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THE BULL MARKET REPORT for February 26, 2024

THE BULL MARKET REPORT for February 26, 2024

Market Summary

The Bull Market Report

After the trauma and endless anxieties of the last few years, it's no shock that a lot of investors are still unwilling to accept the evidence that the Wall Street Journal headlines and our own account statements tell us every day: stocks have not only recovered their equilibrium but pushed past all historical peaks into record-breaking territory. That simply doesn't happen unless rational markets weigh the opportunities that corporate innovation can unlock against the threats we all face, and ultimately decide that it's better to bet on progress than hide on the sidelines. Money is flowing into stocks. Cash is getting back to work in pursuit of better outcomes than the yields money market accounts currently pay.

And since earnings provide a tangible sign of how well all that corporate innovation is working, it's clear now that the innovators have faced every challenge of the last few years and come up smiling. Across the corporate landscape as a whole, the situation is under control. The world hasn't ended yet because if it had, we wouldn't be here to write this and you wouldn't care enough to read it. Confidence in capitalism survives. After three bear markets in five years (ranging from the now-almost-forgotten 2018 Trade War meltdown to the 2022 Fed hangover, with the COVID crash in the middle), investors are willing and able to let hope and even a little greed drive their decisions.

(That bit about "greed" is important. With the S&P 500 up nearly 28% in the past 12 months, people who clung to a defensive position in those money markets might have slept well at night, but they're also susceptible to envy. They're falling behind their friends and relatives. As their fear swings toward FOMO - fear of missing out - they're going to join the party that we never left, but have quite a stretch to catch up.)

Earnings are moving higher again, despite the Fed raising rates, despite inflation, despite the perpetual certainty that there's always another recession lurking just over the economic horizon. Macro conditions have been a real drag on corporate results. Should any of those conditions improve, corporate results will register the relief. That's why people are so fixated on the Fed actively cutting interest rates. As far as we're concerned, the most important thing is that the Fed stopped actively making things worse months ago. Rates got as bad as they're going to get. Companies survived. They evolved. And now they're leaner, meaner and more dynamic than ever.

There's always a bull market here at The Bull Market Report. As another quarterly corporate confessions cycle winds up, we'd like to use The Big Picture to talk about where the season leaves us and what we see ahead, while the individual stock updates below provide more specific feedback on how well various recommendations have done and look to do in the future. The Bull Market High Yield Investor has a simpler mandate this time around: If interest rates have peaked, what income-oriented investments make sense? We hope you'll appreciate the conclusions. And as always, reach out if you'd like different coverage or more detail on any topic. You know how to reach us. (Todd@BullMarket.com).

Key Market Indicators

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The Big Picture: A Champion Earnings Season

Sometimes the investor's life boils down to knowing how to grit through the challenges until the moment comes when the world finally turns your way. That's the mindset Wall Street has had to maintain through the Fed's long war on inflation and the pressure that higher interest rates put on an economy that was otherwise on the verge of overheating. We all needed the conviction to see better times ahead. According to all the numbers we've been seeing this season, that pivot from anticipation to gratification is finally here.

The 4th quarter of 2023, has produced a great earnings season in the first two months of this year. The fundamentals are trending up faster than they have since mid-2022, when the Fed really started getting aggressive in its tightening campaign, and operations across the S&P 500 started to feel the sudden deceleration in the air. Back then, earnings growth across the market had slowed to a 2.5% crawl, which felt sluggish at the time. After that, things got worse, with "growth" shifting into reverse as inflation and interest rates squeezed margins from both sides. It took an entire year before the executives running these companies could make enough tough decisions to get the numbers moving back in the right direction.

Three months ago, we got our first hint that growth was back on the menu. Expectations were extremely low, but those executives managed to manufacture a few percentage points of positive progress. This earnings season started from a similar playbook and effectively ended on another high note last week. From a fundamental perspective, the bulls have won. Across the S&P 500, growth is on track to not only stay positive for the second quarter in a row but accelerate from a little over 2% to roughly 4%. With two data points on the books, Wall Street now feels a lot more confident in projecting that the current quarter will also show that companies are still expanding at a reasonable rate and not contracting at all.

Following earlier interest rate increases aimed at curbing inflation, the Fed has paused its tightening cycle for the past few months. While inflation remains above target, recent data indicates some moderation in price pressures. This provides the Fed with more leeway in its policy decisions, unless unforeseen circumstances cause a rapid resurgence in inflation. What we're left with is a sense that the future will be not only better than the present but the past as well. That's why year-over-year growth is so important. It means progress.

And progress is good. Companies that generate more cash than they did in the past deserve to have more valuable stocks. Record earnings support record-breaking markets like the one we're in now. That's the world where the bull is in control. You can see that story play out in the way stocks have responded to this season's quarterly reports. Since the big Banks started the cycle on January 13th (five weeks ago), the S&P 500 and Nasdaq have rallied close to 7%. Remember, in the long term it can take the market a full year to generate results like this. These are the boom times.

Bull Market Report stocks have outperformed the broader benchmarks. This season has handed our portfolios a gain of 7.5% across all recommendations, almost a full point ahead of the high-flying Nasdaq. The winners are easy to see. In the core Stocks For Success portfolio, Amazon (AMZN) and Berkshire Hathaway (BRK-B) have been superstars, rewarding shareholders at a rate more than double the Nasdaq. Meta (META), Netflix (NFLX), Snowflake (SNOW), The Trade Desk (TTD) and of course NVIDIA (NVDA) did even better than that. How about Super Micro Computer (SMCI), which more than earned its name with a 165% gain during this earnings season. Outside the Technology space, it's hard to ignore what The Carlyle Group (CG), Novo Nordisk (NVO), Eli Lilly (LLY) and Recursion Pharmaceuticals (RXRX) are doing. We'd like to single out Eli Lilly here. This was the season that the stock turned into a four-digit (1000%) win on our watch, since the initial Research Report back in 2016. That's more than 100% every year. Beat that, bond bulls!

This is not to even hint that every single one of our stocks spent this season cheering. There are a lot of pain points. But that's how life in the market always plays out. On any given day or in any given season, there are winners and there are losers. As long as your winners do well enough to compensate for the losses, you end up ahead. And leadership rotates. A lot of the champions this quarter may stall or even fumble three months from now. Some of the underdogs will come back fiercer than ever. We haven't given up on any of our current underdogs, although some of the decisions were extremely tough. They'll come back. Meanwhile, our champions will run the field as far as they can. Their quarterly reports gave them a lot of fuel,  and the next season doesn't even start until mid-April, so there's plenty of time for a victory lap or two.

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BMR Companies and Commentary

NVIDIA (NVDA: $788, up 9% last week)
High Technology Portfolio

Another Blowout Quarter As AI Hits The Tipping Point

The most anticipated earnings call this season was an absolute blowout on Wednesday after the close, with chipmaker Nvidia soaring past consensus estimates across the board. The company posted $22 billion in revenue, up 265% YoY, REPEAT: 265% - that’s almost FOUR TIMES, compared to $6 billion a year ago, with a profit of $12.8 billion, or $5.16 per share, up from $2.2 billion, or $0.88 the prior year, as it rides on the coattails of an unprecedented global phenomenon.

Figures for the full year were just as impressive, with a mammoth $60 billion in revenue, up 125% YoY, compared to $27 billion a year ago, with a profit of $32.3 billion, or $12.96 per share, against $8.4 billion, or $3.34 – four times the year before. The stock popped 16% following the results, adding a record $272 billion to its market cap, the largest ever since Meta added $195 billion following its fourth-quarter results over two weeks ago. Some compared the one-day jump in market cap to Nvidia adding more than an Intel Corporation. In. One. Day. This is truly an incredible story. Oh – Here’s more. The founder, Jensen Huang got $10 billion richer on Nvidia’s share price surge that day. The Nvidia CEO saw his overall wealth increase to $69 billion after the stock in the California chip maker he founded in 1993 jumped more than 16% after it outstripped expectations in posting exceptional fourth-quarter results. The market cap increased by $280 billion on Thursday.

During the quarter, Nvidia’s data center division led the way with $18.4 billion in revenue, up 400% YoY, driven by massive new capex spending in the segment, with technologies like generative AI taking resource utilization to a whole new level.

Not one to rest on its laurels, the company has unveiled a string of new products, solutions, and collaborations during the quarter. This includes the Nvidia DGX SuperPod for drug discoveries; the MONAI API for cloud-based medical imaging; collaborations with Google, Cisco, Amgen, and many more, creating insurmountable network effects that no newer entrant or established player can match.

As it inches close to a $2 trillion market cap, ($1.96 trillion now) Nvidia’s more than 5X rally over the past 14 months is already the stuff of legends. There is no questioning the quality of this company, or the role it is set to play in the future. The only debate that continues to rage is relative to its valuation, and whether it can justify the same. This largely stems from the market’s inability to wrap its head around the coming age of AI.

A question asked on ChatGPT consumes much greater server resources than a traditional Google search. As people get accustomed to the new way of searching and finding information online, and while newer use cases and applications start cropping up, AI data and processing requirements will rise dramatically each passing year for the foreseeable future.

OpenAI’s Sam Altman recently had a lot of eyes rolling when he sought $7 trillion to develop silicon-chip manufacturing capacity that can power artificial intelligence. A figure that is two to three times the size of the global electronics industry is a bit hard to digest but doesn’t seem that off the mark considering that generative AI is set to add 7% to global GDP, or $6 trillion over the next 6 to 7 years alone, which we believe is a rather conservative estimate.

Trading at 32 times sales and 40 times earnings, Nvidia is anything but cheap but is certainly nowhere close to its peak given its pole position in the biggest tech story of this century. The company is already rewarding investors generously with $10 billion in dividends and buybacks this year, made possible by a strong balance sheet, with $26 billion in cash, $11 billion in debt, and $28 billion in cash flow. For them to raise another $5-10 billion in equity via a secondary would be easy as pie. Super Micro Computer (SMCI) just completed one last week, raising $1.7 billion in a convertible bond offering.

We added the stock at $460 in December. Our Target is currently $600 with the Sell Price of $400. We are changing the Target to $900 and the Sell Price to $700. We secretly think the stock could go to $1,500 or higher this year. Don’t tell anyone.

Listen, Artificial Intelligence is changing the world we live in. And we are guessing that you probably haven’t felt any of it yet, meaning that the ballgame is in the top of the 1st inning with just one out. There is a long, long road ahead and it is very exciting. All of Silicon Valley is working on AI as we speak. And again, AI is driving the stock market higher. It set an all-time high Friday. Dow, S&P and Nasdaq. But the story is LONG TERM. We believe Nvidia will be higher later this year and next. 2026? This company could be the largest in the world. It’s number 3 now; Microsoft at $3.04 trillion and Apple at $2.82 trillion look out!

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Ally Financial (ALLY: $36, up 1%)
Financial Portfolio

Leading auto finance company Ally Financial released its fourth quarter results recently, reporting $2.1 billion in revenues, down 6% YoY, compared to $2.2 billion a year ago. Profits of $140 million, or $0.45 per share, were down from $330 million, or $1.08, with a beat on consensus figures at the top and bottom lines, coupled with strong guidance.

For the full year, the company posted $8.2 billion in revenue, down 3%, compared to $8.4 billion a year ago, with a profit of $930 million, or $3.05 per share, against $1.9 billion, or $6.06. The drop in its performance during the past year was largely owing to rising provisions for bad debt, alongside fresh FDIC charges, both of which remain in line with the broader industry in recent quarters.

Despite a challenging year, the company continues to post strong operating metrics. While auto origination volumes dipped 14% to $40 billion for the full year, compared to $46 billion previously, the number of applications increased by 4% from 12.5 million to 13.0 million. Retail deposits have hit $142 billion across 3 million customers, up from $138 billion and 2.7 million during the year-ago period.

Ally earned insurance premiums of $1.3 billion during the quarter, its highest ever, made possible by its growing dealership network. Total active credit cardholders hit 1.2 million, up 20% YoY, offering a compelling return profile for the company, while its bread and butter auto loans hit an average yield of 10.8%, up 124 basis points over the past year, with negligible impact on originations.

Following a 43% rally in 2023, the stock still trades at 1.2 times sales and 9.8 times earnings, while offering an annualized yield of 3.3%. Ally is well positioned for an extended rally, with the low interest paid on deposits resulting in marked improvements in net interest margins. It ended the quarter with $7 billion in cash, $21 billion in debt, and $4.7 billion in cash flow. Our Target of $35 was breached late last month at $38 and it has been holding steady all this month. Our Sell Price is $27. We’re bullish on this one and are raising the Target to $43, and the SP to $31. At $11 billion, the company is fairly small in the world of finance and we can see strong growth ahead, through organic growth and future acquisitions.

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Financial Select Sector SPDR Fund (XLF: $40, up 2%)
Financial Portfolio

The Financial Select Sector SPDR Fund is a leading ETF for those looking for exposure to the Financial Services industry. The fund, like the banking and financial services sector that it tracks, had a roller coaster of a year in 2023, starting with the regional banking crisis in March, which saw massive pullbacks across the board, followed by a strong recovery leading it to end the year with a gain of 10%.

Several small banks shut down last year, and while the fund has escaped unscathed, largely owing to its focus on quality, blue chip securities in the industry, there are stressors in the sector that remain a challenge. Unrealized banking losses are now estimated between $1.5 to $2.0 trillion, and the US banking system is now somewhat reliant on the Federal Reserve stimulus to shore up and deal with liquidity issues.

This stimulus may not last forever, forcing banks to reckon with the crisis sometime over the course of this year. Fortunately, the Fed has officially ended its hawkish stance on interest rates and is expected to announce 1-3 rate cuts in 2024, offering banks and financial institutions much-needed respite. Rate cuts may not eliminate these unrealized losses, but can certainly provide a breather.

The Fund has escaped and remains insulated from the worst of this crisis, thanks to its extensive diversification. Its biggest holding has been, and still is Berkshire Hathaway, at nearly 14%, followed by JP Morgan Chase, Visa, Mastercard, Bank of America, and Wells Fargo, among others. Most of these banks have limited exposure to treasuries, or are well-capitalized to warehouse these underwater bonds.

The sector is set for a rebound in 2024, and few other funds are better suited to ride this trend. With an expense ratio of just 0.10%, an extensive track record going back decades, and a pedigreed management team, we expect strong value creation with the fund over the coming months. There certainly are risks, but the Fund, as well as the industry, are much better positioned today than they were a year ago. Our Target is $47 and our SP is $30, hereby raised to $35.

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The Carlyle Group (CG: $45, flat)
Special Opportunities Portfolio

This private equity giant released its fourth quarter results recently, reporting $900 million in revenue, down 15% YoY, compared to $1.1 billion a year ago. Profits were $400 million, or $0.86 per share, compared to $430 million, or $1.01, with a beat on consensus estimates on the top and bottom lines, coupled with strong guidance helped send the stock on an extended rally.

For the full year, the company produced $3.4 billion in revenue, down 30% YoY, compared to $4.4 billion a year ago. It posted a profit of $1.4 billion, or $3.24 per share, against $1.9 billion, or $4.34, owing to dropping asset sales and dealmaking across the board. The past year was undeniably challenging, but Carlyle ended on a high note and is set to carry forward strong momentum for the new year.

During the quarter, the firm realized $5.2 billion in proceeds from asset sales, and $20.6 billion for the full year, down from $8.6 billion, and $33.8 billion a year ago. It made fresh investments worth $7.2 billion, and $20.0 billion for the full year, compared to $6.8 billion, and $34.0 billion. Its total assets under management have hit a fresh high of $430 billion, up 14% YoY, with $76 billion in dry powder.

Carlyle’s private equity portfolio gained 2% during the quarter, followed by credit funds appreciating by 4%, but its real estate portfolio continues to struggle with a 2% decline, and its infrastructure and natural resources funds were largely flat during the quarter. Global real estate is currently in a state of flux, with a lot of changes taking place, not just in high-end commercial real estate, but in residential markets as well.

Despite a challenging year, the stock fared well in 2023, posting 36% in gains, which will and already is extending into the new year. With the Fed’s hawkish stance coming to an end, M&A transactions will start to pick up once again, boding well for fee revenues. Carlyle has authorized $1.4 billion in buybacks, made possible by its $1.8 billion in cash reserves, $9.3 billion in debt, and substantial cash flows.

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Exxon Mobil (XOM: $104, flat)
Energy Portfolio

Energy giant Exxon Mobil released its fourth quarter results early this month, reporting $84 billion in revenue, down 12% YoY, compared to $95 billion a year ago. It made a profit of $10.0 billion, or $2.43 per share, against $9.2 billion, or $2.27, with a beat on earnings, but a slight miss on top-line figures. This, however, didn’t dent the stock’s rally, owing to broader optimism surrounding the oil and gas industry.

For the full year, Exxon produced $345 billion in revenue, down 17% YoY, compared to $415 billion a year ago, with a profit of $40 billion, or $9.52 per share, against $60 billion, or $14.06. The drop in figures during the quarter and the full year are largely in line with expectations, owing to the fall in oil and gas prices YoY, as the elevated prices stemming from the wars in Ukraine and Gaza, normalized during the year.

During the quarter, the company produced 3.8 million barrels of oil equivalent per day, up 136,000 barrels compared to the prior year, owing to developments in the Permian Basin, as well as at its assets in Guyana. The company’s upstream profits took a $2 billion hit during the quarter, owing to regulatory issues at its Santa Ynez Unit assets in California, without which Exxon would have had a stellar beat.

A lot is happening around oil and gas prices at the moment, with a recovery in China, the Red Sea conflict, and a drawdown in US inventories, all creating short-term tailwinds. However, leaving all of this aside, what matters to us is Exxon’s remarkable execution over the years, which has seen its earnings power double from 2019 to 2023, totally irrespective of oil prices, margins, and other factors.

Exxon Mobil’s $60 billion acquisition of Pioneer Natural Resources is set to conclude halfway through this year, giving rise to substantial cost and operational synergies. The company has a lot going for it and yet it still trades at 1.3 times sales and 11 times earnings. The company returned $32 billion to investors and maintained a strong balance sheet with $32 billion in cash, $42 billion in debt, and $55 billion in cash flow. Our Target is $120 and our Sell Price is $85. We’re going to tighten the SP to $95 just in case.

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SPDR Gold Shares ETF (GLD: $189, up 1%)
Special Opportunities Portfolio

The SPDR Gold Shares ETF is the largest gold fund in the world by quite a margin. Its extensive track record, low expense ratio, minimal tracking errors and massive liquidity have made it the most sought-after instrument for most investors seeking a hassle-free option to gain exposure to gold. The fund had a great year in 2023, up 13%, and looks set to continue along the same lines this year, owing to several factors.

To start with, central banks across the globe have started buying gold heavily, with the World Gold Council expecting demand for the precious metal to hit a new record this year. With the Federal Reserve indicating 1-2 rate cuts in 2024, the US dollar will be vulnerable to outflows, prompting various country emerging and developed central banks to diversify their currency reserves with gold.

Historically, each time the Fed ends a hiking cycle, the gold charts a robust performance the following year, and we expect the same this year as well. This bullish cycle often lasts three to five years, but we expect something a lot more robust this year owing to the commodity being significantly undervalued relative to the S&P 500, with the ratio hitting the lowest levels in history.

Gold is still a safe haven during times of uncertainty, and given the increasing geopolitical risks and conflicts across the world, starting with Ukraine, the Middle East, and now a massive military build-up in China, there are plenty of catalysts in the near term. Given a long enough time frame, the commodity’s prospects are many times better, with several tailwinds aligning in its favor. This includes the Dollar being replaced as the world’s reserve currency, with many countries signing unilateral trade agreements that sidestep the currency altogether. (However, we don’t think this will happen anytime soon.) Besides this, the fact that the Fed printed 80% of all US dollars in existence during the course of COVID alone, clearly points to the fact that gold, and not US Treasuries are the ultimate hedge against the excesses of the US government.

Our Target is $215 and our Sell Price is $175. The current price of gold is $2,030, having peaked at $2,135 in December. Where is it headed? Only time will tell. But we’re leaning to “higher.” Remember, the SPDR GLD Trust actually holds gold in its vault, equal to its market cap which currently stands at $56 billion.

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CBRE Group (CBRE: $90, down 3%)
Stocks For Success Portfolio

Our favorite diversified real estate conglomerate released its fourth-quarter results a week ago, reporting $9.0 billion in revenue, up 9% YoY, compared to $8.2 billion a year ago. Profits came in at $430 million, or $1.38 per share, against $420 million, or $1.33, with a beat on consensus estimates at the top and bottom lines, coupled with a strong guidance for the full year leaving investors optimistic.

For the full year, the company hit $32 billion in revenue, up 3.6% YoY, compared to $31 billion a year ago. Profit came in at $1.2 billion, or $3.84 per share, down from $1.9 billion, or $5.69, largely owing to investment volumes dropping during the year, with high interest rates, and a fundamental realignment in the commercial real estate segment taking a toll on the company’s advisory business.

During the quarter, CBRE’s advisory services saw $2.59 billion in revenue, down 1%, compared to $2.61 billion, followed by its Global Workplace Solutions at $6.1 billion, up 15% YoY, compared to $5.3 billion. The Real Estate Investments segment, which includes its development solutions, as well as asset management, was down 10% at $260 million in revenue, compared to $290 million.

These figures are rather phenomenal, considering that commercial real estate investment volumes in the US dropped 44% YoY during the quarter. If anything, the company’s performance during this past year shows its resilience in the face of a remarkably tough macro environment and is a testament to its extensive diversification across services, asset classes, geographic locations, and more.

Following a 21% rally in 2023, CBRE still trades at a valuation of less than 1 times sales and 21 times earnings. Now that the Fed’s hawkish stance is slowly coming to an end, the stock is set for a rally this year, riding a long overdue recovery in the real estate market. The company has $1.5 billion in pending buyback authorizations, ending the year with $1.3 billion in cash, $4.9 billion in debt, and $500 million in cash flow. Our Target is $105 and our SP is $73, hereby raised to $85. Let’s play the SP tight, as there is some negativity surrounding commercial real estate at the moment, although CBRE makes money in good times and bad. In fact, companies need their services way more in tough times.

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Meta Platforms (META: $484, up 2%)
Long-Term Growth Portfolio

Social networking giant Meta Platforms ended the year on a high note, with a spectacular fourth-quarter performance early this month. The company posted $40 billion in revenue, up 25% YoY, compared to $32 billion a year ago, with a profit of $14 billion, or $5.33 per share, exactly triple YoY, from $4.7 billion, or $1.76 per share, with a beat on consensus sending the stock soaring following the results, jumping from $394 to $475.

The company’s figures for the full year were just as extraordinary, with $135 billion in revenue, up 16% YoY, compared to $117 billion a year ago. It posted a profit of $40 billion, or $14.87 per share, up from $23 billion, or $8.59. This can mostly be attributed to the rebound in digital ad spends, following a slump last year, and the year before, coupled with accelerating user growth across its family of apps.

Meta’s extensive family of apps, which includes the Facebook platform, WhatsApp, Instagram, Facebook Messenger, and now Threads, had 3.2 billion daily active users on average during the quarter, up 8% YoY. Monthly active users across the family were mere inches away from 4 billion, an increase of 6% YoY, driven by growing interest penetration, and the company’s efforts in retaining and engaging users.

Ad impressions during the quarter grew 21% YoY, with the average price per day increasing 2% YoY, which is rather impressive. This means that despite the supply of inventory increasing significantly, ad prices kept up, and this highlights a major rebound in global digital ad spending. Meta is now focused on unlocking other sources of revenue across its massive landed base, beyond its traditional advertising.

Despite the stock’s phenomenal 440% rally since mid-2022, it is still rather undervalued, and with its first dividend announcement and a potential stock split later this year, it is far from done. The company’s year of efficiency has been a phenomenal success, with significant improvements in its cost profile following layoffs, before ending the year with $65 billion in cash, $38 billion in debt, and $71 billion in cash flow.

Our Target was smashed at the beginning of the month, having blown by the $350 target late last year. We are raising it today to $550. Our Sell Price doesn’t exist. We would not sell META/Facebook. The market cap is now over $1 trillion, at $1.25 trillion. #6 in the country/world. Can you name them? Hint: MANAGM

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Recursion Pharmaceuticals (RXRX: $13.37, up 32% in the past two weeks)
Early Stage Portfolio

Recursion Pharmaceuticals is a pioneering biotech company that develops AI and machine learning-enabled platforms to aid in the process of drug development.

The company is a research company at this point, with revenues minimal. They have almost $400 million in cash in the bank, and debit of just $50 million. Many bigwigs of the tech and investment world are paying close attention to its massive potential in the world of new pharmaceuticals. When we first started coverage for this stock, we discussed how it had Cathie Woods’s stamp of approval, with ARK’s funds owning 4 million shares in the company, which we thought was pretty good. This figure has now gone up to its current level of 23 million shares in all of ARK’s funds. ARK INVEST now owns a sizable 8.5% stake in the company, valued at $300 million, which is enough to get analysts to pay attention to the stock. Now, just two months since our first report on the stock, semiconductor giant, Nvidia has announced that it has invested $76 million into this company, and this is in addition to the $50 million that it had already invested last year.

Recursion aims to industrialize drug discovery, and it plans to achieve this by building a massive library of chemical compounds and their reactions with gene types, before letting the forces of AI and ML work their magic. It has already partnered with Nvidia to power its supercomputer, BioHive-1*, and this partnership is set to grow deeper, with the two innovators playing off each other's strengths.

* BioHive-1 is Recursion’s supercomputer, one of the top 500 supercomputers in the world and the fastest supercomputer wholly owned and operated by any biopharma company

Key Points of the recent News Release from the company last week:

  • Recursion announces a multi-year collaboration and $50 million investment from NVIDIA.
  • This collaboration aims to accelerate the development of Recursion's AI foundation models for drug discovery.
  • NVIDIA will provide computational power, expertise, and access to their BioNeMo platform for model training and distribution.
  • Both companies share a vision to revolutionize drug discovery through AI.

Benefits of the collaboration:

  • Faster development of advanced AI models.
  • Wider reach and impact of Recursion's models through Nvidia’s BioNeMo, a generative AI platform that provides services to develop, customize and deploy foundation models for drug discovery.
  • Improved data-driven strategy and model release for Recursion.

Significance:

  • Marks a major step towards Recursion's goal of becoming a leading "techbio" company.
  • The collaboration has the potential to significantly impact the development of new medicines.

Today, pretty much anything that Nvidia touches turns into gold, so as soon as its fresh investment was announced Recursion’s stock popped 20%. But note that Recursion is partnering with other companies like Roche/Genentech and Bayer on drug discovery efforts. Our Target is $18, hereby increased to $28. Our SP is $8. THIS STOCK IS VERY SPECULATIVE.

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The Bull Market High Yield Investor

Despite a few hot inflation prints earlier this month, the investors who really care about interest rates aren’t worried enough to vote with their wallets. There’s zero real money in the futures market riding on any more tightening moves from the Fed. Zero. Which cuts through a lot of the doomsday chatter. If anything, the odds of a significant number of rate CUTS this year remain high. Rate futures traders think we’ll see 2-4 loosening moves, enough to take overnight rates down 0.5% to a full percentage point. That’s real relief. It’s enough to take rates down to where they were a year ago or even lower.

The world did not end a year ago. Everyone now knows that the current level of monetary austerity is survivable. Sustainable. It might sting to pay that much interest, but we’ve seen that the economy has been able to bear it. And if the absolute level of interest isn’t toxic in itself, then the only thing to fear is time. Rates are likely to start going down before the end of the summer, but have they stayed too high for too long for borrowers to handle? We think the answer is no. For one thing, even borrowers who got into debt at the highest rates (last summer) will rush to refinance the minute the Fed relaxes. The more ground the Fed gives up, the more leeway they’ll have to refinance.

The relief spreads. Things feel better. All we need for that to happen is for inflation to show us real signs of improvement. The PCE will set the tone on Thursday morning. If it’s good, the futures market has the right idea and there’s no need to be afraid. It only gets complicated if the numbers come in as hot as the CPI and PPI did. In that scenario, rate relief will be elusive. But in the past, the economy has grown fast enough to power through higher borrowing costs. It evidently doesn’t take much. GDP is on track to expand about 2.5% in the current quarter. That’s a good sign.

Growth is the engine that keeps the economy moving forward. It’s the gas pedal. Rates are the brake. As long as the gas is pushing the car forward faster than the brake is slowing it down, the economy is in a good place for investors. It’s that simple. Whether the Fed gets its foot off the brake or not, the gas is flowing. But in a strong economy, stocks have what they need to outperform.

Bonds, meanwhile, are only attractive if you can lock in yields that you can be satisfied with over the long haul. That satisfaction is in the eye of the investor, but as far as we're concerned, locking in around 4% a year (or barely 2% above inflation, even if the Fed achieves its target) is not exactly a thrilling outcome. We'd rather chase higher income from corporate dividends, where growing companies end up with more cash to share with shareholders. Then there are chances to simply capture a higher current yield than anything the Treasury market can give you . . . and these opportunities often have other advantages as well. We profile one of each type of investmetn here for you.

Prologis (PLD: $133, flat. Yield=2.6% right now, but it could rise over time)
REIT Portfolio

Warehousing giant Prologis released its fourth quarter results recently, reporting $1.8 billion in revenue, up 10% YoY, compared to $1.6 billion a year ago. It created a profit, or FFO of $1.20 billion, or $1.26 per share, against $1.18 billion, or $1.24, which was broadly in line with estimates, and despite light guidance for the new year, the stock has been on an ascendant streak ever since the results.

The company’s full-year figures were impressive, with revenues at $6.8 billion, up 40% YoY, compared to $4.9 billion a year ago. Profits were $5.3 billion, or $5.61 per share, against $4.2 billion, or $5.16, driven by robust occupancy rates, at 97%, record new lease commences at 44 million square feet, and a retention rate of 73%, among many of other internal and macroeconomic factors.

It had an eventful quarter and year when it comes to fresh deployments, with $500 million worth of acquisitions during the fourth quarter alone, and $730 million for the full year. This was followed by $3.2 billion worth of development stabilizations, $3.4 billion in new development starts, and finally $1.6 billion in dispositions, all perfectly aligning with Prologis’ capital recycling initiatives.

Prologis currently remains right in the sweet spot amidst massive global tailwinds, with the e-commerce boom not showing any signs of slowing, and the supply constraints in recent years forcing merchants to maintain larger inventories. As a result, in the third quarter of 2023, it raised rents by a phenomenal 74% on all expiring leases, because it could, and there was plenty of demand from companies to pay for it.

Following a 19% rally last year, the stock is not cheap by any measure, trading at 16 times sales, and 40 times earnings. However, given its massive addressable market, it wouldn’t be wise to value it like any other REIT. This is a growth stock that pays a nice dividend and with a strong balance sheet ($530 million in cash, $30 billion in debt, and $5.4 billion in cash flow) has the potential to raise that distribution a lot more over time.

Guess what? We looked back a decade and saw that Prologis "only" paid $0.28 per share quarterly back then. Shareholders who locked in at that point have seen their payout soar to $0.87 in the intervening years. They paid about $40 for that income stream in 2014, which means that what was once a 2.8% current yield is now handing them 8.7% of their initial investment every year. If the trend continues, investors today who are willing to settle for less than 3% can ultimately enjoy a similar outcome.

Either way, our Target is $160 and our SP is $110, raised today to $120. This is no small company, with a $123 billion market cap. Solid as a rock.

Nuveen Municipal Credit Income Fund (NVG: $11.85, up 1%. Yield=4.6% tax free, or the equivalent of 7.7% taxable)
High Yield Portfolio

Since hitting its lowest levels in over a decade, the Nuveen Municipal Credit Income Fund has created a stellar rebound over the past four to five months. Following significant value erosion for over two years owing to the Fed’s hawkish stance, the possibility of multiple rate cuts in 2024 has reignited optimism in the Fund, presenting a once-in-a-decade opportunity for value investors and speculators alike.

Municipal bonds are now in a plum position, with the muted possibility of further rate hikes eliminating downside risks, and a higher for longer interest rate environment allowing for significant value creation and equity-like yields. Yields are at the highest point to start the year since 2011, and for the first time in over a decade, investors will enjoy attractive total returns from cash, a dynamic that has long been absent.

After the second consecutive year of net outflows in munis in 2023, at $19 billion, we expect demand to start rising soon, as tax loss harvesting starts to subside, and there is more clarity on the Fed’s interest rate strategy going forward. Higher yields and lessening volatility will compel mutual funds and other institutional investors to lock in yields by reallocating funds from other assets in favor of muni bonds.

Despite a net outflow in 2023, it is worth noting that much of it was driven by redemptions at short-term funds, whereas longer-term funds recorded a net inflow of $10 billion during the year. Portfolio managers should now start to pursue moderately longer duration profiles, aimed at creating enduring value as it becomes increasingly certain that rate hikes are coming to an end, with cuts on the horizon.

In addition to broad-based tailwinds in its favor, the Fund at a Book Value of $13.55 trades at a 14% discount, offering tax-free yields of nearly 4.6%. In this light, there are few better funds to ride this trend than the Nuveen Municipal Credit Income Fund. Our Target is $16 and our SP is $11.

Good Investing,

Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998

Netflix Rules The Streaming Landscape

Streaming giant Netflix (indicated at $538, up 9% overnight)  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

 

 

THE BULL MARKET REPORT for December 18, 2023

THE BULL MARKET REPORT for December 18, 2023

Market Summary

The Bull Market Report

We were feeling pretty good a few weeks ago. Now, the Fed has given us permission to openly cheer. The BMR universe is up 40% YTD, with portfolio after portfolio soaring faster this month than the Nasdaq and the S&P 500 put together. At this point, our stocks are poised to leave the market as a whole far behind, and it isn't hard to understand why. Investors are finally looking forward to a future that's tangibly better than the past. If there's a recession in 2024, the odds are good that it will be relatively mild. From a corporate perspective, the recession that matters has already come and gone. We're back in a world where the fundamentals are improving again instead of deteriorating as they did for much of this year. Yes, earnings are shifting back into record-breaking gear.

The Dow Industrials have responded by recovering their pre-bear-market highs and then moving even farther forward into record territory. While the Nasdaq and the S&P 500 aren't quite there yet, the pain we endured last year has almost entirely evaporated. The BMR universe, for example, is where it closed out 2021. That's an important milestone because it means that for the first time in months, investors who held on through the Fed's aggressive tightening cycle are on the verge of breaking even. They haven't lost appreciable money. The only thing they've lost is time. At the rate our stocks are moving, we're making up for that lost time fast. Sooner or later, we'll be back on our long-term trend, and the way statistics work means that after a period of underperformance, we can look forward to accelerated gains for at least a little while to come.

In other words, the best may be yet to come. The earnings cycle that starts next month will almost certainly be the strongest we've seen in the 12 months. After that, the year-over-year numbers can get even better as corporate executives shake off all the pressure on their operations and get back to work. Inflation has receded to something like "normal" historical levels. Profit margins remain robust. Supply chains have become far more resilient than they were before the pandemic. A new wave of technological innovation is already boosting productivity, enabling worker-starved companies to do more with the people they have. Mass layoffs like we saw in 2008 or 2020 look relatively remote at this stage.

Of course, additional shocks can create setbacks. But life is full of shocks and as we love to say, Wall Street has survived generations of shocks (world wars, social upheavals, oil embargos, pandemics, credit crashes, high and low bond yields, high and low taxes) and thrived. That's "normal." Something new emerges to worry about and investors find a way around or over that wall of worry. Stocks continue their long record-breaking trajectory. In a bear market, it's easy to forget that the S&P 500 has spent most of its life chasing from peak to peak, taking us all to levels of unprecedented wealth along the way. This isn't simply our optimism talking. It's historical fact.

Granted, the road is never smooth from day to day, week to week, or even year to year. But the ultimate direction is never really in doubt. Everyone at the Fed who votes on monetary policy currently thinks interest rates will go down in the coming year. Nobody seriously thinks rates will go up. The drag we feel from that direction is unlikely to increase. This is as bad as it gets in this cycle. And when you're already feeling the worst, those statistical rules tell us that things are going to get better. All we need to do is keep our eyes open and remain disciplined enough to stay in the market waiting for that reward. What we've weathered in the last few months was simply the bears struggling to reassert their relevance. We just saw the so-called "bond king" Jeffrey Gundlach try to argue that 10-year bonds yielding less than 4% is a red flag when two short months ago he was worried that 5% was going to poison the economy.

There's always a bull market here at The Bull Market Report. As always, we need to talk about several of our favorite stocks, leaving The Big Picture to delve into a few of the "defensive" themes we like a whole lot less in this environment. The Bull Market High Yield Investor dissects a few of the things Fed Chair Jay Powell said this week that resonate with our investment philosophy, as well as our thoughts on the economic landscape as a surprisingly great year winds up. The holidays are coming. Santa is here.

Key Market Indicators

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The Big Picture: Check Your Defense

A lot of investors stayed sidelined this year after the 2022 bear market crushed any confidence in the market they had left. After all, the pundits told them, a recession was imminent and exposure to stocks could only add to the pain. But sometimes a defensive posture is the surest way to fail. Start with the bond market. If you bought 1-year Treasury paper a year ago, it’s maturing now. You’ll get your money back, plus 4.65% interest. There was no risk there. However, the money you’re getting back is worth 3.1% less than it was at the end of 2022, thanks to inflation. The interest payments don’t stretch as far either. All in all, for every $100 you put in, you’re getting the equivalent of $101.40 back. And in the meantime, everyone else was passing you like you were standing still. The S&P 500 gained 22% in that same 12-month period. The Nasdaq jumped a staggering 48%.

Adjust for inflation all you want, but those investors are still significantly richer than they were when you parked that $100 in the bond market where it wasn’t vulnerable to much besides opportunity costs. Stock investors gritted their teeth, closed their eyes, and jumped. They were rewarded for that calculated risk, that leap of faith. And not every bond investor was foresighted enough to buy the actual bonds and hold to maturity. Long-term bond funds are down a net 6-7% in the last 12 months. Yes, it is possible to lose money in the Treasury market when other people are buying high and selling low on your behalf.

Likewise, investors who wanted to stay in the stock market but clung to the “defensive” sectors missed their shot at the dramatic recovery. In effect, those who were in aggressive areas of the market during the bear cycle locked in their losses while locking out the rebound that followed. Utilities are down 9% over the past year. They lost money. Cash is flowing into areas of the economy that are more vibrant and have the power to rally when the bulls are in charge. Defensive consumer stocks (think Big Food and grocery stores) are down. Don't get us wrong, we remain committed to our defensive line, but we aren't going near areas of the market that are clear losers. They rarely do well in an economic downturn. It’s just that they rarely drop hard. They preserve more value than other stocks when the market as a whole takes a dive.

In other words, there is rarely a way to make real money unless you can leverage them with options like some people try to do. What these sectors are all about is protecting existing capital. If you already have more capital than you need, a strong defense is a decent way to hold onto more of it for a longer period. But most of us want to build wealth. We want more than we have. That means a strong offense. Think technology, communications, and discretionary consumer stocks. Industrials. These companies have what it takes to grow. Sometimes that proposition falters, but over time, they run farther to the upside than the downswings take away.

Look at the Industrials. Say you bought the sector on the brink of the COVID crash. You made about 25% in the years that followed until the 2022 bear market got in the way. At the very worst moment of the bear cycle, your initial investment showed a slight loss. Today, about a year from that bear bottom, your initial investment has recovered all lost ground and more. You’re up 35% across the cycle. That’s a strong offense. The gains are bigger than the losses. You end up ahead. Cycle after cycle, you get farther ahead.

How about utilities? Down a net 9% across the same period. How about a bond fund? Down 20% counting dividends. Ouch. The defense was lethal. Gold did well, but gold is a hedge against inflation. And a lot of people were desperate for an inflationary shield in the last few years. We would have rather been in gold than bonds. Thanks to our SPDR Gold Shares ETF, we are. But then again, we are always happy to stay in stocks. To each their own. Feel free to tell us how you feel! Your feedback helps to guide our recommendations to fit your needs.

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BMR Companies and Commentary

The Carlyle Group (CG: $42, up 13% last week)
Special Opportunities Portfolio

Alternative assets manager The Carlyle Group posted a smaller-than-expected but tangible drop in earnings during its recent third-quarter results. The company posted $780 million in revenues, down 45% YoY, compared to $1.4 billion a year ago, with a profit of $370 million, or $0.87 per share, down from $640 million, or $1.42. It, however, posted a spectacular beat on consensus estimates during the quarter.

Private equity giants such as Carlyle have struggled in recent months owing to high interest rates, macro uncertainties, and geopolitical conflicts putting a dampener on M&A activities. This, however, didn’t stop the company from realizing proceeds worth $5.6 billion from asset dispositions during the quarter, as it deployed $4.1 billion towards new investments and acquisitions, bringing it to $12.6 billion YTD.

The Carlyle Group is a global investment firm that specializes in alternative asset management, primarily focusing on private equity, real assets, and private credit. They manage a staggering $380 billion in assets under management as of this moment, making them one of the world's largest private equity firms.

Here's a breakdown of their business, an IN-DEPTH LOOK:

1. Private Equity:

Carlyle's bread and butter. They invest in established companies across various industries like aerospace, consumer, defense, energy, healthcare, technology, and more. They typically acquire majority or controlling stakes in these companies, aiming to improve their operations and drive value creation before selling them later for a profit. Think of them as financial alchemists, turning underperforming companies into gold.

2. Real Assets:

This segment focuses on investments in infrastructure, real estate, and energy assets. They invest in things like airports, ports, pipelines, warehouses, renewable energy projects, and even student housing. Carlyle aims to generate stable income and long-term capital appreciation through these investments.

3. Private Credit:

This newer arm provides financing to mid-sized companies that often struggle to access traditional bank loans. Carlyle offers various debt solutions, including senior loans, mezzanine debt, and distressed debt, catering to different risk appetites.

What makes Carlyle so good at what they do? Here are some key factors:

Experienced Team: Founded in 1987 by a group of seasoned Wall Street veterans, Carlyle boasts a team with extensive expertise in finance, investing, and operations.

Global Reach: With offices in 28 cities across six continents, Carlyle has a deep understanding of different markets and economies, allowing them to identify promising investment opportunities worldwide.

Industry Focus: They have a strong track record in specific sectors like aerospace, consumer, and healthcare, giving them valuable insights and relationships within these industries.

Operational Expertise: Carlyle doesn't just invest money; they actively work with portfolio companies to improve their operations, streamline processes, and drive growth.

Strong Network: They have built strong relationships with investors, governments, and other industry players, giving them access to deal flow and valuable information.

The company is like a well-oiled machine, seamlessly navigating the complex world of alternative investments and generating significant returns for its investors. Carlyle’s funds have shown remarkable resilience in the face of headwinds. While capital market activity remains a bit weak, there has been a steady recovery during the third quarter, and this coupled with the Fed’s recent pivot on interest rates indicates a strong possibility of good times ahead.

The firm’s fundraising activity has slowed a bit with the new higher-interest-rate environment that we have been in this year, at $6.3 billion during the quarter, down from $8 billion a year ago, bringing total assets under management to $380 billion, up 3% YTD. It now has dry powder that is ready to be invested of over $70 billion, as it looks for new opportunities across private equity, real estate, and credit to unveil themselves.

Despite the challenging conditions, the stock is up by 40% YTD but is down 30% from its all-time high of $60 two years ago. It currently offers remarkable value, as well as an annualized yield of 3.3%. The company stands to unlock substantial value going forward. It has a strong balance sheet with $1.7 billion in cash and $9.2 billion in debt. Our Target is $45 which we are raising today to $53, and our Sell Price is $28 which we are raising today to $34.

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SPDR Gold Shares ETF (GLD: $187, up 1%)
Special Opportunities Portfolio

The largest gold ETF in the world by a wide margin, the SPDR Gold Shares ETF is looking more upbeat than ever heading into the new year. Gold briefly traded above $2,100 an ounce early this month, setting a new all-time high, before falling to its current level of $2,030. Following a mixed year, it is now up by 10% YTD since gold prices started to rally a few months ago. With prices near all-time highs, we expect this rally to continue into 2024, even as broader consensus anticipates a soft landing for the US economy.

Gold prices have seen significant volatility in recent weeks, mainly owing to the shift in investor sentiment, and the decline in post-pandemic inflation that has prompted the Fed to end its hawkish stance. That being said, there are still signs of weakness in the US economy. Gold is a vehicle for wealth preservation and hedging.

In addition to this, central banks across the world are increasingly stockpiling gold in response to the rising national debt in the US, along with a debt crisis brewing in the broader world economy. There is also the growing institutional demand, during this period of growing geopolitical tensions in several conflict regions.

During the upcoming year, many factors in play will decide the direction of precious metals. A hard landing or recession for the global economy would send investors running for cover, and prompt the Fed to cut rates, making gold more attractive. Similarly, while high interest rates have a negative correlation with gold, staying higher for longer can make the yellow metal a lot more attractive.

Following a disappointing show since the pandemic, gold is stirring once again, and there are few better ways to gain exposure to it, than the SPDR Gold Shares ETF. With a nearly two-decades-long track record, an expense ratio of just 0.4%, and robust liquidity (8 million shares a day on average), no other fund even comes close. We’re sure you know this, but in case you don’t, the SPDR Gold Shares ETF actually owns gold bars. The current level of assets owned (gold) is $57 billion. It is hidden away in HSBC Bank USA, London, as well as other undisclosed locations. Guess why they are not disclosing the locations! Our Target is $190 and our Sell Price is $160. We are raising both to $215 and $175.

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Visa (V: $258, up 1%)
Financial Portfolio

Global payments giant Visa released its fourth quarter results recently, reporting $8.6 billion in revenues, up 11% YoY, compared to $7.8 billion a year ago. The company posted a profit of $5.6 billion, or $2.27 per share, against $4.2 billion, or $1.93, with a beat on estimates on the top and bottom lines. It further posted an upbeat guidance for the new year, sending the stock on an extended rally ever since. Every time we write about Visa and mention their profits, we are in awe. Look at those numbers above. On $8.6 billion in revenues, they reported $5.6 billion in profits. We must say there are very few, if any more profitable companies on a percentage of revenues. Apple is good at 30%, but Visa is insanely good at 65%, after tax.

The company’s full-year figures were just as exceptional, with $33 billion in revenues, up 11% YoY, compared to $29 billion a year ago. It posted a profit of $17 billion, $8.29 per share, against $15 billion, or $7.01. Despite being faced with a wide variety of headwinds, the company has continued its ascendant streak, made possible by its growing partnerships and integrations across the ecosystem.

During the quarter, the company posted robust performances across core operational metrics, with total processed transactions at 56 billion, up 10% YoY. This was followed by a similar growth in payments volume and cross-border volumes at 9% and 16%, respectively. This was once again made possible by Visa’s growing penetration across geographies, use cases, and product classes.

Its value-added services are helping unlock substantial value for banks, merchants, and financial institutions, all the while creating substantial competitive moats for the company. Visa’s tap-to-pay, payment account tokenization, and business expense management tools are a few of the many products, services, and solutions that the company has unveiled in recent years, that have since gained traction.

The stock is up 24% YTD, scaling new heights each passing month, and perfectly justifies its valuation at 16 times sales and 26 times earnings, given the massive digital payments tailwinds in its favor. Visa rewards shareholders generously with $5 billion in dividends and buybacks during the quarter alone, made possible by its $20 billion treasure trove, just $21 billion in debt, and $21 billion in cash flow.

The stock hit a new all-time high Wednesday at $263. Our Target is $265 and We Would Never Sell Visa. The Target is hereby raised to $295. This $530 billion market company is heading higher, of that there is no doubt. We added the stock seven years ago in 2016 at $70. How are we doing? And where do you think the stock will be in another seven years? Let’s put it this way: If you don’t have any shares, get some in your portfolio!

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Eli Lilly (LLY: $572, down 4%)
Healthcare Portfolio

Pharmaceuticals giant Eli Lilly released its third quarter results recently, reporting $9.5 billion in revenues, up 37% YoY, compared to $7.3 billion a year ago. The company posted a profit of $3.1 billion, or $3.39 per share, against $1.8 billion, or $1.98. It was, however, hit with a $3.0 billion charge from acquiring in-process research and development during the quarter.

During the quarter, the company saw strong growth in its metastatic breast cancer drug, Verzanio, with sales hitting $1 billion, up 68% YoY, and the diabetic medication, Jardiance at $700 million, up 22% YoY. However, other blockbuster products such as Trulicity fell a bit, with a 10% drop in sales YoY, largely owing to the changes to estimates for rebates and discounts during the period in question.

The big news for the company and shareholders during the quarter is the US and EU approval for its anti-obesity drug Zepbound, with results showing a reduction in major cardiovascular events, in addition to substantial weight loss benefits. The drug will be available by the end of this month. Goldman Sachs expects this class of drugs to bring in $150 billion in additional revenues through 2030.

Eli saw strong progress on the pipeline front, with FDA approval for Omvoh, to treat adults with ulcerative colitis. These developments couldn’t have come at a better time, considering that it is set to lose exclusivity to Trulicity in the US by 2027, eating away a good chunk of its revenues.

Eli Lilly had a banner year for its pipeline in 2023. Here's a breakdown of the highlights:

Regulatory Approvals:

  • Donanemab (Lecanemab): This Alzheimer's disease treatment received FDA approval in July, becoming the first anti-amyloid therapy to reach the market. This was a major milestone for Lilly and a promising development for Alzheimer's patients.
  • Mirikizumab: This IL-23 inhibitor was approved in September for plaque psoriasis, offering a new option for patients.
  • Lebrikizumab: This IL-13 inhibitor was approved in the US and EU in December for adults and adolescents with severe nasal polyposis, offering relief from a debilitating condition.
  • Tirzepatide (Zepbound): This dual GLP-1 and GIP receptor agonist completed positive FDA approval came in November. It appears that it will become a blockbuster drug for weight management.

Late-Stage Pipeline Advancement:

  • Pirtobrutinib: This BTK inhibitor demonstrated promising efficacy in Phase 3 trials for mantle cell lymphoma and chronic lymphocytic leukemia. On December 1, 2023, the Food and Drug Administration granted accelerated approval to pirtobrutinib for adults with chronic lymphocytic leukemia or small lymphocytic lymphoma.

Eli Lilly has done remarkably well this year, with the stock posting a YTD rally of 57%, and while its valuations might seem expensive at 16 times sales and 46 times earnings, they are perfectly justified given the potential of its new drugs in the obesity niche. The company ended the quarter with a strong balance sheet, comprising $2.6 billion in cash, $20 billion in debt, and $5.7 billion in cash flow. Our Target is $665 and We Would Not Sell Eli Lilly. We added the company at $69 in 2016. We like this company!

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ServiceNow (NOW: $698, flat)
High Technology Portfolio

Enterprise cloud computing giant ServiceNow released its third quarter results recently, reporting $2.3 billion in revenues, up 25% YoY, compared to $1.8 billion a year earlier. The company posted a profit of $240 million, or $1.18 per share, against $150 million, or $0.74, with a beat on estimates at the top and bottom lines, coupled with strong guidance for the full year resulting in an extended rally for the stock, rallying from $530 to its present level at $700. The stock hit a new all-time high this week at $720.

Subscription revenues led the way with $2.2 billion in revenues. Current remaining performance obligations stood at $7.4 billion, up 24% YoY, which is set to be realized over the next 12 months, largely the result of large multi-million dollar, multi-year commitments from leading organizations across the world. During the third quarter alone, the company inked 83 new deals with annual contract values over $1 million, an increase of 20% YoY. It currently boasts a total of 1,800 customers with annual spends in excess of $1 million, and 50 customers spending more than $20 million, an increase of 58% YoY. A few new additions included the US Air Force, Cleveland Clinic, and one of the world’s largest automakers.

As always, the company continues to go all-out when it comes to growing its base and executing plans. So far this year, it has unveiled 5,000 new capabilities, including a wide range of generative AI features to help its customers unlock value. The company has since embedded AI across all workflows, with text summarization, chat, and search being a few of the many new features available to customers.

The company is slowly, but surely turning its platform into a must-have for enterprise systems and workflows. If not for its extensive platform and features, the partnerships and integrations it has built over the years will create substantial moats to stave off competitors making it a strong value creator going forward. It ended the quarter with $4.1 billion in cash, $2.3 billion in debt, and $3 billion in cash flow.

This is no small company, clocking in at $143 billion in market cap. It’s certainly not cheap when you look at the P/S ratio – Price to Sales. 6-10 is high. ServiceNow checks in at 143/8.5 which equals 17. Revenues for the past few years were $4.5 billion, $5.9 billion, $7.2 billion in 2022, and what looks like $8.5 billion in 2023. If the company can hit $10 billion in 2024, that would bring the P/S ratio down to 14 – high but not killer high. Our Target is $650 and our Sell Price is $500. The stock blew through our Target in mid-November. Let’s do this: We are raising our Target to $800 and raising our Sell Price to $650. This is a high-flyer for sure. We love the company and believe they will continue to go places in the future. They are showing good growth in revenues, profits are good, but not stellar. But if the market turns sour, high flyers tend to fly lower, many times quickly. Watch your investment here closely.

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Occidental Petroleum (OXY: $59, up 4%)
Energy Portfolio

Hydrocarbon exploration company Occidental Petroleum released its third quarter results recently, reporting $7.4 billion in revenues, down 22% YoY, compared to $9.5 billion a year ago. It posted a profit of $1.1 billion, or $1.18 per share, down from $2.5 billion, or $2.44, but posted a beat on estimates on the top and bottom lines, coupled with a rise in its full-year guidance figures.

The drop in revenues and profits during the quarter is largely in line with the broader energy industry, which has been hit hard by falling global oil and gas prices after a run-up last year. The company, however, produced 1.22 million barrels of oil equivalent per day, above its estimates in August.

Its chemicals business, OxyChem, posted a profit of $370 million, down slightly from $440 million the prior quarter, owing to falling margins. The marketing segment posted a loss of $130 million, as against a loss of $30 million the prior quarter, as midstream margins started to get squeezed amidst falling global demand and prices.

During the quarter, the company announced that it wished to acquire the oil and gas producer CrownRock, in a deal estimated to be worth $12 billion. This will add 170,000 barrels of oil production per day, and 1,700 more undeveloped locations, with the potential to create substantial cost synergies going forward. Occidental is now diversifying into carbon capture, even as its fossil fuel business continues to go strong. Carbon capture has been in the news recently, especially at the Climate Change Conference that just ended in Dubai. Oxy is one of the first to invest in this potential big business.

The stock is down 4% YTD, trading at under 2 times sales and 12 times earnings, offering immense value to investors. It has made great use of the cash it generates each quarter, with $1.5 billion in YTD preferred stock redemptions, and it bought back $340 million of Berkshire Hathaway's preferred shares, bringing redemptions this year to 15% of the initial $10 billion investment by Warren Buffett's firm that was used by Occidental to fund its acquisition of Anadarko Petroleum in 2019. It has rapidly reduced debt, all the while continuing the $600 million in stock repurchases. Our Target is $90 and our Sell Price of $61 is lowered today to $50. We would be buyers of Oxy here at $59, rather than sellers. If Warren likes it, we like it. Not always, but certainly here. We can see Berkshire making an offer for the whole company at something north of $75 a share sometime in 2024 or 2025. This could be one of Warren’s last large legacy moves.

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C3.ai (AI: $31, up 10%)
Early Stage Portfolio

Enterprise AI startup C3.ai released its second quarter results last week, reporting $73 million in revenues, up 17% YoY, compared to $62 million a year ago. The company posted a loss of $15 million, or $0.13 per share, against a loss of $12 million, or $0.11, with a beat on earnings estimates, and a miss on the top line figures, despite which the stock posted a 15% rally following the results. The company’s subscription revenues now constitute 91% of total revenues. During the quarter, the company added a string of new marquee customers to its roster. This includes the likes of GlaxoSmithKline, Indorama, and First Business Bank. It expanded its agreements with Nucor, Hewlett Packard, Roche, and Con Edison, among others.

C3’s federal bookings continue to remain upbeat, with 20 new agreements signed, representing half of total new bookings during the quarter. It further expanded its agreements with Federal agencies such as the US Navy, the Office of The Director of National Intelligence, the Defense Logistics Agency, and the Department of Health & Human Services, among others.

In the sprawling landscape of digital innovation, C3.AI stands out as a beacon of practical intelligence. They haven't gone chasing the latest Artificial Intelligence whims; instead, they've chosen to forge a path through the dense jungle of business complexities, armed with the tools of artificial intuition. Their mission? To equip organizations with weapons, not of war but of optimization, growth, and informed decision-making. For example, oil and gas companies can now monitor the health of their assets with hawk-like precision, while manufacturers can produce optimized production lines. C3.AI software helps banks fight fraud by using algorithms to spot early warning signs, preventing major problems. The company focuses on solving specific industry problems, making its solutions relevant and accurate. Plus, their platform is easy to use, even for people without an AI background. C3.AI is making AI accessible and practical for everyday businesses, paving the way for a future where AI is a real tool for success.

Growth has slowed down in recent quarters largely owing to its pivot to a consumption-based pricing strategy, where it plans to implement a pricing model based on vCPU/Hour*, which it believes will be the standard for cloud software pricing going forward. This model brings C3’s solutions within the purview of small businesses and startups, as opposed to large government agencies and enterprises like it is today.

* Virtual central processing unit - A pricing model that refers to a cloud computing billing system where you pay for the vCPU resources you use per hour.

C3’s growing partner ecosystem has been its biggest achievement so far this year, having closed 40 agreements with the help of its partners such as AWS, Baker Hughes, Booz Allen, Google Cloud, and Microsoft. Despite the volatility, the stock is close to a triple YTD, and while profitability remains elusive, the company is well capitalized, with $760 million in cash, and no debt. Our Target is $50 and our Sell Price is $24.

Don’t forget how volatile this stock can be. The market cap is only $3.7 billion, so an influx of buy or sell orders can move this stock by 3-5 points a day and more. Be very careful with this speculative stock. It’s not profitable and Wall Street hasn’t liked non-profitable stocks for the last two years. (It never really has liked them, but has tolerated them in various periods over the past decades.) However, any sustained downward movement in the overall market will knock this stock for a loop. We can see it below $20 before you know what hit you. Be careful.

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Energy Transfer (ET: $13.71, up 3%. Yield=9.1%)
Energy Portfolio

Midstream giant Energy Transfer Partners reported its third quarter results recently, posting $21 billion in revenues, down 10% YoY, compared to $23 billion a year ago. Profits hit $470 million, or $0.15 per share, down from $900 million, or $0.29, owing to the sharp drop in the prices of natural gas and natural gas liquids over the past year and a half. The company hit record natural gas transportation, fractionation, and export volumes, up by 14%, 9%, and 20% on a YoY basis, respectively. Its intrastate and interstate transportation volumes were up by 2% and 15%, respectively, followed by crude transportation and terminal volumes posting growth of 23% and 15%, another significant record for the firm.

Energy Transfer is a midstream energy giant playing a crucial role in moving natural gas and natural gas liquids (NGLs) across North America.

What They Do:

  • Transportation: ET owns and operates an extensive network of pipelines, spanning nearly 90,000 miles, that transport natural gas, natural gas liquids, and crude oil to processing facilities, storage areas, and ultimately, end-users.
  • Processing: Through its network of processing facilities, (80 gas processing plants in Texas, Louisiana, Pennsylvania, Oklahoma, and Wyoming, among others, Energy Transfer removes impurities and separates NGLs from raw natural gas, unlocking their commercial value.
  • Storage: ET boasts massive storage capacity for both natural gas and NGLs, enabling companies to manage supply fluctuations and optimize delivery.
  • Marketing: ET acts as a matchmaker, connecting producers of natural gas and NGLs with buyers at the best price, earning fees for facilitating these transactions.

What They Own:

  • NGL Fractionators: ET owns 8 fractionators with a total capacity of approximately 1.15 million barrels per day (mbpd).
    • Some of their facilities combine fractionation and storage, so the total number of fractionation units might be slightly higher.
  • NGL Fractionation & Storage Hubs: The exact number isn't publicly available, but:
    • They mention "several" NGL fractionation and storage hubs in their project highlights.
    • Given their focus on integrated facilities, a significant portion of their 8 fractionators may also function as hubs with storage capabilities.
  • Export Terminals: They currently operate 3 export terminals:
    • Nederland Terminal in Texas
    • Marcus Hook Terminal in Pennsylvania
    • AltaGas Liquids terminal in British Columbia, Canada

Energy Transfer remains resilient to challenging times largely owing to its extensive diversification and strong footprint across the midstream segment within the US. It remains committed to growing along the same lines, with $2 billion a year earmarked for capital spending, with 40% allocated to midstream projects, and the rest aimed at a wide variety of NGL, refined products, and interstate production projects.

The energy sector continues to see substantial headwinds from climate change activism, but Energy Transfer Partners remains insulated in this regard, owing to its focus on natural gas, as opposed to crude oil. Natural gas and natural gas liquids are believed to be a strong ally in the fight against climate change and are expected to play a key role in the global transition away from fossil fuels over the coming years.

The stock is up 18% YTD, and is still very attractively priced at a little over 0.50 times sales and 8 times earnings, all the while offering enticing dividend yields of 9.1%. In August, ET announced a $7 billion merger with Crestwood Equity Partners in a bid to take advantage of substantial cost-saving synergies*. The company has a mammoth $9.6 billion in cash flow. Our Target is $15 and our Sell Price is $12. Energy Transfer is no small company, clocking in at $46 billion. We believe in the Energy business in the United States, especially natural gas and liquids. ET keeps these fluids flowing 24 hours a day, 365 days a year. We can see this firm at $17 in a few years, all the while paying its fabulous 9% dividend.

* Crestwood Equity Partners includes gathering and processing assets located in the Williston, Delaware, and Powder River basins, including approximately 2.0 billion cubic feet per day of gas gathering capacity, 1.4 billion cubic feet per day of gas processing capacity, and 340 thousand barrels per day of crude gathering capacity. When consummated, this transaction would extend Energy Transfer’s position in the value chain deeper into the Williston and Delaware basins while also providing entry into the Powder River basin. These assets are expected to complement Energy Transfer’s downstream fractionation capacity at Mont Belvieu, as well as its hydrocarbon export capabilities from both its Nederland Terminal in Texas and the Marcus Hook Terminal in Philadelphia, Pennsylvania.

This transaction is also expected to provide benefits to Energy Transfer’s NGL & Refined Products and Crude Oil businesses with the addition of strategically located storage and terminal assets, including approximately 10 million barrels of storage capacity, as well as trucking and rail terminals. These systems are anchored by predominantly investment-grade producer customers with firm, long-term contracts, and significant acreage dedications.

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The Bull Market High Yield Investor 

By now you know that everyone at the Fed who votes on monetary policy thinks interest rates are going down at least 0.5 percentage point in the coming year and some anticipate double that level of easing. But Jay Powell said two more things that should guide every investor’s strategic outlook. First, Powell “welcomes the progress” on inflation. That’s a crucial attitude if you’re committed to being invested throughout your life.

He isn’t banking on inflation continuing to drop at any particular rate or to any particular level across any particular timeline. But he isn’t asking a lot of questions about the trailing numbers either, hoping to somehow reveal a hidden problem. All the most powerful person in the global economy is doing is accepting the good data alongside the bad. Life is like that. There will be good numbers and bad ones. You can’t explain the bad beats away. Reality is reality. However, that also means you can’t close yourself off to the good beats when they hit.

As human beings, most of us fear the pain and try to avoid it. Go too far in that direction and you end up closing yourself off to the progress, and to the opportunities life also provides. When you’re closed off to the opportunities, you’re not an investor. At best, you’re watching somebody else’s experience and refusing to participate because you have a feeling it’s all a horror movie in the long run. If that’s your world, we can’t help you. Protect what you have as well as you can because you’re probably not open to the possibility of taking a calculated risk that pays off to put you ahead of where you are right now.

That’s not our world. We're invested. And it’s not Powell’s world either. When he sees progress, he doesn’t nitpick it into oblivion by interrogating how long it lasts or even if it’s real. He accepts it. Embraces it. “Welcomes” it when it comes. On Wall Street, we make money when it’s flowing. We've watched Jay Powell for years and he believes in calculated risk, which is another way of saying he’s motivated by a form of game theory. When making a move gives him a reasonable opportunity to change the game board in his favor, he’ll make the move. Otherwise, he’s content to conserve his resources for a better opening.

Of course, that move needs to make a real impact. It has to be meaningful. We’re lucky on Wall Street because our moves all have money attached and money is a number. If the move doesn’t move the money more than you’d get in the bond market, it isn’t worth making. But then there’s that second insight Powell made in the press conference. “There’s little basis for thinking the economy is in a recession now.” Every word there matters. He’s not blindly optimistic. He knows that you’re rarely more than 3 years away from the next recession and rarely more than 5 years from that cyclical moment of truth.

As he told the reporter, there’s always a chance that a recession is mere months from materializing. They can even come from thin air like the one in 2020 when the economy locked down hard and fast. However, you can’t plan for thin-air scenarios like a global pandemic. Investors and other human beings need to extrapolate from current conditions to shape our expectations about the future. Does the world look good or bad right now? Is it getting better or worse? At what rate?

A recession is nothing but a deterioration in economic conditions big enough to affect a broad segment of the population and lasting at least 5-6 months. That’s it. It doesn’t mean mass layoffs, bank crashes, bear markets, a bent yield curve or profound suffering. And the logical correlate of that is that mass layoffs, bank crashes, the yield curve, the market and profound suffering do not necessarily line up with every recession. They often come together but the causal relationship is more complicated. Bear markets and the yield curve tend to precede a recession. The Fed has a lot of power over the yield curve and markets fear the Fed.

But right now, nobody in the Fed expects GDP to decline in the coming year. Growth will slow to somewhere above 1 percent and below 2 percent, but that’s far from the end of the world. We’ve muddled through with less in the past. It doesn’t mean active economic destruction; or wealth destruction. At worst, the people who vote at the Fed think unemployment will edge up to 4.2% next year. Again, not the apocalypse. Closer to “normal” historically. Powell used the word “normalizing” a lot in that press conference. Going back to “normal” only feels awful when you’re addicted to abnormal, if not completely unsustainable conditions. And as far as he can see, there’s “little basis” for thinking things are all that terrible right now. He’s approaching this as an economist and Wall Street insider, not as a private person.

This economy can feel miserable. We get it. It’s been a long and exhausting couple of years. We’re all working harder just to keep up with inflation. But the numbers don’t support that misery. When that happens, economists and Wall Street insiders acknowledge their feeling but go with the numbers. We trade on numbers. Our feelings are our own. Powell doesn’t see much basis for thinking the economy is in a recession right “now,” here in the present where we're writing this and you’re reading it.

This is the time that matters. The past is dead. We can’t trade it or go back in any way to change it. The future is nebulous. None of us can predict it. All we can do is extrapolate on the conditions we see in the present. If they continue, the future will look like the present. If they change, the future will change in that direction. Powell and his cronies at the Fed don’t see the present as that bad. Wall Street agrees. The Dow and the Nasdaq (it's close) are hitting record highs. This is the best those indices have done in all of history.

Is this as good as it gets? The Fed thinks things get a little better next year. In that scenario, we’ve already lived through the worst. We welcome the progress. We hope you do as well. And with that in mind, we need to cut a stock that has been defensive one without giving us much progress. Time to let it go in order to focus on other recommendations that can actually embrace the gift the future provides.

Ventas (VTR: $49, up 6%)
REMOVING COVERAGE

We added Ventas to our portfolio in 2016 at $60 a share. On paper, this is a perfect stock to hold, as the company is one of the largest owners and operators of healthcare facilities across the world, being largely recession-proof with extensive diversification across locations, industries, and geographic locations. In addition to this, it has broad multi-decade-long secular tailwinds in its favor, with the potential to create substantial value.

Yet, since we added this REIT seven years ago, revenues have grown at a snail's pace of just 2.6% annually, and the stock languished. Despite being a high-quality company, it has consistently been dealt with a tough set of cards in recent years, and while it might seem rational to wait for a while longer as it finds its post-COVID heels, we are pretty done with this stock. We've cashed $17 in dividends so we haven't done badly . . . but there are many other good places for your capital.

Rithm Capital (RITM: $10.87, up 4%. Yield=9.1%)
High Yield Portfolio

Rithm Capital is a highly diversified asset management company, active in lending, financing, real estate investments, and more. The third quarter results, saw $1.1 billion in revenues, up 20% YoY, compared to $910 million a year ago. The company posted a profit of $280 million, or $0.58 per share, against $300 million, or $0.62, with a beat on consensus estimates at the top and bottom lines.

Rithm Capital is highly differentiated from other mortgage REITs and BDCs with its business diversified across various lines of business including but not limited to mortgage lending, consumer lending, mortgage servicing, single-family rentals, and with its recent acquisition, wealth management, creating a broadly covered and well-hedged portfolio for all market conditions.

During periods of higher interest rates such as the present, when originations witness a slowdown, the company’s $600 billion mortgage servicing rights portfolio comes to its aid, along with its single-family rentals with high interest rates making home ownership harder. During the quarter, its NewRez operating business generated funded originations to the tune of $11 billion, down from $13 billion a year ago.

The company completed its merger with Sculptor Capital Management in November, absorbing its $33 billion of assets under management, as it continues its foray into investment management, effectively putting it on the same lines as PE giants such as Blackstone, although it is nowhere as big just yet. Last year it acquired a 50% stake in Senlac Ridge Partners (now Greenbarn Investment Group), an investment management firm with a focus on commercial real estate, to expand its presence in this lucrative space.

The stock is up by a stellar 31% YTD, while still trading at a little over 2 times sales and 6 times earnings, and offering an annualized yield of 9.1%. Despite the run-up in recent months, it trades at a 12% discount to book value.  Our Target is $13 and our Sell Price of $8.50 is a bit low, so we are raising it to $9.50. We are very high on Rithm Capital. Their commitment to innovation and recent acquisition spree hint at major expansion plans. CEO Michael Nierenberg's vision is clear – he wants to see this relatively small company ($5 billion market cap) become a much bigger player. While predicting the future is always tricky, reaching twice its current size in two years and crossing the $20 billion mark by 2030 are strong possibilities.

Nuveen AMT-Free Municipal Credit Income Fund (NVG: $11.97, up 3%. Yield=5.1% tax free, the equivalent of 7.8% taxable)
High Yield Portfolio

The Nuveen AMT-Free Income Fund has posted a remarkable rally since we last discussed the fund a couple of months ago. This rally isn’t surprising considering the strong favorable economic data emerging from across quarters, and the Fed finally pivoting from its hawkish position on interest rates, which means debt investors can finally see some value following months of testing newer lows.

While we may see some rate cuts over the coming months, interest rates in general will remain higher for longer. This leaves muni bonds at a rather attractive position, with less risk of value erosion owing to rising interest rates, while at the same time offering equity-like yields, and little-to-no downside risks. This will prompt steady inflows into municipal bonds and funds over the upcoming few months.

For the first time in years, there is compelling value to be found across the muni bond spectrum, as investors want to lock in on attractive yields by reallocating funds from elsewhere. Given that muni bonds are next to only treasuries when considering the risk of default, they are much better positioned when compared to corporate bonds which still have to deal with many more macro uncertainties.

We’ve seen a nice 20% rally in the past two months and the stock is now just down by 3% YTD, and continuing to trade at a 12% discount to book value. As we’ve mentioned many times in the past, for long-term, conservative investors all of this is just noise. If you’re looking for tax-free yields of 5.1% and a default rate that is less than 0.08%, there are no better funds than the Nuveen AMT-Free Municipal Credit Income Fund. Our Target is $16 and our Sell Price is $11.

Good Investing,

Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998

THE BULL MARKET REPORT for August 14, 2023

THE BULL MARKET REPORT for August 14, 2023

Market Summary

It's been a bumpy couple of weeks, but baby bull markets tend to sputter a little sometime between the 60- and 120-day mark. With that in mind, this test of investors' courage seems almost foreordained in terms of where it fits in the larger Wall Street cycle. Yes, things were going extremely well. Yes, stocks were racing back to the levels they comfortably commanded before the pandemic inflated and then deflated a bubble. And yes, that rebound is largely justified. We just need to test that justification in order to shake off our residual trauma from the bubble collapse; and the last few years in general.

This is how stocks normally behave. If the bull market has hit a wall this early, it will be the shortest significant rally in modern history. Bull markets generally run for 5-6 years and even in the depths of the Great Depression, the recovery was both more robust and more sustained. Granted, we live in unusually unsettled times, but sooner or later every statistical aberration reverts to the long-term trend. For the S&P 500 and large stocks in general, that means moving up 8-11% a year across the long term. And for Treasury yields, that means about 1% above inflation.

Keep that last part in the back of your head when people try to tell you that 4% bond yields are poison for the stock market. Across generations, inflation has averaged a little over 3% a year. Adding a full percentage point to that "normal" historical level gives you a number above 4%, which means this is where long-term yields should be. If anything, with the latest read on consumer prices coming in at 3.2%, both inflation and interest rates are exactly where they should be under normal circumstances.

Of course, accepting this argument means letting go of a lot of assumptions and expectations that have accumulated over the last 10-15 years. Extremely low interest rates were a historical aberration left over from the 2008 crisis. They needed to come back up, for a lot of reasons. Whether the trigger that gets them back on track is the Fed or a sudden Treasury credit downgrade is secondary. And stocks have historically rallied in the face of exactly this kind of interest rate environment. This is a market fact. Unless you think something fundamental has broken within the American psyche that will prevent us from rising above all current obstacles like we did in the wake of the 2008 crash, or the dotcom crash, or 911, or World War II, or the Great Depression itself for that matter, the numbers are on our side.

In the meantime, the numbers are not great, but they aren't terrible either. The S&P 500 is up 16% YTD, which is accelerated performance when you look at the statistics. Granted, a lot of investors still have wounds left to heal before they really start feeling good about their experience in the last few years, but things are still moving fast in the right direction. The Nasdaq is up a blistering 30% in barely 7 months. Our stocks, balanced between a strong defense and plenty of aggressive growth recommendations, are right in the middle. We've scored a 22% bounce so far this year. In just another 7 percentage points, we'll be back where we were at the end of 2021 ... right before the zero-rate bubble started to rupture.

The big market benchmarks are in a similar state. Even counting the recent pullback, Wall Street as a whole hasn't exactly fallen off a cliff. Stocks are within sight of record territory. And as you know, these relatively rarefied levels near all-time peaks tend to be a little precarious. Investors and traders challenge every move. The bulls need to fight for every inch. Sometimes we need a little time to build up our strength and go over each wall of worry in turn. But it happens. On average, the bulls run for 5-6 years before a real obstacle gets in the way and forces a major downswing. Across each multi-year run, the market as a whole tends to quadruple in value.

In other words, things look a long way from unsustainable or overheated. This is a pause, not a halt. Corporate earnings support this. This has been a mediocre earnings season but the mood has been more hopeful than depressed and a lot of investors have even showed signs of impatience. People can't wait to see the numbers on the current quarter and then guidance for the end of the year. There's a strong sense that by then, the Fed will be finished raising short-term interest rates, which means the pressure on the economy will not get much worse. And when things can't get much worse, they generally get better from there.

Inflation is no longer accelerating. The Fed is getting traction. Earnings across the S&P 500 are not great, but they aren't plunging either. At worst, the tone reads "stagnation," a stall instead of a swoon. That's not a hard landing. Unless the real cliff is coming, this is the soft landing we needed. The recession so mild that it barely even registers after years of disruption, upheaval and, most recently, an economy too strong for anyone's comfort. When investors run from signs of the job market running too hot, it's really a sign that we could all use a break. The economy needs to cool off. That's what the Fed is doing. The alternative is watching prices keep soaring indefinitely, which creates a vicious cycle in which the dollar ends up much lower. Nobody wants that. This is preferable. This is what normal feels like.

There's always a bull market here at The Bull Market Report. As earnings season winds down, the drama has shifted back to the bond market, which shifts The High Yield Investor into the spotlight as we work to explain how rising yields pushed our stocks back down 3% in the last two weeks. As a result, The Big Picture once again revolves around benchmarking the current stock market environment against history, and finds the results highly encouraging. And if you're still paying attention to earnings, we've got plenty of updates for you as always.

Key Market Indicators

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The Big Picture: From Baby Bull To Tempestuous Tot

If you’ve already written this bull market off for dead, we have to admit, you’ve given up on the stock market and we can’t help you. For this bull market to have been born in June and dead by August, the economic environment would need to be worse than it was in 1932, in the deepest depths of the Great Recession. That’s when the shortest bull market in modern memory happened. Back then, investors only got two months after rallying 20% from its peak before the bear recouped control of Wall Street. Those were truly bad times.

But even then, investors who bought the brief rally didn’t have a lot to complain about. That two-month rally sent the S&P 500 up a dizzying 91%. The brief but savage retreat that followed took about 30% off that peak, leaving the market roughly 55% off its low. Maybe you think the world is in worse shape now than it was 80 years ago and the market just no longer has what it takes to recover. In that scenario, you’ve effectively given up on stocks, the economy and the American people.

Because in every other crisis over the past eight decades, the bulls got years to run. Other than the 1932 shudder, the shortest modern bull market lasted 1.8 years, before the grim lead into World War II cut the rally short. Only the 2020-2021 pandemic bubble was anywhere near that truncated. It took real determination for the bulls to start running this time around. The mood bottomed out in October and it took eight months for the S&P 500 to recover 20% from that low point. During that period, it became clear that even the Fed’s aggressive rate hikes wouldn’t be severe enough to crash the economy immediately.

And in the absence of that crash, guess what? We survived. Corporations didn’t implode like people feared. A recession like the one we saw in 2008 didn’t happen this time around. We're thinking the recession is already well underway for corporations. Earnings are down from last year. But in the new third quarter, we’re looking for a slight uptick. Even if that doesn’t happen, the comparisons practically guarantee better times ahead for the end of the year. In that scenario, we’ve already lived through the worst of it. Things get better from here. In a few months, members of the S&P 500 will be getting bigger again in the aggregate. The economy will be growing.

That’s good for investors. It’s hard for stocks to go down for long when the economy is feeding more profit across big companies year after year, which is why bull markets are hard to kill once they get going. Admittedly, it isn’t a smooth ride. The first few months of any baby bull are the most intense. But then there’s generally a lull and a pause for the market to test its convictions. Things slow down. People get nervous and start second guessing themselves. But in history, the bull has never backed down this fast. History can bend, but it rarely breaks. If the bear takes over again, we'll be shocked.

Remember, bond yields move in the opposite direction from bond prices. If bonds are falling and rates rising, that means money is pouring out of that particular side of the global financial markets. Within the dollar sphere, money flowing out of bonds means money flows into cash or stocks. Cash is bad news as long as inflation remains high. You might be able to get 4% in money markets, but you’re probably going to lose it all from inflation. Only stocks can make enough right now to keep ahead of inflation. Some may go down instead but the right stocks have a fighting chance. When that’s the best bet you get, you take it. We have the right stocks.

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BMR Companies and Commentary

Moderna (MRNA: $101, down 6% last week)
Healthcare Portfolio

Get ready for a good long read on this extraordinary company. This is not a 1- or 2-minute read. It will be 5-10 minutes. So, hang on. Here we go.

Leading biotechnology company and mRNA pioneer, Moderna, released its second quarter results a week ago. The company posted $340 million in revenues, down by a colossal 94% YoY, compared to $4.7 billion a year ago. It further posted a loss of $1.4 billion, or $3.62 per share, against a profit of $2.2 billion, or $5.24. This was largely the result of the seasonal nature of its COVID-19 vaccine sales.

While this was expected as the world moves on from the pandemic, the company, however, expects $6 to $8 billion in revenues from its COVID shot this year, with the US alone expected to buy anywhere between 50 to 100 million doses for the fall. Its updated COVID vaccine, targeting the omicron subvariant XBB.1.5. Is still awaiting FDA approval, but will be ready for a rollout over the coming months.

The company is confident of seeing robust demand for the shot, not just in the US, but also in Europe, Japan, and other leading markets. With COVID-19 becoming ubiquitous, Moderna expects this great business to continue. Far from resting on its laurels, however, it has gone all out to ensure its pandemic windfall is used towards developing more sustainable products.

This includes a robust pipeline of vaccines targeting cancer, heart disease, and a slew of other conditions, and are all set to hit the market by 2030. This pipeline includes its experimental vaccine for respiratory syncytial virus, aimed at adults aged 60 and above, followed by its personalized cancer vaccine in partnership with Merck, which passed its first major clinical trial early last month, with flying colors.

The stock is down by 44% YTD and over 78% from its all-time high in 2021, and as such, is quite de-risked. It currently trades under 4 times sales and 35 times earnings, which might seem rich, but is perfectly justified for a growth stock such as this. It has since repurchased stock worth $1.5 billion and ended the quarter with $8.5 billion in cash, $1.2 billion in debt, and negative $230 million in cash flow. Our Target is $250 and our Sell Price is $150. SO, let’s discuss.  These numbers are there for you to decide what to do. And each and every one of you has a different scenario of buying the stock. Some of you bought the stock in January 2023 when we added the stock at $193. Some of you bought the stock beforehand in February 2020 at $26. As the stock has come down from the all-time high of $464 in September of 2021, and more recently from the $218 level in January of this year, you have decisions to make on a day-to-day basis. And all of these decisions are personal, based on a myriad of things that are going on in your life. We could list them here, but you know what we mean here. It comes down to a decision that YOU have to make: Do I sell? Do I stay with it? Do I add more? Tough questions. We highly recommend GTC Stop Orders. Good-‘Til-Canceled orders are orders to sell a stock at a certain price. If it hits the number, the order executes and you are out of the stock. If you bought in January, you could have put a stop order in place to sell at say, $181. Or $171 or whatever price you picked. They used to call this order a Stop Loss order because that’s what it does. Now it is just called a Stop order.

We’re not real happy that the market has drubbed this company the way it has. But we believe in the firm long term, and since we are a long-term investment newsletter, we believe in the companies that we follow and if the stock moves lower, in many cases we like it even more than it was at the higher price. That is the case with Moderna. We would buy the stock here as they have a strong, diverse set of new products coming to market this year, in 2024 and 2025, and beyond.

The future looks bright for Moderna. The company has a strong pipeline of new products, including vaccines for influenza, respiratory syncytial virus (RSV), cytomegalovirus (CMV)*, and HIV. Moderna is also developing a personalized cancer vaccine that could revolutionize the treatment of cancer. The potential dollar size of these markets is enormous. The global market for influenza vaccines is estimated to be worth $8.5 billion, the RSV market is worth $2.5 billion, the CMV market is worth $1.5 billion, and the HIV market is worth $30 billion. Moderna could capture a significant share of these markets with its innovative products.

*CMV is related to the viruses that cause chickenpox, herpes simplex, and mononucleosis. CMV may cycle through periods when it lies dormant and then reactivates.

In addition to its new products, Moderna is also expanding its manufacturing capacity. This will allow the company to meet the growing demand for its vaccines and other products. Moderna is well-positioned to be a major player in the pharmaceutical industry for years to come.

Here are some specific examples of new products that Moderna has in the pipeline. The company is committed to using its mRNA technology to develop innovative new treatments for a wide range of diseases:

A bivalent influenza vaccine that protects against both influenza A and influenza B.
An RSV vaccine that is more effective than existing RSV vaccines.
A CMV vaccine that could prevent congenital CMV infection, which can lead to serious health problems in newborns.
A personalized cancer vaccine that is designed to target the specific mutations in a patient's cancer cells.

The company is worth $39 billion now. At its peak, it was worth $189 billion. Can it go there again in the future? We believe so.

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Axcelis Technologies (ACLS: $167, down 5%)
High Technology Portfolio

This company is one of the largest suppliers of capital equipment for the semiconductor industry, leading some industry observers to call it one of the most important companies in the world. During its second quarter, despite a glut in the Chip industry, the company has continued its strong streak, with $270 million in revenues, up 24% YoY, compared to $220 million a year ago. The company posted a profit of $62 million, or $1.86 per share, against $48 million, or $1.43, in addition to a beat on consensus estimates at the top and bottom lines. Its dominant position within this space, amid an industry that in many places has been turned upside down, has resulted in substantial tailwinds for Axcelis, something that is unlikely to subside even in the case of a glut in the market.

Axcelis Technologies ended the quarter with an order backlog of over $1.2 billion, including fresh orders of $200 million. This is largely the result of persistent demand for its Purion family of products, particularly from the silicon carbide power markets. These are semiconductors used in cars, particularly electric vehicles, which are growing fast around the world.

The company’s customers span markets of advanced logic chips, memory chips, and storage chips, all of which are set to witness robust demand, as a result of the unprecedented growth in AI, machine learning, and cloud computing. It is further the only ion implant company capable of providing full-recipe coverage for all power device applications, allowing for high-volume, low-cost manufacturing.

As a result, the company has increased its revenue forecast for the full year by $70 million, giving the stock that is already up by 115% YTD, more reason to rally. Axcelis has a strong balance sheet position with $450 million in cash, just $80 million in debt, and $250 million in cash flow. This puts many lucrative value-creation opportunities, such as dividends and stock repurchases on the horizon going forward. Our Target is $150 and our Sell Price is $125. We are raising the Target today to $195, and the Sell Price to $148.

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Roku (ROKU: $79, down 8%)
Early Stage Portfolio

Streaming giant Roku caught another break with its second quarter results a week ago. The company posted $850 million in revenues, up 11% YoY, compared to $760 million a year ago, with a loss of $110 million, or $0.76 per share, down from $112 million, or $0.82, in addition to a beat on consensus estimates on the top and bottom lines.

The company posted strong growth across key operational metrics, with total active accounts at 74 million, up 16% YoY, and reaching a level of 25 billion hours streamed on the platform during the quarter, up by 4 billion hours from last year. The Roku channel now accounts for 1.1% of total TV viewership, establishing it as a leading player in the global streaming space, with plenty of room to grow.

The platform’s average revenue per user slid 7% YoY, to $40.67, but this is mostly owing to a global advertising slowdown, which has since started to turn around, as recessionary fears abate. Roku is perfectly poised to reap rewards from this trend, given its dominance in the connected TV space with a market share of 50% in North America, and billions of dollars of unmonetized ad inventory.

Roku continues to face substantial challenges as a result of supply chain constraints and inflationary pressures, particularly when it comes to its hardware business. Its decision to not pass these additional costs onto customers is what led to the string of losses in recent quarters. This same strategy will pay off in the long run, as it faces stiff competition from the likes of Alphabet TV, Amazon, and Apple TV.

The stock is down by over 85% since its all-time high in 2021 but has posted a 95% rally YTD, amid substantial challenges and headwinds. It currently trades at under 3.5 times sales, which is very reasonable for a growth stock with a landed base and massive competitive moats. Roku ended the quarter with $1.8 billion in cash, just $650 million in debt, and $15 million in cash flow. Our Target is $110 and our Sell Price is $62.

With all of this said, we are not very happy about the fact that the company can’t make a profit. Yes, they have a ton of cash to tide them over the next year or two. But gee whiz, after all these years, WHY CAN’T THEY MAKE A PROFIT? We’ve always said to ourselves: When you are not happy about something, you have to take some action. We’re pretty darn tired of waiting for this one, so yes, their future looks bright, but the stock had better move higher, and if it doesn’t, we are going to move on. The way we like to do this is to set a Stop. We would suggest that you put a Sell Stop in place at $74. If it goes there, we are out. If it goes higher, we will move the stop up accordingly over time.

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PayPal (PYPL: $62, down 2%)
Financial Portfolio

PayPal released its second quarter results two weeks ago, reporting $7.3 billion in revenues, up 7% YoY, compared to $6.8 billion a year ago. The company posted a profit of $1.3 billion, or $1.16 per share, against $1.1 billion and $0.93. Despite posting in line with estimates, the stock witnessed a pullback following the results, owing to a slew of factors and operating metrics.

During the quarter, the company processed over $370 billion in payments, across 6.1 billion transactions, up 11% and 10% YoY, respectively. It processed 55 transactions per active account, an increase of 12% YoY, with total active accounts growing to 435 million, up marginally from 428 million during the same period a year ago. It is truly an astounding number of accounts.

PayPal is an online payment platform that facilitates payments between individuals and businesses. It is one of the most popular online payment platforms in the world. PayPal is successful because it is easy to use, secure, and trusted by businesses and consumers alike.

PayPal has a new deal with private-equity giant Kohlberg, Kravis & Roberts. According to this deal, the PE firm will be acquiring PayPal’s ‘Buy Now, Pay Later’ loans originated within the UK and other European countries, to the tune of $44 billion, with $1.8 billion in net proceeds to PayPal set to be realized over the next few months alone. This provides the fintech giant with much-needed liquidity and stability, as it forays deeper into the lucrative consumer credit markets. In addition to this, the company has seen enormous traction with its recent rollout of PayPal Complete Payments, onboarding big ticket channel partners, the likes of Adobe, WooCommerce, Shopify, Stack Payments, and LightSpeed among others.

As PayPal grows by leaps and bounds, it hasn’t lost sight of its promise to continue delivering exceptional value to shareholders, with $1.5 billion being returned via buybacks during the second quarter alone. It plans to scale past $5 billion in buybacks in 2023, giving strong support to the stock, while hardly denting its robust balance sheet, with $11 billion in cash, just $12 billion in debt, and $5.8 billion in cash flow. And the firm is quite profitable, as noted above in the first paragraph. The Target is $125 and we would not sell PayPal.

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The Trade Desk (TTD: $75, down 12%)
Early Stage Portfolio

One of the largest demand-side advertising platforms, The Trade Desk released its second quarter results last week, reporting $460 million in revenues, up 23% YoY, compared to $380 million a year ago. The company posted a profit of $140 million, or $0.28 per share, against $100 million, or $0.20, driven by its relentless streak of onboarding new brands, inventory, and partnerships throughout the past year.

Despite a beat on consensus estimates at the top and bottom lines, the market reaction following the results put a damper on the stock’s 100% YTD rally. The results themselves had nothing to warrant an adverse reaction, and in our opinion, this was everything to do with the company’s unjustifiably high valuations of 22 times sales and 290 times earnings, many times higher than the industry average.

The Trade Desk is a technology company that helps businesses buy and sell digital advertising. They are successful because they offer a platform that is easy to use, transparent, and effective. The company has a strong focus on data and analytics, which allows them to help businesses target their ads more effectively. While demand for advertising has hit a rough patch over the past few quarters, the company’s precision and transparency-driven platform has remained resilient nonetheless. Its business development initiatives have made its solutions indispensable for large brands, resulting in a 95% customer retention rate for the ninth consecutive year.

In a niche filled with walled gardens from the likes of Meta and Alphabet, The Trade Desk has succeeded by making this business more accessible to everyone. It has continually gained market share at the expense of its two major competitors, and while the threat of Alphabet’s renewed efforts in this space is substantial, TTD’s expansive moats, industry partnerships, and integrations will not be easy to breach.

The stock was upgraded by many firms on the Street, including Wells Fargo, raising their target to $100 from $82. Piper Sandler has a nice round $100 price target, with Morgan Stanley at $105. During the quarter the company repurchased stock worth over $40 million, with a further $360 million in pending authorizations. This should provide it with much-needed support during volatile times like the present. The Trade Desk ended the quarter with $1.4 billion in cash, a mere $250 million in debt, and $630 million in cash flow. Note: We wrote about The Trade Desk in The Bull Market Report of July 17th. Check it out on the website.

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HF Sinclair (DINO: $59, up 8%)
Energy Portfolio

Independent petroleum refiner HF Sinclair released its second quarter results two weeks ago, reporting $7.8 billion in revenues, down 30% YoY, compared to $11.2 billion a year ago. The company posted a profit of $500 million, or $2.60 per share, down from $1.3 billion, or $5.59, but the beat on consensus estimates at the top and bottom lines sent the stock on a strong rally from $51, and the $46 level in July. We added the stock at $61 in December, so the weakness this year has been put behind it.

During the quarter, the company was hurt by the drop in volumes due to the drop in energy prices and the economic slowdown globally, along with a slowdown in refining margins. The gross margin per barrel stood at $22, down 40% YoY, compared to $36 a year ago. This was coupled with lower production of 554,000 barrels of oil per day, down from 627,000 barrels during the second quarter of last year. This is in sharp contrast to the previous quarter, when the company looked upbeat as a result of increasing utilization rates, falling oil refining capacities, and a widening crack spread, owing to the normalization of global energy markets. (Crack Spread is the margin or pricing difference between a barrel of crude oil and the finished petroleum products.)

HF Sinclair is an energy company that produces and sells a variety of fuels, including gasoline, diesel, jet fuel, renewable diesel, specialty lubricant products, specialty chemicals, and specialty and modified asphalt. They have a long history in the energy industry, having been founded in 1916. They have a strong financial position and are committed to innovation. The company used its windfall gains over the past year exceptionally well, paring down debt to $3.6 billion, while offering a well-covered annualized dividend yield of 3%, ending the quarter with $1.6 billion in cash, and $2.5 billion in cash flow during the quarter. Our Target is at $72 and our Sell Price is at $51. This is a solid $11 billion company with a strong management team.

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Sunrun (RUN: $16.64, down 5%)
TERMINATING COVERAGE

Photovoltaic cells and energy storage solutions provider Sunrun is riding the post-IRA high life, as evidenced by its second quarter results two weeks ago. The company posted a profit of $55 million, or $0.25 per share, against a loss of $12 million, $0.06. This was still a fairly mixed quarter, with earnings blowing past estimates by a wide margin, with top-line figures coming in below expectations.

Market reactions aside, this was a spectacular quarter for the company, with 103 megawatt hours of fresh installations, up 35%. Total solar energy capacity installations reached 300 megawatts, exceeding the high-end of its guidance at the end of the quarter. Net subscriber value hit $12,320, up by $320 from the prior quarter. Much of this was made possible by the tax credits availed to consumers since the passing of the $700 billion Inflation Reduction Act last year. With tax credits now covering 30% of the installation costs, solar companies such as Sunrun are on a fiery streak.

The company unveiled a slew of new products and initiatives during the quarter, starting with the Sunrun Shift, a home solar subscription that aims at maximizing value under California’s new solar policy. It further signed a partnership with PG&E to develop a distributed power plant that turns home solar storage systems into resources during periods of peak demand, helping prevent blackouts.

Sunrun is an undisputed leader in an industry that is set to hit $400 billion by 2030, and following a 30% YTD pullback, and an 83% decline since its all-time high in 2021, it is trading at a mere 1.5 times sales. The company ended the quarter with $670 million in cash, and over $10 billion in debt which is concerning, but has the assets and is now generating sufficient cash flow to back this up.

With all of this said, we’re not happy with the performance of the firm. After thinking this through long and hard, we believe their marketing philosophy is skewed. The firm offers solar leases, solar loans, and purchase agreements where customers agree to buy the electricity generated by their solar panels for a fixed price over a set period. They don't have to pay upfront for the solar panels, and they don't have to worry about maintenance or repairs. This all sounds great at first glance, but the financing costs for the firm are exorbitant at $10 billion, which is WAY out of line. We added the stock at $29 and we reluctantly exit the stock here. We will be replacing this with a much better solar option in the coming weeks.

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Twilio (TWLO: $62, up 1%)
Long-Term Growth Portfolio

Twilio is the leading provider of cloud-based programmable communications solutions. It released its second quarter results last week, reporting $1.0 billion in revenues, up 10% YoY, compared to $940 million a year ago. It posted a profit of $120 million, or $0.54 per share, against a loss of $7 million, or $0.11, coupled with a beat on estimates for the next quarter sending the stock up from the $58 level following the results.

The company hit a rough patch over the past year, owing to persistent macro pressures, which in turn resulted in longer sales cycles, lower deal sizes, and a substantially lower dollar-based net expansion rate* at 103%, compared to 123% a year ago. The slowdown in the social, streaming, and crypto verticals has made things worse, yet Twilio has successfully managed to hold its ground as things start to turn around.

* Dollar-based net expansion rate (DBNER) is a measure of how much revenue you earned from existing customers due to add-ons, upselling, and cross-selling.

Twilio currently has 304,000 active customers on its platform, against 275,000 a year ago, which is largely in line with estimates. The company’s communications revenues led the way at $910 million, up 10% YoY, followed by data and applications at $125 million, up 12%.

Over the past few years, the company has made significant progress in offering a differentiated customer value proposition. It has done this via acquisitions, partnerships, and integrations, which have since resulted in wide, impenetrable moats. The tailwinds as a result of this are only just beginning to be realized and have since prompted a flurry of analyst rate hikes, with the high end of its target at $110.

The stock is up by 23% YTD, but is still off by 86% from its all-time high in 2021 at $457, while trading at a mere 2.8 times sales, making it a fairly priced growth stock. The company completed $500 million in stock repurchases during the quarter, from its $1 billion in authorizations at the beginning of this year. It ended the quarter with a strong balance sheet with $3.7 billion in cash, $1.2 billion in debt, and a stable cash flow position. Will the stock ever reach its all-time high again? We believe so, but certainly not for a few years. In the meantime, we see steady, profitable growth ahead and look forward to breaching our Target of $135. Our Sell Price is $65, with the stock under that price now, as you know, so if you are anxious, set a sell stop at your pain point, say $55 or so. We don’t believe this can happen, but a lot depends on the world economies and all of the potential negatives in the world. We are optimists, as the American economy and markets have grown through thick and thin, through war and viruses, and bull markets and bears, for 200 years. We’ll come through again, of that there is no doubt.

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The Bull Market High Yield Investor

It happened like clockwork. Something nudges long-term interest rates above 4% and a perfectly good rally in the stock market evaporates. This week, the trigger was a shock cut to the Treasury’s credit rating, a significant shift in the bond market but not necessarily anything the rest of Wall Street needs to worry about. Most of the big players blew off the downgrade. Warren Buffett, Jamie Dimon, Janet Yellen, everyone. The rating agency that pulled the trigger, Fitch, is relatively minor, with maybe 15% of the global heft in this space. Neither of the true giants spoke up.

And the timing of this downgrade is strange to say the least. It feels like a PR stunt, a desperate reach for relevance. But for now, that 15% of the world that pays attention now needs to adjust its bond portfolios to mirror this move, which means selling Treasury debt to make room for whatever this agency decides is still worth its top rating. Demand for Treasury bonds goes down a bit. And the laws of economics say that when demand for a thing suddenly drops, the price drops with it. When bond prices drop, yields go up. Suddenly yields on the 10-year are above 4%.

This is a historical pain point for the market. Round numbers scare people. The thought is that if you can lock in 4% a year on bonds for the foreseeable future, enough investors will pull their money out of stocks to buy those bonds. But wait a minute. Money flowing out of stocks into bonds means demand for bonds picks up again. Prices in this scenario firm up. And guess what, yields go down. The situation just resolved itself.

That’s how this works. It’s how it worked in 2011 and it’s how it’s going to work now. Yields have had trouble getting above 4% in this cycle. It’s going to take a massive shift in the landscape to get them permanently above that level now. If you’re worried about yields, buy bonds when they hit 4%. And if you’re unwilling to buy bonds at 4%, stick with the stocks that can deliver better under the right circumstances. Beyond that, 4% is just a number.

After all, there are two things here to keep in mind. First and foremost, when long bond yields are stuck at roughly 4% and the Fed has pushed short-term rates well above 5%, the system is showing dramatic signs of stress. That’s the inverted yield curve that tends to foreshadow a recession. The Fed controls the short end. The market decides the long end. When the market keeps buying so many Treasury bonds that long yields stay below short yields, the market is already so fixated on an economic downturn ahead that the prophecy becomes self fulfilling.

But if long-term Treasury yields were to rise back above the short end of the curve, that recession signal goes away. Keep that in mind when people talk about how lethal 4% really is. The only way this curve can heal is if those long yields climb well above 4% or if the Fed wakes up and decides there’s been a terrible mistake. You know the first scenario is the only plausible one. And that’s the second factor to watch. We remember back to 1994, when Treasury yields started at 5.92% and crossed 8% by November. They didn’t get back below 5.5% until 1998. That’s at least four years the world survived yields much higher than 4%, a period in which the S&P 500 doubled. It was the dotcom boom, one of the greatest rallies in history. And it happened in the face of those rates.

What’s lethal about 4% yields? Fear itself. We’ll get through this. Stocks will recover and get back to work. If yields stay above 4%, it’s going to be a lot harder to argue that there’s a recession looming. And if they fall below 4%, where does all that fear go? For now, if you're happy earning 4% a year, bonds are attractive. If you want more, you need to reach for a few of our higher-yield recommendations like the two profiled here.

Apollo Commercial Real Estate Finance (ARI: $10.74, flat. Yield=13.0%)
High Yield Portfolio

New York-based Apollo Commercial Real Estate Finance primarily invests in real estate-backed debt instruments, including senior mortgages and mezzanine loans. The company released its second quarter results recently, reporting $63 million in revenues, up 10% YoY, compared to $57 million a year ago, with a loss of $16 million, or $0.11 per share, against a profit of $50 million, or $0.35. The numbers were weighed down by net realized losses on investments of $82 million, or $0.61 per share, from a subordinate loan backed by an ultra-luxury residential property. This was a significant event, one that saw a $60 million increase to its special current expected credit loss allowance, bringing it to a total of $141 million. This includes an already realized loss of nearly $80 million on the same Manhattan-based ultra-luxurious residential property and is a reflection of the state of New York’s property market, which continues to struggle with a very tough post-COVID recovery.

The company continues to benefit from higher interest rates because 99% of its portfolio is held in floating debt. This led to another consistent quarter of strong distributable earnings of $0.51, well above the quarterly dividend of $0.35. There has been some talk of a dividend cut, but with the level of coverage, we are not concerned. We believe the likelihood of interest rates remaining high for the foreseeable future is quite high.

Leaving this aside, Apollo’s loan portfolio remains as sturdy as ever, with a total portfolio value of $8.3 billion, a weighted average yield of 8.6%, with nearly 94% of them being first mortgages, making this a good place to be in a high-interest rate environment. The trust further funded two first mortgage loans worth $170 million, and received repayments worth $600 million.

The stock is down by 1% YTD, trading at an enticing 27% discount to book value. Apollo ended the quarter with $370 million in cash, $7.0 billion in debt, and $330 million in cash flow.

BlackRock Income Trust (BKT: $11.82, down 2%. Yield=8.9%)
High Yield Portfolio

The BlackRock Income Trust, one of the leading investors in agency mortgage-backed securities and US Government securities offers plenty of value for conservative investors looking for capital preservation, alongside regular income. With its exposure to quality AAA-rated securities, its risk quotient is only a notch below treasuries and munis, while offering higher yields and avenues for capital appreciation.

Ever since the Fed began its hawkish stance, the fund has witnessed a steady pullback and is currently down 6% this year so far. As a result, it offers an enticing 9% dividend yield, all the while trading at a 5% discount to book. With inflation slowing down, and the Fed’s rate hikes finally coming to an end, this fund represents a stellar economic opportunity during the months ahead.

The thing about this fund is that while it may be affected by macroeconomic headwinds and market volatilities in the short term, for investors with a long enough time horizon, the risk of loss is very low. This is made possible thanks to its exposure to mortgage-backed securities, all insured by Fannie Mae, Freddie Mac, and Ginnie Mae, which while not explicitly guaranteed by the US government, we know for a fact that the latter will step in to keep these entities solvent.

The biggest drawback when it comes to investing in the BlackRock Income Trust is the lack of any significant hedges against interest rate risks. During a high-interest rate environment like the present, a portfolio of mortgage servicing rights offers much-needed cushioning against volatility, but they don’t own any, as Rithm Capital and others do. We feel that the company, at current levels, has limited downside risk as the current interest rate levels are very beneficial for the fund.

Good Investing,

Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998

THE BULL MARKET REPORT for May 8, 2023

THE BULL MARKET REPORT for May 8, 2023

Market Summary

A few traders threw a tantrum last week after Jay Powell said "it would not be appropriate" to cut interest rates in the immediate future. We have to say that while a pause in rate hikes seems imminent, active cuts were vanishingly unlikely unless the banking system collapse. And that's not exactly something rational investors really should be eager to see. So instead of focusing on what it would take for the Fed to suddenly reverse its war on persistent inflation, we'd like to open this Bull Market Report with a survey of the facts on the ground.

The Fed has the best view of the economy and in fact determine its trajectory from month to month. They're effectively saying the sky is too blue and the sun is too bright for comfort. We can disagree with the Fed but they still call the shots. They aren't feeling stormy weather. They want it to get stormier. Over the years we've learned a lot about how Jay Powell thinks. He hates high interest rates. The thought of a severe recession that throws millions of people out of work terrifies him. He'll relax the minute inflation recedes to a tolerable level.

As far as our portfolios are concerned, the world does not appear to be ending, and because other investors keep bidding up many of our stocks, we once again have pockets of fresh profit, keeping our results stable in a month when the market as a whole struggled from time to time without surrendering. Despite all the talk about the Fed breaking things in the Banking industry, the S&P 500 actually managed to shake off all of its Silicon Valley losses to edge 0.2% above its February high just a few days ago.

That's an achievement that would otherwise get lost in the gloom. We like it when the market can support a pattern of higher highs because it means money keeps flowing into stocks across Wall Street's periodic mood swings. Without that virtuous cycle, the bulls simply wouldn't be able to climb each wall of worry. But that's exactly what's happened here. Admittedly, it took several weeks for that to happen and the breakthrough was only a handful of points on the S&P 500 before the latest round of Fed dread took it away.

We're still a long way from fully shaking off the bear's grip on the market. Every shock will stir sentiment and uncover remaining pockets of anxiety. But in every cycle since October, the bulls reach a little higher and the bears fail to push stocks so far down. Life, in other words, starts looking better from month to month. Companies not only learn how to survive shifting economic conditions but demonstrate that they can operate profitably. They're thriving. A lot of our stocks are thriving as well. That would not be the case if the economy were teetering on the edge of a cliff.

In the last two weeks, Energy took a significant step back. That's not a thrill for shareholders, but it's a pretty good indication that inflation is receding with commodity prices. Weaker inflation means the Fed can relax and act to comfort the market in a crisis. If you're afraid of the Fed, this is a good thing for every stock that doesn't make money pumping fuel out of the ground. And if you don't see that, then maybe the Fed isn't really what scares you. Meanwhile, the Financials are relatively resilient. Some innovative names like Bill Holdings (BILL) and PayPal (PYPL) are actually moving up, expanding their market footprint as entrenched legacy Banks falter.

This is how the economy works to create wealth at the expense of old broken ways of doing things. Our High Technology portfolio jumped 4% in the last two weeks. The core Stocks For Success group, dominated as it is by the biggest giants of Silicon Valley, also moved up. Microsoft (MSFT) rebounded 9% over this time period. Apple (AAPL) jumped 5%. Innovation is no longer seen as a problem or a source of empty hype. Serious investors are once again finding these stocks attractive because they represent a solution to the challenges that face us all.

But innovation isn't everything. People need places to live and work, no matter what virtual reality miracles happen in the "metaverse" or elsewhere online. Our Real Estate portfolio rebounded 5% in the last two weeks because the world failed to end. Big landlords didn't collapse. Believe it or not, their management teams have dealt with worse and didn't quit. They survived. And shareholders booked a lot of dividends over the years. That's another place wealth comes from.

There's always a bull market here at The Bull Market Report. This time around, we'd like to conduct a bit of a thought experiment in The Big Picture and take all the dread circulating around the market at face value. "What if," we ask, "the world isn't actually ending? What's the right investment posture for that?" The High Yield Investor takes a similar tone with a discussion of whether Jay Powell could have told the truth when he said the Banking system remains strong and relatively healthy. And as always, we have a lot of stocks to review. After all, it's earnings season. And the season is unfolding a lot better than many investors anticipated.

Key Market Indicators

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The Big Picture: "Normal" Is Right Here

We’ve all suffered through a lot together. The last few years have given investors the most jarring ride since the Great Recession. Banks are failing. The Fed seems obsessed with crashing the economy. A lot of people are convinced that the world is on the brink of collapse. The world can end in any number of ways, destroying endless wealth and security in the process. It’s enough to make someone head for the exits. But the question we need to grapple with as investors is a lot simpler: What if it doesn’t?

So let's run a thought experiment and postulate what would happen if the world stubbornly refuses to melt down and everyone on the sidelines misses their chance to participate in the good things the future still has in store. This scenario is not as outrageous as it might look. After all, the latest economic numbers suggest that the biggest immediate fear Wall Street and Main Street currently have to grapple with is the fear of missing out. While some corporations are trimming payrolls, enough are still hiring that unemployment keeps hovering around its lowest level in over 50 years. Wages are up. As the banks have revealed, households aren’t defaulting on their debt in large numbers. And as a result, the economy as a whole keeps growing just a little faster than inflation.

It might feel like a recession to weary workers. It might look like a recession on the horizon to wary investors. But there’s always a recession on the horizon . . . the cyclical nature of the economy ensures that we’re rarely more than a few years from the next one. And when the fundamental numbers keep trending in the bullish direction, experienced investors know that their portfolios will ultimately be worth more as well. That’s crucial in an inflationary world like the one we live in now.

Remember how the math works? When inflation is tracking at 3% over time, your wealth needs to earn at least 3% a year or you are actually losing purchasing power. You’re getting poorer. The Fed wants to drive inflation down to 2%, which is low but still just far enough above zero to penalize everyone so frightened that they can’t bear to do anything with their money beyond hiding it under the metaphorical bed. And right now, prevailing inflation remains high enough that even the highest-yielding bank products just don’t cut it.

That’s why the regional banks are failing, by the way. When their portfolios are stuffed with bonds paying less than inflation, they can’t raise the rates they pay on deposits. So depositors bail out and the balance sheets implode. But we aren’t banks. That’s actually not our problem. Our problem is how we effectively protect our existing wealth and build on it when the world fails to come to a screeching halt. That’s the problem of life. Living costs money. Unless the world comes to an end, you need to keep spending money.

Our solution starts with a little insurance against extended periods of market stagnation like the one we’ve just lived through. When your stocks go nowhere, you need a way to stay liquid. The biggest threat is outside circumstances forcing you to sell in stressed market conditions in order to pay the bills. That’s how hedge funds and retirement plans fail. Survivors keep enough cash flowing to surf the storms. Dividend stocks are a great way to do it. Our High Yield holdings focus on these opportunities to generate current income without selling a single share of stock. That’s our defense.

And anything less than an extreme outcome is temporary and partial by definition. Suddenly you aren’t facing the end of the world; you’re just looking at a stressful environment. Generations of history prove that Wall Street and Main Street alike have survived every shock and come back more resilient than ever. That’s the American way. On average, a year in the market is worth 8-11% above inflation. Some years are a lot worse and some are a lot better, but that’s the average that prevailed in the wake of the dotcom crash and the 2008 crash and even today. Over the past four years, the VIX has gone crazy and the Fed has spun in a vast and terrible circle. Recession and recession shadows have alternated with bear markets and bubbles. The market has still climbed almost exactly 11% a year on average over that period. Compounded.

Now maybe you’re eager to cut out some of the bad times in order to avoid the pain of a losing year for the market as a whole. We get that. Nobody enjoys stress. It isn’t the end of the world, but it can feel like it. Our solution there is equally simple. Nobody’s forcing you to buy and hold the market as a whole. There’s a whole world out there beyond the S&P 500. And there are always relative strong spots in the economy as well as obvious pain points. Last year, if you were brave enough to own Big Energy, you did well. We bought it. This year, Technology is coming back. You keep rotating. That’s life. It hasn’t ended yet. And we roll with the the changes and strive to beat the market averages.

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BMR Companies and Commentary

Apple Reports A Quarter That Pleases (AAPL: $174, up 2%)

Stocks for Success Portfolio

Amid bank failures, ceaseless rate hikes by the Fed and a global economy that continues to teeter on the edge of a recession (yet somehow manages from quarter to quarter never to actually fall over the cliff), Apple’s second-quarter results on Thursday were an absolute delight. The tech giant posted $95 billion in revenues, down 3% YoY, compared to $97 billion, with a profit of $24 billion, or $1.52 per share, down from $25 billion, or $1.52.

Despite posting its second straight quarterly drop in revenues, the stock popped 5% on Friday, thanks to the company’s beat on consensus estimates at the top and bottom lines. The stock has remained under pressure throughout the past three months, owing to rumors of a drop in Mac sales, coupled with the slowdown in fulfillment by its largest supplier, Foxconn, both of which were proven to be overblown during the results on Thursday.

The tech giant’s star performer remains its coveted iPhone, posting sales of $51.3 billion, up 1.5% YoY, compared to $50.6. The segment came in well ahead of estimates at $48.9 billion, even as worldwide smartphone sales contracted by over 15% during the same period. Apart from this, the Services business was the only other segment to post a YoY growth of 5%, with $20.9 billion in revenues.

Apple’s other key products - the Mac, iPad, and Other Products, which include wearables and accessories, posted a YoY decline. They each posted sales of $7.2 billion, $6.7 billion, and $8.7 billion, down by 31%, 13%, and 1%, respectively. The company, however, claims it witnessed a steady YoY growth across all key geographies, only to be weighed down by foreign exchange headwinds. We’re not sure we agree with the company on this last statement.

As to the future, the company expects a similar performance overall for the current quarter, as it continues to grapple with macroeconomic pressures, the slowdown in consumer spending, coupled with persistent supply chain issues. To address the latter, the company has gone all-out to diversify its sourcing and fulfillment away from China, in favor of India and Vietnam, among others for a more resilient supply chain. But getting there is a long process, as you can imagine.

In the face of growing challenges, Apple continues to remain the cash cow it has always been, with $29 billion in cash flow during the second quarter alone, of which nearly $23 billion was returned to shareholders in the form of dividends and repurchases. The company has authorized a further $90 billion in fresh repurchases, adding to the $600 billion in buybacks it has completed over the past decade. Now that’s a story!

In addition to this, the company raised its quarterly dividends for the 11th consecutive year, albeit, a small percentage. The company’s cash position continues to fall, at $51 billion at the end of this quarter, with debt of $110 billion, but this is hardly concerning given its remarkable cash flow. If you do the numbers, the firm is making almost $2 billion a week(!) Handing out cash to its stockholders is something the firm loves to do and will continue into the future.

The stock is flirting with its all-time high of $182 set in late 2021. Our Target for Apple is $190, which we are raising today to $220. The Sell Price is: We would never sell Apple.

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Energy Transfer (ET: $12.36, down 4%)
Energy Portfolio

Dallas-based Energy Transfer released its first quarter results early last week, reporting $19.0 billion in revenues, down 7% YoY, compared to $20.5 billion a year ago. The company posted a profit of $1.0 billion, or $0.32 per share, down from $1.2 billion, or $0.37, owing to lower energy prices and increased maintenance and operational expenses.

While the results were rather disappointing, in the case of midstream companies, top and bottom-line figures are largely irrelevant, given their vulnerability to energy price volatility. What matters is volumes, and in this regard, the company performed exceptionally well across the board, with its natural gas liquid fractionation and transportation volumes up by 18% and 13% on a YoY basis, respectively.

The midstream segment, interstate natural gas transportation, and crude oil terminal volumes were up by 14%, 11%, and 6% YoY, respectively. The growth in volumes is largely the result of the company’s Gulf Run Pipeline being placed in service, in addition to higher utilization across its Transwestern, Panhandle, and Trunkline systems, given the broad structural shifts being seen across the global energy markets.

We analyzed these trends thoroughly when we first started covering this stock last year, and to summarize it once again, it has to do with the rising rig counts within the US. With environmental concerns firmly on the back burner, the US is once again going all-out on domestic energy production, and as a result, midstream giants with extensive infrastructure are set to benefit from robust secular tailwinds. The company sports a $38 billion market cap.

Energy Transfer will continue delivering value to shareholders. This includes improving its balance sheet position, with $1 billion in debt pared down in the first quarter alone, aiming for a leverage ratio of 4 to 4.5x. Trading at just 0.44 times sales, it is remarkably undervalued for a stock boasting a yield of 10%, ending the quarter with $1.2 billion in cash, and $47 billion in debt.

The firm has a significant portfolio of long-term contracts in place. These contracts play a crucial role in ensuring stable revenue streams and mitigating price volatility risks. While specific details may vary, Energy Transfer typically enters into long-term agreements with producers, shippers, and end-users for the transportation, storage, and processing of natural gas, crude oil, refined products, and other commodities. A typical example of a long-term contract is a transportation agreement with a natural gas producer. Under this contract, Energy Transfer agrees to provide transportation services for a specified volume of natural gas over a period of 10 years. The contract stipulates a fixed transportation fee per unit of gas transported, providing predictable revenue for the company. Additionally, the agreement includes a minimum volume commitment, requiring the producer to ship a minimum amount of gas each year. Failure to meet the commitment may result in penalty payments. This long-term contract ensures a stable revenue stream for ET while offering the producer reliable transportation services for their natural gas.

Our Target is $14 and our Sell Price is $10. We would not hesitate to buy more at this level and could expect to see a 15-20% return per year in the future. Even if most of that is from dividends, it still counts as a win.

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Shopify (SHOP: $62, up 28%)
High Technology Portfolio

eCommerce platform Shopify posted phenomenal first quarter results last week, reporting $1.5 billion in revenues, up 25% YoY, compared to $1.2 billion a year ago. The company posted a profit of $12 million, against $25 million last year. The unexpected beat on the top and bottom lines sent the stock higher following the results.

The company further continued its stellar streak across core operating metrics, starting with gross merchandise value at $50 billion, up 15% YoY, compared to $43 billion a year ago, followed by gross payment volumes at $28 billion, up 25% YoY, compared to $22 billion. Merchant and subscription solutions revenues came in at $1.1 billion and $380 million, up by 31%, and 11%, respectively.

Shopify had an eventful quarter, marked by significant additions of notable brands to its platform. The company witnessed a surge in the number of prominent brands choosing to utilize their e-commerce infrastructure and services. These brands recognized the value of Shopify's robust and user-friendly platform, which enables them to establish and grow their online businesses efficiently. It further announced the launch of Commerce Components by Shopify, a modern tech stack for enterprise retail, in addition to updated pricing across its basic and advanced plans, which went into effect for all new and existing customers two weeks ago.

The most important announcement, and one that came as a relief for shareholders and analysts, was the sale of its logistics business to Flexport, in return for a 13% stake in the firm. Given the nature, complexity, and laser-thin margins in this segment, this was a much-needed move, allowing Shopify to focus on its core competencies of building on its powerful e-commerce platform and network.

Shopify remains increasingly focused on profitability, as evidenced by the 20% cut in its headcount. Profits during the quarter would have been a lot higher, if not for the severance expenses of $150 million. The company’s balance sheet remains as robust as ever, with $4.9 billion in cash, just $1.6 billion in debt, and $100 million in cash flow, as it goes from strength to strength across its core businesses. We hold Shopify at the top of our list of investments for future growth. Our Target of $60 was hit this past week and we are raising it to $80 today. We would never sell the stock. The all-time high is $176, set in late 2021. This was the peak of its run from the $14 level in 2018. (We added it at $7 in 2017.)

SHOPIFY HAS A PLATFORM, like Facebook, like Apple’s App Store, like Google, like Amazon, and it is the most powerful tool in the world for young entrepreneurs to set up businesses and create wealth for themselves and their families. And when they succeed, the company takes part in their success. They are crushing the competition and will continue to dominate for decades to come.

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Visa (V: $232, flat)
Financial Portfolio

In the face of tough global macro conditions, payments giant Visa has continued to exceed expectations with its second-quarter results recently. The company posted $8.0 billion in revenues, up 11% YoY, compared to $7.2 billion a year ago, with a profit of $4.4 billion, or $2.09 per share, against $3.8 billion, or $1.88, with a huge beat on the top and bottom lines.

The company continued its stellar streak across core operating metrics, with payment volumes, cross-border volumes, and total payments processed, up by 10%, 24%, and 12%, respectively. This growth shows no signs of slowing down, with the double-digit growth across volumes, revenues, and earnings set to continue during the third quarter, thanks to its extensive dealmaking and ceaseless product innovation.

The global payments processing industry is essentially a duopoly dominated by Visa and Mastercard, both with wide moats keeping new entrants at bay. Visa currently has over 5 billion active debit and credit card accounts across 200 countries. The broad-based shift away from cash, and towards digital payments creates a robust secular tailwind for the company that is set to last throughout this decade and beyond.

Visa maintains this lead with long-term partnerships with leading financial institutions across the world, often with the help of incentives that cost as much as 27% of its gross revenues. During the second quarter alone, the company renewed agreements with the likes of TD Bank and CIBC*, among others. It further signed new card issuance deals with fintech companies Stripe and Adyen during the quarter.

* one of the largest banking institutions in the United States.

The most notable event during the quarter was the launch of Visa+, which represents the future of the company, offering instant peer-to-peer transfers across payment modes such as banks, PayPal and Venmo, wallets, apps, and more. The company continues to reward shareholders generously, with $3.2 billion in repurchases and dividends during the quarter, hardly making a dent in its balance sheet with $17 billion in cash, $21 billion in debt, and $19 billion in cash flow. Our Target is $265 and we would never sell the stock. The stock hit a 2-year high this past week. As this bull market continues, this stock will lead the pack and hit a new all-time high ($252), set in the summer two years ago. We can’t wait to raise the Target to $300.

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Bill Holdings (BILL: $94, up 22%)
High Technology Portfolio

Payments solutions company, Bill Holdings (new name) posted a monumental third quarter performance, with revenues at $270 million, up 63% YoY, compared to $170 million a year ago. The company posted a profit of $60 million, or $0.50 per share, against a loss of $9 million, or $0.08, with a phenomenal beat on consensus estimates on the top and bottom lines.

The company currently serves over 450,000 small businesses, up from 386,000 last year. It has processed payments of $65 billion across 21 million transactions, an increase of 13% and 36%, respectively. In addition to subscription and transaction fees, the company generated interest earnings of over $30 million on the customer balances that it holds on its books. (With the higher rates come some benefits!)

Bill and its subsidiaries Invoice2Go, Divvy, and Finmark offer small businesses with a seamless solution to handle all of their back-office operations. This includes accounts payables management, receivables, spend management, and everything in between. It currently counts over 6,000 accounting firms, including PWC and KPMG as its partners, along with 6 of the top 10 financial institutions.

Thus far, the company has barely scratched the surface of its massive global potential, which it estimates at 30 million small businesses and sole proprietorships within the US alone, and over 70 million around the world. It is currently a leading provider in this space, with features and functionality that are second to none, as evidenced by its phenomenal 130% net dollar-based retention rate, which means 30% of additional revenues coming from existing customers.

During the quarter, the company repurchased $27 million of stock, which we think is rather premature, but it is mostly aimed at making up for stock-based compensations to avoid the dilution of common shareholders, which is commendable. Given its robust balance sheet with $2.6 billion in cash, debt of $1.8 billion, and coupled with its newfound profitability and cash flow of $34 million, it will afford to reward shareholders generously. Watch for bigger buybacks and a dividend in the coming years. Our Target is $125 and our Sell Price is $80. This stock is a recent case of holding onto a stock that had gone below our Sell Price. In many cases, it is wise to hold on to these great companies.

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Moderna (MRNA: $137, up 3%)
Healthcare Portfolio

MRNA vaccine pioneer Moderna released its first quarter results last week, reporting $1.9 billion in revenues, down 70% YoY, compared to $6.1 billion a year ago. The company posted a profit of $80 million, or $0.19 per share, against $3.7 billion, or $8.58 per share. The stock soared following the results, owing to a stronger-than-expected, surprise profit, and the top-line performance during the quarter. The drop in the company’s sales was expected as the demand for its COVID-19 vaccine starts to wane, however, a sudden spike in demand for its only marketable product, gave investors much to cheer. Moderna maintains its guidance for 2023, with sales expected at $5 billion from advanced purchase agreements of the same Covid vaccine, around the world, throughout this year.

The company posted a profit during the quarter, after accounting for $150 million in write-offs for vaccines that exceeded their shelf lives, in addition to $135 million in unused manufacturing capacity expenses. It is further encouraging to see new contracts being inked for its COVID-19 vaccines across US government agencies, pharmacies, hospital chains, and more, pointing towards resilient demand even as the peak of the pandemic is past us.

Moderna expects the demand for boosters, especially among seniors and people with weak immune systems to continue, resulting in a steady revenue stream. The company currently has five different vaccines in early clinical trials and expects to launch its RSV* and flu vaccines in 2024. It projects revenues between $8 billion and $15 billion by 2027 from 6 major respiratory vaccines. The windfall gains during the course of Covid have helped the company double down on its R&D, with expenses in this segment up by 100% YoY. Moderna has used some of the proceeds of its huge inflow of revenue to reward shareholders, with $530 million in stock repurchases during the quarter. With $3.4 billion in cash and $1.8 billion in debt, it remains well-capitalized for the road ahead. As noted above Moderna has projected 2023 sales of the vaccine to reach at least $5 billion. That figure does not account for contracts that could be signed this year. The company specified the potential for deals with the U.S., Europe, and Japan, among others. The company will increase its R&D investment to $4.5 billion in 2022, it said. Moderna has 48 programs in development, with 36 clinical trials ongoing.

* Respiratory syncytial (sin-SISH-uhl) virus, or RSV, is a common respiratory virus that usually causes mild, cold-like symptoms. Most people recover in a week or two, but RSV can be serious, especially for infants and older adults.

Our Target is $250 and our Sell Price is $150. Yes, the stock is below our Sell Price so you should consider the risks here. We’re going to stick with it, as we see tremendous growth ahead as its R&D begins to pay off. Yet there are no guarantees, and sometimes Wall Street doesn’t enjoy the wait, punishing the stock along the way. It is currently out of favor, but we see it differently, and view it as a tremendous buying opportunity.

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Universal Display (OLED: $137, up 3%)
Special Opportunities Portfolio

A leading manufacturer and designer of energy-efficient displays and lighting technologies, Universal Display released its first quarter results last week, reporting $130 million in revenues, down 13% YoY, compared to $150 million a year ago. The company posted a profit of $40 million, or $0.83 per share, down from $50 million, or $1.05, owing to inflationary pressures and macro uncertainties.

The company generated $70 million in material sales during the quarter, down 20% YoY, compared to $87 million. This is followed by royalties and licensing fees at $55 million, down 8% YoY, compared to $60 million, and its up-and-coming contract research services business at $5 million, up 25% YoY, from $4 million. This segment is expected to grow exponentially as OLED technology gains pace.

While the company anticipates a slowdown during this year, largely owing to the macro uncertainties and inflationary pressures, it remains confident of steady tailwinds from a new OLED adoption cycle. It has since acquired the phosphorescent emitter patent portfolio of German-based Merck KGaA, in order to further strengthen its position in the segment, and capitalize on the broad secular tailwinds.

Universal Display disappointed investors with a bleak guidance for 2023, and during its first quarter results, it has continued to maintain the same figures, projecting a YoY decline of 7%. It has, however, signaled potential for a strong rebound in 2024, which has helped the stock command higher multiples, despite being one of the worst performers in the semiconductor segment over the past year.

This is a stock for the long-term, being steeped in science and deep research; investors won’t do well to judge it on its quarterly game. The stock has been on an uptrend throughout this year, posting gains of 28% YTD, but still remains down by over 45% from its peak in 2021. It issued a dividend representing an annualized yield of 1% (Zzzzz), before ending the quarter with $160 million in cash and just $40 million in debt. Our Target is $145 and the Sell Price is $115, which we are raising to $130. If it goes below this price, we are out. Having added it at $95 in 2018, it’s been a long haul here with a lot of disappointments. Yes, you’ve made money, but we are tired of the slowing growth of the company in a market where they should be growing at 20-30% a year. This is not happening. $130 and out.

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Teladoc Health (TDOC: $26, down 1%)
Early-Stage Portfolio

Telemedicine and virtual healthcare company Teladoc released its first quarter results recently, reporting $630 million in revenues, up 11% YoY, compared to $570 million a year ago. The company posted a loss of $70 million, or $0.42 per share. The results were ahead of estimates at the top and bottom lines. The company continued to see growth across key metrics and segments last quarter, starting with total integrated care members at 85 million, up from 79 million a year ago. The BetterHelp online mental health platform ended the quarter with 470,000 paying members, up from 380,000 users a year ago, followed by its chronic care program enrollment at 1 million users, up from 910,000 users during the year ago period.

Full-year revenue increased to $2.4 billion last year. Management expects revenues for 2023 to be about $2.6 billion, an improvement of 9% from 2022. Adjusted EBITDA is anticipated to be about $305 million, which suggests 24% growth from the 2022 figure of $245 million.

Teladoc, however, witnessed a marginal decline in its average revenue per user at $1.39, down sequentially, as well as on a YoY-basis, at $1.44 and $1.41, respectively. The company’s enterprise business that caters to employers and health plans reported $350 million in revenues, up 5% YoY, and represents a key growth driver for the company as employers revamp their health and wellness perks.

As demand for weight loss drugs continues to grow in the US, Teladoc’s pre-diabetes and weight management program is set to join the fray, offering diet and nutrition counseling, mental healthcare, fitness tips, and even prescriptions for GLP-1 drugs such as Ozempic. Following its fiery streak during the pandemic, Teladoc is set to play an outsized role in US healthcare, even though growth has flat-lined on a YoY basis.

As of now, the company remains focused on profitability, laying off 300 workers in January to lower operating costs, but its biggest expense still remains user acquisition, via extensive digital advertising spending. The stock trades at a valuation of just 2 times sales, with $900 million in cash, $1.6 billion in debt, and $230 million in cash flow. The big drag of course is profitability. Wall Street just can’t take it. And we don’t blame them (whoever “them” is. Oh – it’s us!) Yes, we can’t take it. What can one do about this is the question. You can sell all, buy more, or sit and wait. We remain quite amazed at the huge revenues that the firm has created, but we are also amazed at how they can’t figure out how to make money.

Our Target is $72, which is way too high. We’re lowering it to $42. We have no Sell Price currently because we can’t imagine the stock going much lower from here. But in reality, anything can happen on Wall Street. Thus, we are instituting a Sell Price at $22. $22 and out. The investment has certainly been a disaster as we are down significantly. This was one where we should have honored our initial Sell Price.

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The High-Yield Investor
The Bull Market Report 

Jay Powell raised a few eyebrows this week saying that conditions in the banking industry are getting better when reportedly half of all banks are already “potentially” insolvent. Is he whistling in the dark, hoping we don’t panic and trigger a 2008-style crash? Has he gone crazy?

Despite all the anxiety and dread, we have to come down (a little narrowly) on his side. We’re actually a long way from a Lehman Brothers “too big to fail” failure. We know this because we know how the banking landscape has actually evolved in the last 15 years. There are 4,200 banks. Most are very small, not even “regional” in scope. At a glance, not 400 of them are big enough to be publicly traded and the bar there is extremely low. The smallest bank stock on our radar, Carver (CARV), is worth just $18 million. It’s hurting, don’t get us wrong. Earnings have crashed in the squeeze between higher lending rates and deteriorating credit quality. But it’s 0.02% the size of Citi (C) today. Its problems are not systemic or contagious. Ten years ago, the 10 biggest institutions held more than half of all U.S. deposits. Today their footprint has grown to two thirds of deposits, leaving everyone else fighting over a shrinking piece. That’s bad for all those smaller banks, but as long as the bulge bracket remains strong, the industry as a whole won’t show much strain.

And the Big Banks just reported earnings. They’re confident. They’re doing fine. While they are arguably too big to be allowed to fail at this point, they’re big enough to look out for themselves. That’s what Powell sees. While it’s sad and a little scary to see a Silicon Valley Bank or a First Republic Bank implode, these companies weren’t even 1/20 the size of Lehman Brothers back in the day. They make headlines but headlines don’t rock the boat. Remember, there are 4,200 of them and between them they hold a third of all U.S. deposits. Their feelings don't bend the fundamentals for the system as a whole.

If you're worried about the system as a whole, you should be worried about the fundamentals. Everything else is just feelings, and Wall Street has infamously never shown a lot of respect for emotion unless there are numbers to back it up. Will Powell keep tightening until a truly important institution breaks? That’s the real question because your gut response says a lot about your sense of the Fed’s authority. If you think Powell and company are more likely to overreach than correct at the first sign of crisis, you’re in a miserable situation. We can’t fight the Fed. If the Fed is incompetent, there’s no place to hide.

Lately the market’s faith in the Fed has been faltering. We started to see it when Powell suddenly decided in 2019 that there was no reason to maintain interest rate discipline in the absence of inflation. He was more interested in boosting the economy and keeping the market cheering. Then in the early stages of the pandemic, he clearly panicked. When the threat of a 2008-style credit crisis became real, rates went straight to zero. Now here we are. Powell is talking tough as long as inflation is on the table, but it’s hard to ignore his track record, and harder than it once was to trust the Fed to act as long-term steward of the economy as a whole.

We’re a long way from the invincible era of Alan Greenspan, much less Ben Bernanke. But even those icons ultimately revealed feet of clay. Greenspan triggered both the dotcom and the 2008 crashes. Bernanke cleaned up the latter, but the results were far from robust. At the end of the day, while we can’t fight the Fed, we’re still free to make up our own minds. We think Powell is right to do what it takes to beat inflation into submission. We also think he’s right that the banking environment as a whole remains robust.

But we know that if big banks start breaking, he’ll flinch. For now, we are not buying the little banks on the dip. We are actively culling our Financial recommendations instead. Let this shake out. We’ll be here to pick up the pieces, just like Jamie Dimon and his cronies at the big banks are picking them up even as we speak.

AGNC Investment (AGNC: $9.91, down 4%. Yield=15.2%)
High Yield Portfolio
CUTTING COVERAGE

One of the largest Mortgage REITs, AGNC Investment released its first quarter results two weeks ago. The company managed to deliver a profit of $410 million, or $0.70 per share, against $380 million, or $0.72 per share, but this came at the price of a massive miss on top-line figures. While the company’s agency mortgage-backed securities (MBS) portfolios started to perform well during the first half of the quarter, things started turning sour in the later weeks, with regional bank instability, interest rate volatility, and a broader macro uncertainty, all weighing it down. As a result, the company’s MBS portfolio underperformed treasuries and swaps in March, resulting in a negative economic return.

The negative economic return resulted in a $0.43 decrease in its book value to $9.41 per share, compared to $9.84 the prior quarter. As a result, the stock now trades at a premium to book value, making AGNC the only Mortgage REIT currently to do so. This is not consistent with the mood around this corner of the market, where stocks generally trade at significant discounts to book value because investors remain wary and reluctant to hold their positions in what could become an economic crisis. With that said, now is the perfect time to exit this stock, as it is unlikely to continue to trade at a premium forever.

It might seem crazy to exit this stock right now with the stock producing a 15% annualized yield in monthly $0.12 per-share installments. But we believe that its spread income has peaked and will start deteriorating from here. While remaining assets theoretically pay enough now to cover the dividend, AGNC has consistently sold off its holdings, down from $90 billion to $57 billion over the past two years, all the while continuing to dilute investors with fresh stock issuance, undoing any potential bright spots. We’ve collected a lot of money from dividends over the years, but the retraction in the stock itself has taken it all away. We reluctantly say goodbye to this Mortgage REIT. The inverted yield curve has taken another prisoner.

Apollo Commercial Real Estate Finance (ARI: $9.52, down 6%. Yield=14.7%)
High Yield Portfolio 

This New York-based mREIT predominantly invests in senior mortgages, mezzanine loans and other real estate-backed debt instruments. Despite all the anxiety around the credit market, business is actually good here . . . and we have more than vague assurances to back up that statement. The latest quarterly revenue figures show $70 million coming in (up 29% compared to $55 million a year ago) and a full $0.48 per share turned into profit. A year ago, Apollo was running at full speed and only booked $0.35 per share in profit. That was enough to pay the long-established dividend and it's now likely that management will either stockpile the extra cash for any anticipated rough times ahead or, in the absence of real strain, simply distribute it to loyal shareholders.

The company ended the quarter with a loan portfolio worth $8.5 billion, with an unlevered, all-in yield of 8.6%. It funded an additional $170 million worth of loans, mostly refinancing two floating rate mortgage loans, in addition to the add-on fundings of $114 million during the quarter. The firm further received proceeds to the tune of $500 million from repayments and the sale of loan assets.

Originations have taken a plunge during the first quarter, largely a result of the high interest rates that have made it too expensive to borrow. The rising interest rates over the course of the past year and a half have served the firm well, since 99% of its portfolio remains concentrated in floating rate loans, but this creates a downside risk when the Federal Reserve changes course and starts lowering rates.

This explains the fact that the stock is trading at a monumental 62% discount to book value, offering yields as high as 15%. While investors worry about its distributable earnings taking a hit in a true crisis and leading to a cut in dividends, we suspect this concern is rather overblown. After all, no credible analyst on Wall Street currently projects earnings dropping below $1.47 per share this year (based on the previous quarter, something above $1.60 is far more likely) and even in 2024, the odds of Apollo reporting less than $1.30 per share are extremely low. Put that into context: management can bank anything better than $1.40 this year against future dividend obligations and ride out any economic disaster.

Admittedly, 2020 was a bad year for Apollo. Earnings dropped to $0.84 per share as the Fed gyrated and the yield curve crumpled. But that was a scenario when floating interest rates came as close to zero as they get. If you're anticipating a COVID-style worst-case outcome, that's it. Otherwise, rates might go down incrementally . . . without dropping to the point where Apollo feels that same level of pressure. The stock remains down by over 9% YTD, largely owing to the regional banking crisis, volatile interest rates, and risks of a downturn. While there are risks pertaining to this stock, we believe the opportunity and potential far outweigh these risks.

Good Investing,

Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998