% above where it is now. That's better than what stocks have historically delivered over the long haul. It's a boom.
And even in this 15% scenario, there's a strong argument that stocks will be strategically attractive at that point. The Fed will find an excuse to guide the short end of the yield curve down. That's a good thing for the market, giving valuations an excuse to reinflate as the "risk-free" return rate on cash drops. Long-term yields should drop far enough with it to take a lot of pressure off the economy and Wall Street alike.
Meanwhile, earnings expansion is on track to speed up from 11% for this year to 14% in 2025.
Those extra 3 percentage points bend the P/E calculations just enough to eliminate just about any rational fear that stocks are overvalued now. Remember, smart investors pay extra for faster growth because every additional percentage point on that side shortens the amount of time you need to wait in uncertainty and doubt to see your companies grow into what would otherwise look like high valuations. We wouldn't be shocked to recheck the numbers in 12 months and see the S&P 500 in the aggregate bringing in as much as $50 more per "share" (spread across all 500 stocks of course) than it's making now, and then at the end of 2025, adding another $35-$40 to that pool of cash takes the S&P 500 multiple down BELOW long-term historical averages if the market doesn't move appreciably in either direction in the meantime.
All you need to take advantage of that discounted future is buy stocks today and hold on until next summer. There will undoubtedly be volatility. Maybe it will take the market down, in which case the discount will be even more substantial a year from now. And maybe it will take the market up, in which case the route to positive returns pays off earlier. All in all, analysts collectively think the market can rally another 13% or so in the next 12 months. At that point, if all the projections line up with reality, the market looks LESS overheated on an earnings basis, even though investors would have reason to cheer with a better-than-average annual gain on the books.
We like the odds of executives continuing to outperform. They've already successfully weathered an earnings recession, a slowing global economy and just about everything inflation and interest rates can throw at them. Give them a little relief and the numbers will go through the roof. All we need to provide is that year of fortitude. It feels like a pretty good bet.
-----------------------------------------------------------------------------
BMR Companies and Commentary
C3.ai (AI: $30, up 23% last week)
Early Stage Portfolio
Enterprise AI company C3.ai released its fourth-quarter results last week, reporting $87 million in revenue, up 20% YoY, compared to $72 million a year ago. The company posted a loss of $14 million, or $0.11 per share, against $15 million, or $0.13, with a beat on estimates on the top and bottom lines, coupled with robust guidance for the new year bringing much-needed glad tidings for investors.
For the full year, the company posted $310 million in revenue, up 16% YoY, compared to $270 million a year ago, with a loss of $56 million, or $0.47, against $46 million, or $0.42. With demand for enterprise AI solutions continuing to intensify across industries, the company exceeded the top end of its guidance for the full year as well. It marked its fifth consecutive quarter of accelerating revenue growth.
During the quarter, the company signed 47 new agreements, including 32 new pilots, with marquee clients such as ExxonMobil, General Mills, BASF Petronas, and the US Navy, among others. This has resulted in subscription revenues rising 41% YoY, constituting 92% of its total revenue, giving the company much-needed stability and certainty regarding its cash flow position going forward.
C3’s focus on expanding its partner network has paid off well, with 91 of the 115 agreements closed last year from companies such as AWS, Google Cloud, and Microsoft Azure. The qualified opportunity pipeline with the partner network grew a huge 63% YoY. The company received a blockbuster response for its GenAI offerings, with 50,000 inquiries coming from 3,000 businesses during the fourth quarter; alone.
Some thoughts:
C3.ai's future holds promise, but it's definitely on the speculative side of the AI industry. Here's a breakdown of their potential and competition where it fits into the landscape of the AI revolution:
Strengths:
- Focus on Enterprise Applications: Unlike some AI companies targeting broad consumer markets, C3.ai focuses on developing enterprise-grade AI solutions for specific industries like manufacturing, energy, and healthcare. This targeted approach allows them to cater to specific needs and potentially achieve faster adoption.
- C3 AI Suite: Their core product, the C3 AI Suite, offers a comprehensive platform for developing, deploying, and managing AI applications. This can be attractive to businesses looking for an all-in-one solution.
- Partnerships: C3.ai has established partnerships with major technology players like Microsoft and Google. This gives them a leg up in terms of access to resources and market reach.
Challenges and Competition:
- Emerging Market: The enterprise AI market is still evolving, and it's not guaranteed that its approach will be the most successful in the long run. They face competition from established tech giants like Microsoft, Amazon (AWS), and IBM, all with significant resources and cloud computing expertise.
Profitability: C3.ai is not yet profitable, and it's unclear how quickly they can achieve profitability in this competitive landscape
The best choice for you depends on your risk tolerance and specific investment goals. The company offers a potentially high reward but also carries a higher risk due to the competitive landscape and its unproven track record of profitability.
The stock has had a fairly volatile year so far, but the recent rally following its fourth-quarter results has put it firmly in the green. As of now, the company is focused on growth, giving profitability a pass, but a pole position in the potentially $1 trillion enterprise AI market will ultimately will make it worthwhile. The company has sound financials, with $750 million in cash, and no debt. Our Target for this very speculative high-flyer is $50 with the Sell Price at $24. We added the stock at $22 in 2023, so we are up 34%. But is it worth the anguish or the volatility? Only YOU can decide that!
-----------------------------------------------------------------------------
The Trade Desk (TTD: $93, down 2%)
High Technology Portfolio
Pioneering ad tech company The Trade Desk released its first quarter results recently, reporting $490 million in revenue, up 28% YoY, compared to $380 million a year ago. It produced a profit of $130 million, or $0.26 per share, compared to $110 million, or $0.23, with a beat on consensus estimates on the top and bottom lines, coupled with an upbeat forecast for the second quarter. We are impressed by the profitability level – 27% after tax. That’s up there with some of the greatest companies in the market, like Apple, Google and Facebook.
During the quarter, the company was aided by continued penetration of connected TVs, with industry giants such as Disney, NBC Universal, and Roku making deeper pivots into this segment. This comes as the company’s UID2*, its alternative to the aging browser cookies, as it becomes more and more ubiquitous across the open internet, resulting in robust value for advertisers, and undeniably strong moats for Trade Desk. Unified ID 2.0 (UID2) is a non-proprietary, open standard accessible to constituents across the advertising ecosystem. It enables advertisers, agencies, ad technology companies, and ad publishers selling advertising to interoperate together in advertising workflows. The company struck a string of new collaborations and partnerships with its UID2 during the quarter, starting with Times Internet, a leading media conglomerate in India, followed by satellite TV giant, Dish Media, along with TF1 and M6, two of the largest broadcasters in France. As a result, the platform now has access to ad inventory in over 11,000 destinations across connected TV, display, mobile, and audio.
The Trade Desk isn't just another ad network; it provides a self-service, cloud-based platform for ad buyers. This platform allows businesses and agencies to plan, manage, and optimize their advertising campaigns across various channels and devices. Here's what makes them special:
- Independent and Open Platform: Unlike some ad networks that prioritize their own inventory, The Trade Desk offers an independent platform with access to a vast marketplace of ad inventory. This gives ad buyers more control and flexibility in reaching their target audience.
- Data-Driven Targeting: The Trade Desk leverages data and analytics to help ad buyers target specific audiences with greater precision. This can lead to more effective and efficient advertising campaigns.
- Programmatic Bidding: They automate the ad buying process, allowing advertisers to bid on ad impressions in real-time based on pre-defined criteria. This can help them secure better ad placements at more competitive prices.
Why They Are Leaders:
- Focus on Innovation: The Trade Desk is constantly innovating and developing new features to stay ahead of the curve in the fast-evolving advertising landscape.
- Transparency & Control: They prioritize transparency and control for advertisers. This builds trust and encourages long-term partnerships.
- Global Reach: The Trade Desk operates in a global marketplace, giving advertisers access to a vast audience.
The Trade Desk has strong secular tailwinds in its favor within the digital advertising market, which stood at $600 billion in 2023, expected to rise to over $870 billion by 2027. Global streaming giants are doubling down on advertising: Netflix with its 40 million ad-tier subscribers and Disney+ have already announced partnerships with the company to monetize their massive ad inventory.
The stock had a phenomenal year in 2023, up 60%, which has been extended this year with a YTD rally of 31%. While the valuation is anything but cheap, at 22 times sales and 120 times earnings, the massive addressable market and an impressive compound annual growth rate of 32% largely make up for it. The company ended the quarter with $1.4 billion in cash, just $240 million in debt, and $600 million in cash flow. Our Target is $100 and our Sell Price is $64. We’re raising both to $120 and $84 respectively. The stock hit $97 two weeks ago, not quite a new all-time high, as that was set in 2021 at $114. But we can see that number being broken later this year if the market holds steady and moves higher. If not, that is why we have such a tight stop. No matter how good a company is, if the overall market tanks hard, it will bring these high flyers down with it. Revenues are great – moving from $840 million in 2020 to $1.2 billion, to $1.6 billion to $1.95 billion in 2023. What worries us the most, is its low level of profitability. Watch this one closely.
-----------------------------------------------------------------------------
Workday (WDAY: $211, up 4%)
TERMINATING COVERAGE
Workday, a leading financial and human capital management solutions provider, released its first quarter results last week, reporting $2.0 billion in revenue, up 18% YoY, compared to $1.7 billion a year ago. It posted a profit of $103 million, or $0.38 per share, against -$10 million, or $0. The company beat on consensus estimates but lowered full-year guidance a bit. See below.
As always, subscription revenues led the way at $1.8 billion, up 19% YoY, with the rest coming from professional services at $180 million, up 12% YoY. The company’s 12-month subscription backlog now stands at $6.6 billion, up 18% YoY, followed by total subscription backlog at $21 billion, an increase of 24% YoY. The gross revenue retention rate came in at 95%, representing a churn of just 5% over the year.
During the quarter, the company onboarded several marquee new companies. This includes Asda, Electrolux, TopGolf, and LVHM, among others. In the public sector, the company acquired the Defense Intelligence Agency (DIA) as a customer for its Workday Government Cloud. It now counts 60% of the global Fortune 500 as customers and was named a leader in cloud Human Capital Management for 1,000+ employees by Gartner.
The company continues to double down on AI and now has 50 AI and 25 generative AI use cases in its roadmap. Workday completed the acquisition of HiredScore, an AI-powered talent acquisition and internal mobility solution. With 65 million users and 800 billion transactions on its platform each year, the company has a wealth of data to train its AI and leapfrog competitors.
Following a robust performance last year, the stock has had a rough start to 2024, and is down 21% YTD, mostly owing to its high valuation. We believe that this is unjustifiable, and overblown, considering the massive addressable market of $140 billion, and an impressive 5-year CAGR of 20%. Workday ended the quarter with $7.2 billion in cash, $3.3 billion in debt, and $2.2 billion in cash flow. Our Target is $325 and our Sell Price is $250.
We, that is, you and we have a decision to make. Do we let the company go here? Or do we buckle down and add more? We added the stock at $139 in 2018, so we are up over 50%. You, however, may have a higher entry price. Not that that makes any difference. It just feels better if you can sell and take a profit, even though the stock was at $311 in February. Revenues have been growing for the past four years, from $4.3 billion in 2020, to $5.1 billion, to $6.2 billion, to $7.3 billion in 2023. At the current rate it looks like $8.0 billion is probable for 2024. Growth appears to be slowing and we wonder: Is this 10% growth rate worth such a high valuation? The market just might have something here.
Here’s what occurred: When Workday reported quarterly earnings a week ago, it lowered its forecast for fiscal 2025 subscription revenue to between $7.7 billion to $7.725 billion from a prior call for $7.725 billion to $7.775 billion. That prompted a flurry of price-target cuts from Wall Street. This is a tiny lowering. It is such a small reduction, that you have to re-read the sentence to understand the difference. The stock was smashed. This is what the market is doing to great companies. We’re not happy about it, but it is reality. For this reason, and the slowdown in growth discussed in the previous paragraph, we are going to exit the stock. Tough decision, but the market is just destroying growth companies with slower growth in the forecast.
If you wish to stay in the stock, the knockdown of the stock by $52 a share (19%) since earnings a week ago, certainly creates a better valuation now. It’s down $100 (32%) since February. With cash of $7.2 billion and debt of $3.3 billion, the balance sheet is strong.
-----------------------------------------------------------------------------
First Solar (FSLR: $272, up 2%)
Long-Term Growth Portfolio
First Solar released its first quarter results recently, reporting $800 million in revenue, up 45% YoY, compared to $550 million a year ago. It posted a profit of $240 million, or $2.20 per share, against $42 million, or $0.40, with a beat on consensus estimates on the top and bottom lines, all driven by macro regulatory tailwinds, ever since the passing of the IRA Act in 2022.
The company has a sales backlog of 78.3 GW, up from 71.6 GW a year ago, with net YTD bookings at 2.7 GW, down from 12.1 GW. Its average selling price stands at 31.3 cents per watt, down from 31.8 cents a year ago. The company expects its bookings backlog to extend through 2030, as there is seemingly no stopping demand for rooftop solar and large-scale solar energy generation projects.
While much of the solar energy industry reels from the structural overcapacity in China, First Solar has circumvented this threat, with its focus on differentiation and its business model. The company’s cadmium telluride semiconductor technology is vastly better than the commoditized crystalline silicon modules coming from China, which are known to harbor various reliability and quality issues.
Beyond the regulatory tailwinds, the company stands to benefit from the rise of generative AI as tech giants look to transition towards green energy to operate their massive new data centers, with First Solar being the preferred choice. A typical query on ChatGPT consumes 50 times more energy than a Google Search, so the giants of AI must make this shift to solar if they want to save money and don’t want to come under criticism.
It is already up 58% YTD and is showing no signs of slowing with plenty of tailwinds in its favor, and a pole position in the market. First Solar ended the quarter with a robust balance sheet, with $2 billion in cash reserves, just $680 million in debt, and $900 million in cash flow.
Many leading analysts from UBS, Piper Sandler, and JP Morgan Chase have increased their Price Targets for the stock. UBS raised its target to $320, from $270, the highest on the Street. Our Target was destroyed in the last two weeks as the stock rallied from $187 on May 14th to its present level of $272. We’re up 40% in less than a year. At $215 it is time to raise. We love this company so we are going to best UBS and place a $325 Target on the stock. Our Sell Price of $140 is hereby raised to $240.
-----------------------------------------------------------------------------
iShares US Oil & Gas Exploration & Production ETFÂ (IEO: $103, up 2%)
Energy Portfolio
A pure-play energy fund with concentrated exposure to oil and gas companies that are exclusively involved in exploration and production, this fund closely tracks global energy companies and is thus subject to the industry’s swings and volatility. So far this year, the fund is off to a flying start and is up 9% YTD, mainly owing to the recovery in natural gas prices following a prolonged slump over the past year.
Given a short to medium-term horizon, the oil and gas industry is always eventful, with plenty of geopolitics and macroeconomic factors coming into play. For example, right now there is the Red Sea crisis, a prolonged conflict in the Middle East, and Ukraine intensifying its attacks on Russian oil refineries, among a host of other things to factor in, that could lead to swings in global energy prices.
On the macro front, the demand from China is still weak, but a recovery is in the cards, which could push oil prices beyond the $85 mark. Apart from that, a rate cut by the Fed sometime later this year, and a recovery in demand from Europe this winter for space heating and other residential and commercial uses can all lead to a much-needed rally in natural gas prices, which remain at multi-year lows.
When taking a long-term view, there is a lot to be optimistic about oil and gas stocks. This might seem counterintuitive considering the growing environmental movements the world over, alongside new alternative energy sources, but we believe that natural gas and hydrogen will play an outsized role in this transition. This too will take anywhere from two to three decades to become a reality, and in the meantime, oil and gas giants will be reaping profits.
The Exchange Traded Fund allows investors to ride this trend with its highly concentrated portfolio, with 45% of its assets held in ConocoPhillips, EOG Resources, Marathon Petroleum, and Phillips 66. These are all companies with massive inventories and low production costs, helping generate outsized returns during bullish streaks in energy prices, while still outperforming when prices slump.
Our Target is $120 and our Sell Price is $95. This fund is a great way to own an assortment of energy companies in one transaction. We added the fund at $80 two years ago.
-----------------------------------------------------------------------------
Recursion Pharmaceuticals (RXRX: $8.28, down 10%)
Early Stage Portfolio
Recursion Pharmaceuticals, a leading AI and machine learning company in the biotech space, released its first quarter results a month ago, reporting $13.8 million in revenue, up 14% YoY, compared to $12.1 million a year ago. It posted a loss of $91 million, or $0.39 per share, as against a loss of $65 million, or $0.34 the prior year, but posted a beat on consensus estimates on the top and bottom lines.
Rising losses were largely the result of increasing R&D expenses, at $68 million, up from $47 million a year ago. This was followed by a similar rise in administrative expenses at $31 million, up from $23 million, as the company has been on a hiring spree. Revenues during the quarter were entirely from its partnership with Swiss life sciences company, Roche, which the company expects to scale further.
Recursion has plenty of value catalysts coming up over the next few quarters, which can be quite profitable for the company in a significant way. This includes five drugs in phase 2 clinical trials, each with over 100,000 potential patients worldwide, and no competitor. If the company can successfully commercialize just one of these five drugs, it can add significant value from current levels.
Its AI-enabled drug discovery platform continues to gain momentum, with potential new partnerships and the exercising of existing partnership options capable of driving top-line growth. The company’s 20 petabytes of data collected from real patients, when used with its internal AI software is a game changer for the industry, prompting Roche and Bayer to start working with Recursion.
The company’s AI play has been formidable enough to warrant a $50 million investment from Nvidia, and it has grand plans in this regard, including a next-generation supercomputer. The stock is down 16% YTD, and it stands to offer enormous value if catalysts start to align going forward from present levels. It has a robust balance sheet, with $300 million in cash, and just $50 million in debt. Our Target is $28 and our Sell Price is $8, which is getting tight. We added the stock at $10 just six months ago and it ran up to $17 in February but has since settled down. This is a speculative stock for sure. Enjoy the ride, but be careful.
-----------------------------------------------------------------------------
ARK Innovation ETF (ARKK: $42, down 4%)
TERMINATING COVERAGE
Cathie Wood's flagship Innovation ETF has had a rough start to the year and is down 16% YTD. This comes as the broader equity markets, including disruptive tech stocks, have posted a rally this year. The pullback can be attributed to its high exposure to Tesla, which has been a key detractor for the fund in recent quarters.
The fund’s overreliance on Tesla is clearly wearing it down, and alongside this, other key weak investments include Roku (down 88% from peak), Unity Software (down 90%), Pacific Biosciences (down 96$), and Teladoc, which is down 50% this year and over 95% from its peak in 2021. Ark attributes the weakness in Tesla to auto sales still being lower than pre-COVID levels, but we think the various controversies surrounding Tesla’s founder, Elon Musk, and his controversial $45 billion compensation package could have contributed just as much, not to mention his purchase of Twitter, spending half his time with SpaceX, and many other strange personal quirks that this genius brings to the table. In our opinion, the fund’s underperformance in recent quarters is largely due to it being underweight on market leaders and mega-cap stocks, which have led the rally in 2023 and this year so far.
Investors should start treating the Ark Innovation ETF like a venture capital or private equity fund, which often comes with a lock-in period lasting a few years, up to a decade. That’s how long it takes for disruptive innovations to pay off, and at current levels the stock offers robust value, making it perfect for value-seeking investors with a long enough time horizon.
We are asking ourselves some tough questions lately. Cathie Wood has clearly lost her magic. We added the stock in 2021 at $117, after it had hit an all-time high of $158. We thought it was overvalued and waited patiently for it to come down. Come down it did, but it has continued to erode for the past three years, going nowhere for the past two years, languishing in the low 40s. Why do we continue to hang on to this stock? That’s a good question. We have again been patient with this fund, but for far too long. We don’t have the time to wait any longer. There are much better places for our funds, than the many pie-in-the-sky investments she has made these past few years.
We are exiting the fund and moving on. We’d rather own more Nvidia, more Super Micro Computers, or Eli Lilly and Novo Nordisk.
-----------------------------------------------------------------------------
The Bull Market High Yield Investor
The clock is now ticking on the next Fed policy meeting on June 12. Nobody expects a rate cut or a rate hike at this point. We're more interested in seeing whether consumer inflation numbers due out that morning have any impact on Jay Powell's prepared marks: a soft or "cool" print could once again prompt a lot of talk about relaxing overnight lending rates when the moment is right, while anything hotter than expected could have the opposite effect. Whatever we see this month, it's unlikely to change the primary narrative around the Fed, which is that we'll probably be in a place where Powell and company can start relaxing in September and cut more aggressively after that.
We've been saying it for months and we were right. Short-term interest rates have peaked. People parked in money markets are unlikely to earn more on those accounts than they're making right now. And as the short end of the yield curve recedes, upward pressure on the long end will evaporate along with it. There simply won't be a reason for capital to keep flowing out of Treasury bonds into those money market accounts. And as the bond market stabilizes, long-term yields have less reason to keep climbing to the point where they spook us here in the stock market.
Add it all up and if you're looking for a relatively smooth income stream without the strain of life in the stock market, you need to lock in Treasury yields where they are. That means settling for 4-5% a year, which translates into 2-3% above where the Fed wants to guide inflation in the long term. Maybe a 2-3% real return is enough for you. We have a feeling most investors will want their money to work a little harder, which is why we're banging the drum on stocks and funds like these.
Arbor Realty (ABR: $13.68, up 2%. Yield=12.6%)
REIT Portfolio
Leading Mortgage REIT Arbor Realty released its first quarter results recently, reporting $104 million in revenue, down 5% YoY, compared to $109 million a year ago. It posted a profit or FFO of $58 million, or $0.31 per share, down from $84 million, or $0.46. This was a mixed quarter for the company, with a beat on the top line, but a miss at the bottom, largely owing to a big drop in loan originations across the board due to the tougher mortgage business, due to 7% 30-year loans.
Agency loan originations during the quarter stood at $850 million, down from $1.1 billion a year ago, which Arbor had warned against a couple of months back. The company believes that the first two quarters of this year will include peak stress, as interest rates remain higher, with a possibility of a rate cut in late 2024. Borrowers are deferring taking loans in anticipation of lower rates.
Arbor’s structured portfolio, however, continues to do well, albeit with a small YoY decline, with $256 million in originations, down from $266 million the prior year, with a total of 59 loans being originated, the same as last year. Similarly, the company’s servicing portfolio hit new highs during the quarter, at $31 billion, up 8% YoY, compared to $29 billion a year ago, with a net servicing revenue of $31 million.
The company has done remarkably well throughout the pandemic, and the volatile interest rates environment that followed. This was largely owing to its diversified business model with multiple countercyclical income streams. For instance, if interest rates continue to remain high, originations will take a hit, but the mortgage servicing rights portfolio will increase in value due to low refinancing rates. Who is going to refinance a 3-4% loan at today’s 7% level?
This has helped it maintain its distributable earnings in excess of dividends, and a payout ratio of at least 90% throughout, all the while maintaining its book value, currently at $13.02. Over the past few months, Arbor has held outsized reserves to hedge against delinquencies and has continued to shore up liquidity, resulting in a robust balance sheet, with $910 million in cash, $12 billion in debt, and $550 million in cash flow.
Realty Income Corporation (O: $53, up 2%. Yield=5.9%)
REIT Portfolio
Realty Income, "the Monthly Dividend Company," is one of the largest investors in commercial real estate across the globe and recently reported $1.2 billion in revenue, up 40% YoY, compared to $940 million a year ago. It posted a profit or FFO of $790 million, or $0.94 per share, against $680 million, or $1.03, with a beat on top-line estimates, but a miss at the bottom, making it a mixed performance.
The company is structured as a real estate investment trust, and its monthly dividends are supported by the cash flow from over 13,250 real estate properties owned under long-term lease agreements with commercial clients. During the quarter, the company invested $600 million across a wide range of properties, with a weighted average yield of 7.8%. A significant chunk of these investments, or $320 million was allocated towards assets in the UK and Europe, with an average yield of 8.2%. The company invested $38 million in a US-based data center joint venture, marking its first investment in the space.
Another big milestone during the quarter was the completion of the $9.2 billion acquisition of Spirit Realty Capital, with the new combined firm valued at $63 billion, and Spirit shareholders set to own 13% of it. The CEO of Arbor stated that the transaction is immediately accretive. This gives Realty Income significantly more size, scale, and diversification across asset, geographical, and demographic lines, along with the potential for realizing various cost and operational synergies.
This was an eventful quarter for the company in terms of capital activity, starting with a secondary offering to raise $550 million an at average price of $56.93 per share. Followed by $450 million in 4.750% senior unsecured notes due on February 2029, and $800 million worth of 5.125% senior unsecured notes due on February 2034, resulting in $4 billion in liquidity, to fund $2 billion in investments during the year.
The stock is down by nearly 10% so far this year, but there are a few key catalysts that could turn things around, most importantly a rate cut by the Fed, later this year. What makes this REIT truly impressive is its diversification across classes, assets, and geographies, leaving it well off in all market conditions. It ended the quarter with $680 million in cash, $26 billion in debt, and $3 billion in cash flow.
Invesco Municipal Trust (VKQ: $7.93, up 2%. Yield=5.1% tax free, or the equivalent of 7.8% taxable)
High Yield Portfolio
The Invesco Municipal Trust is a closed-end fund that invests in tax-free municipal bonds, with the aim of generating steady current income for investors, with limited volatility and downside risks given a long-term horizon. It is a perfect product for retirees and other conservative investors seeking consistent tax-free income, but don’t want to stomach any excessive market risks.
The fund posted a stellar rally starting in October when the Fed officially ended its hawkish stance, but as the anticipation of further rate cuts soured, it has been increasingly rangebound over this year. It is, however, making the most of the higher nominal yields in recent months.
Following two consecutive years of net outflows, $140 billion in 2022, and $8 billion in 2023, muni bonds are set for a turnaround this year. Bonds posted negative performance in April, mostly owing to the better-than-expected employment and inflation data, prompting a hawkish reaction from the Fed. New issuances, however, swelled to $45 billion, 29% over the 5-year average, and were oversubscribed 3.8 times. After several months of limited supply, this quarter presented an opportunity for funds to add yield to their portfolios at an attractive risk-reward proposition.
Despite its phenomenal 22% rally since mid-year 2023, the fund offers an attractive discount of 12% to book value, while providing tax-free yields of 5.15%. This makes for a very impressive proposition, not just for conservative, income-seeking investors, but for speculators seeking value as well. With its extensive 30-year track record and a low expense ratio of just 1.3%, this fund is for those who want no risk from equities.
Good Investing,
Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998
by Scott Martin | Jan 24, 2024 | Instant News Flash
Streaming giant Netflix (indicated at $538, up 9% overnight) Â had a spectacular fourth quarter, hitting $8.8 billion in revenues, up 12% YoY, compared to $7.8 billion a year ago. The company posted a profit of $940 million, or $2.11 per share, up from just $60 million, or $0.12 a year ago, with a beat on consensus estimates on the top and bottom lines, coupled with healthy core metrics lifting the stock as high as $50, following the results, in the post and pre-market trading.
The company’s full-year figures were just as impressive, with $33.7 billion in revenues, up 7% YoY, compared to $31.6 billion, with a profit of $5.4 billion, or $12.03 per share, against $4.5 billion, or $9.95 during the same period a year ago. In the midst of all this, Netflix’s guidance for the upcoming first quarter of 2024 stole the spotlight, with $9.2 billion in revenues, up 13% YoY, and profits expected to more than double.
Netflix unveiled a slew of changes to its platform in 2023, starting with the crackdown on password sharing, followed by lower-tiered pricing, and ad-supported accounts. These initiatives have exceeded all expectations, with 13 million new subscriber additions during the fourth quarter alone, bringing its total headcount to a record 260 million, well ahead of estimates.
These changes were complemented by a strong slate of new releases during the quarter, such as the final season of its long-running royal drama, The Crown, among many others. This is amidst the sea of other content that keeps viewers around the world hooked, leading many observers and analysts to conclude once and for all that Netflix has won the online streaming game.
Despite rising competition from all over the world, Netflix is the only company in this space that has consistently posted growth, while remaining profitable. This year it plans to invest $17 billion in fresh content, and just signed a $5 billion deal to livestream the World Wrestling Entertainment’s RAW, along with other exclusive programming and content on the platform by 2025.
The stock has rallied over 35% during the past year, and 48% if you include today’s big jump, and shows no signs of slowing down as the company goes on the offensive to unlock more value across its platform. We love the fact that the company is buying back its stock. During the fourth quarter alone, Netflix repurchased $2.4 billion worth, made possible by its strong and growing balance sheet position with $7.1 billion in cash, $15 billion in debt, and a massive $7.3 billion in free cash flow. Our Target has been a big $590 because we believe so much in this company. We would not sell Netflix. Would you like to know why? Take a peek at this chart and YOU decide:
| Year |
Number of Subscribers (Millions) |
| 2014 |
57 |
| 2015 |
69 |
| 2016 |
82 |
| 2017 |
94 |
| 2018 |
137 |
| 2019 |
158 |
| 2020 |
195 |
| 2021 |
209 |
| 2022 |
221 |
| 2023 (Q3) |
247 |
