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The Weekly Summary

The most volatile year in recent memory is behind us now and our recommendations held up extremely well on the whole. Beyond the Real Estate portfolio and a few significant retreats elsewhere in our High Yield universe, pain points were scattered and relatively mild, roughly matching our usual preponderance of hits to misses. The hits, meanwhile, were extremely powerful. A dozen of our stocks gave us 100% or better returns in 2020 . . . and several tripled over what initially looked like a grim 12 months. All in all, we beat the Technology-heavy Nasdaq by a healthy margin and ran the equivalent of victory laps around other market benchmarks.

We hope you feel good about the numbers. The future, as always, remains uncertain. While vaccines are slowly being distributed, COVID remains a weight on everyday life until we finally have enough people immunized to get back to work. Until that happens, it's an open question whether the economy can pick up where it left off almost exactly a year ago when the first U.S. cases were reported. We're still technically in a recession, with many households, businesses and whole industries holding together thanks to the Fed and occasional federal stimulus payments.

All we really know is that strong companies survived the worst pandemic in a century and that even the weak ones avoided becoming a wave of bankruptcies. If 2020 was as bad as it gets, we're in little danger of the kind of catastrophic market failure that many fretted about in February and March. We'll see good times and bad times, but we know now that the Fed learned an important lesson from 2008. Central bankers will do whatever it takes to keep cash flowing to vulnerable companies. Unless a crisis is too big even for the Fed to manage, the worst-case scenarios aren't all that apocalyptic.

Can worse things happen in 2021? The door is always open, but we doubt it. In many ways, the world has passed a significant stress test. We've developed new and stronger tools to work, collaborate, shop and socialize. COVID caseloads remain elevated and medical systems remain stressed, of course, but we see brighter days ahead. If nothing else, a year after the initial outbreak, year-over-year earnings comparisons are going to get extremely better. It's going to feel like a boom purely on that basis.

Please reach out with any questions or concerns. Write Todd Shaver directly at Info@BullMarket.com. His goal is to respond quickly and give you his thoughts on the markets in order to help you through wrestle through your concerns.

There's always a bull market here at The Bull Market Report! Gary Jefferson is once again on vacation but The Big Picture compensates with a look at what the year would have looked like if you weren't invested in the Big Tech giants that now dominate the market. On the other side of the coin, The High Yield Report reviews a few of the most battered REITs in our universe with an eye toward their ultimate recovery in 2021 and beyond.

And since we previewed our Top Stocks of 2021 last time, we'd like to focus on some big companies that we love but didn't quite make that list. We also want to update you on Zoom Video Communications, one of our newest recommendations misunderstood as just another "COVID Stock." This company was never all about working from home. We see great things ahead for it.

Key Market Indicators

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BMR Companies and Commentary

The Big Picture: How Top-Heavy Is The Market?

As you know, out of the 60 companies we follow, we love some of the biggest stocks on Wall Street as well as some of the smallest. Our experience demonstrates that the swinging market pendulum ultimately favors a balanced full-cycle approach. Concentrating on either extreme can be great in certain phases, but ultimately the economic winds shift and leave investors exposed to frustration if not outright stagnation.

After all, the time to establish a position in most companies is when they're small and on the way to becoming bigger enterprises. A stock that's already big can always get bigger, but it can also stall or even get smaller . . . just look at Exxon Mobil, Intel, General Motors and General Electric, and other names that each broke Wall Street records before ceding leadership to the next wave of market giants.

However, we recognize that great companies can grow to vast scale before ultimately hitting a plateau, especially if other investors crowd into stocks considered too big to fail. That's what we've seen with the Big Tech group and a handful of other companies in the Financial, Consumer and Healthcare sectors. Size provides competitive advantages as well as compensations, and so the biggest stocks on Wall Street keep getting bigger.

We did the math and the 10 biggest constituents of the S&P 500 now account for 26% of that broad index. When they falter, it's going to be hard for the market as a whole to overcome the drag . . . but for now, many of these stocks are still rallying at impressive speeds. Take these 10 stocks out of the S&P 500 and you'll surrender more than half of the index's 2020 return, ending up with barely 7% to show for an extremely volatile year. Apple alone accounted for 4 percentage points of the market's overall gain for the year. Microsoft, Google and Amazon together brought in another 5.5 percentage points, and then the outperformance numbers smooth out to something a lot closer to the average.

This reflects a market that is more concentrated than it was a year ago. We can debate the dynamics (index funds favor past winners, Technology is immune to the virus, sentiment is fragile, and these are the new "safe havens") but the returns speak for themselves. An investor could have rightfully owned just the four stocks we've discussed so far and beaten the rest of the market put together. You don't even need to have owned anything but Technology or stocks like Amazon, Facebook and Alphabet that have changed formal sector classification but remain fixtures of Silicon Valley as far as Wall Street is concerned.

And while Big Tech has gotten vast, other sectors display similar characteristics. The giants are truly gigantic, overshadowing everything else in their industries. Here's a map of the S&P 500 showing relative market capitalization (the size of each box) and 2020 stock performance (green is good, red is not):

We haven't even factored Tesla into our math here because it joined the S&P 500 so late and remains controversial. That's why it gets an asterisk. But the leader board otherwise is as clear as it gets: Apple, Microsoft, Amazon (now technically a Consumer Cyclical company), Alphabet, Facebook. Then you drop down to Berkshire Hathaway, Visa and JP Morgan in the Financials, Johnson & Johnson in Healthcare and Procter & Gamble in the Consumer Defensive sector.

We love most of these names and over time we fully expect the cycle to give our smaller favorites an opportunity to catch up. They may not be as innovative on the surface as Big Tech, but that can be an advantage when innovation hits a wall. Give them time.

But take another look at the red circles on the market map above. Big Tech's triumph has cushioned a lot of pain in a lot of industries, which is why removing these stocks from the S&P 500 would leave the market as a whole moving roughly as slowly as the old-school Dow industrials. The Banks had a bad year. So did Insurance, Energy, Aerospace, most Utilities, our beloved REITs, Beverages and of course Lodging and Travel. Focusing only on this end of the economy reveals that the pandemic year wasn't so euphoric after all: there were still losers. We don't recommend many names in any of these industries, and we aren't blind to their struggle either.

As for whether we'd be happy with a portfolio full of nothing but the biggest stocks, the answer is emphatically "no." In a year when Apple and Amazon soared 75-80%, our average High Tech company gained 100% and the smaller Aggressive group is up 130% in the aggregate. That's the power of small stocks moving fast. And it's how small stocks eventually join the ranks of the giants.

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Alphabet (GOOG: $1,752, up 1% last week) 

When a company as large as Alphabet, with its over $1 trillion market cap, hits an all-time high, we sit up and take notice. A month ago, the stock touched $1,847. Approaching the fifth anniversary of our recommendation, we’d say things have worked out since we initiated coverage at $765. It still generates 80% of its revenue from advertising, and that rebounded strongly from the covid quarter (2Q) in 3Q20. As some normalcy returned, third quarter revenue rose to $46.2 billion, a 14% increase over 2019’s $40.5 billion. Even better, profit was up 59% to $11.2 billion.

With operations that touch so many areas like Search, YouTube, Maps, Android, Google Play and Gmail, it’s no wonder the company is dominant. This has drawn the ire of governments with the Department of Justice and many states filing suits claiming antitrust violations regarding its Search business. We aren’t concerned right now given the lengthy and uncertain process. Our Target Price is $1,865, and when a company is this good, we don’t have a Sell Price. 

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Apple (AAPL: $133, up 1%) 

We know this is a holiday week, but any time a stock reaches an all-time high it is noteworthy. On Tuesday, Apple hit $139. As a reminder, this was the first company with a $1 trillion market cap, in 2018. Well, now it has over a $2 trillion market cap. ($2.25 trillion, if you need precision.) For naysayers that claim large companies can’t grow quickly, we say they are missing the boat. Not when its growth prospects remain bright as ever. Fiscal 4Q20 (ended September 26) sales increased by 1% to $65 billion. Profit fell by $1 billion to $12.7 billion due to operating expenses (SG&A and R&D) increasing from $9 billion to $10 billion.

While the headline numbers don’t look great, sales across four of its categories (Mac, iPad, Wearables, Home, and Accessories, and Services) had strong year-over-year growth. The lone exception was iPhone, which saw sales fall to $26.4 billion from $33.4 billion. This will rebound shortly since it released a new version, iPhone 12, in October. These come in different sizes, have better displays and cameras, and support the 5G network. Reports are that the products are selling very well. Initiating coverage in 2016 at $24, you have seen a price appreciation of 6x, and there’s much more to come. That’s why we are raising our $130 Target Price to $154. As one of our core long-term holdings, we don’t have a Sell Price. Why would you ever sell Apple?

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Okta (OKTA: $254, down 8%) 

A couple of weeks ago, the stock reached $287, an all-time high. The pullback to the current level creates a more compelling valuation since Okta is the leading identity management company that helps firms protect data and information. With the pandemic, this became even more important as more employees logged in remotely. This won’t revert when the virus fades as people continue to work from home.

The Street expected high growth, and its fiscal 3Q21 (ended October 31) results didn’t disappoint. Quarterly revenue rose by 42% compared to a year ago to $215 million. With 95% of its revenue coming from subscriptions, there is a lot of visibility in future results. The company’s Remaining Performance Obligations (contractual subscription revenue that the company will realize over the next year) grew by 53% to $1.6 billion. Management’s 4Q21 revenue guidance calls for $220 million, 33% higher than last year’s $165 million. Right now, the higher revenue has not translated into profitability with its 3Q21 loss widening to $75 million from $65 million, as operating expenses rose to $210 million from $160 million. With fast-growing revenue, it is just a matter of time before the company becomes profitable. With its well-regarded products, and large potential (management estimates the Total Addressable Market is $55 billion and Okta’s annual sales are $825 million), this is a huge opportunity. While the stock has fallen below our $270 Target Price, it won’t take long before it is above that level. Our Sell Price is $205.

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Financial Select Sector Fund (XLF: $29, up 2%) 

This fund invests in the S&P 500’s Financial Sector. You get the industry’s biggest and best companies like Berkshire Hathaway (14% weight), JPMorgan Chase (12%), Bank of America (7%), and Citigroup (4%). These four companies have a combined market cap of $1.325 trillion. Add Wells Fargo and Blackrock and you have another $240 billion of market cap.

Their size is a strength in the industry both in terms of profitability and the ability to withstand major events. Last year is proof, with the companies getting through it just fine. If you have a long-term investing horizon, this fund fits the bill. Even better, you also receive a 1.9% dividend yield.

The underlying stocks have recovered their momentum and the fund itself is above our $25 Target Price. So, we are updating it to $33. Our new Sell Price is $25, up from $19.

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MetLife (MET: $47, up 1%) 

The stock, which had recovered nicely from the year’s low of $23 in March when investors were aggressively selling everything indiscriminately, really took off in the last two months of the year, going from $36 to $49. Weaker results due to COVID-19’s effects (it is more difficult to sell new policies when your sales team and clients are home and not making face to face calls) continued in 3Q20 with revenue down by 14% year-over-year to $16.0 billion. Profit dropped by 71% to $635 million.

The insurance company, a leader in Dental, Disability, Life, and Group Benefits, will bounce back. The Street sure thinks better days are ahead based on the stock’s run following the earnings report. While you wait, you can collect your 4.0% dividend yield. Showing its confidence in the company, management raised the quarterly payout from $0.44 to $0.46 starting in June, right in the middle of the pandemic. Nudging up against our $47 Target Price, we look forward to upping it when the time comes – which will be sooner rather than later. Our Sell Price was $36; now raised to $41.

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Twitter (TWTR: $54, flat) 

The stock bounced back quite impressively in November. In late-October, Twitter reported 3Q20 results, and the stock fell sharply from $52 to $39. Revenue, up 14% year-over-year to $935 million, was just fine. So, what made investors so upset? Monetizable daily active users (mDAU) went to 187 million, which was 1 million higher than 2Q20, but came in much lower than the 10 million additions that the Street was expecting. This isn’t a panic-inducing number since COVID-19 accelerated growth in 2Q20 when there were 10 million new mDAU. We are glad investors realized that and drove the stock back up, reaching $56 in December, a lifetime high, only bested by the $69 it hit fleetingly in 2013 right after it went public, and then falling to $14 two years later.

With the platform increasingly popular as a medium to express thoughts on everything ranging from politics to entertainment, and with partnerships with professional sports leagues like the NBA and NFL that give users live video and commentary, user growth will continue to grow.  The recent move has left our $44 Target Price in the dust. We initiated research a little more than two years ago at $28, and needless to say, we are happy with the return. And with its best growth days ahead of it, we are raising our Target Price to $62. We are also taking this time to update our Sell Price from $34 to $45. 

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Agilent Technologies (A: $118, up 1%) 

The stock is at an all-time high. Remember how it went down to $61 in March after the COVID Crash? The company has had quite a year, with the stock gaining 40%. Fiscal 4Q20 (ended October 31) revenue grew by 8% versus last year to $1.5 billion, driving profits 14% higher to $220 million. (Isn’t it nice to see a young hi-tech company actually make money?!! In fact, the stock selling at 7 times revenues, compared to some we know of that are selling at 40 times sales and are not profitable!)

With the equipment the company provides to the Pharmaceutical, Chemical, and Academia sectors that allows them to do critically important work, revenue and profitability growth is sustainable for 2021 and beyond. For this year, management expects 7% revenue growth from $5.3 billion to $5.7 billion. With steady growth for the foreseeable future, we are comfortable raising our $120 Target Price to $135. Accompanying this move, we are updating our Sell Price to $104 from $94.

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Eli Lilly (LLY: $169, up 1%) 

The stock has had quite a run since early November. Starting the month at $130, it went all the way to $174, an all-time high, a couple of weeks ago. 3Q20 results were mixed, with revenue growing to $5.7 billion, a 5% year-over-year increase, while profit fell by 4% to $1.4 billion. This was due to increasing costs (Cost of Sales up 13% to $1.3 billion, R&D 6% higher to $1.5 billion, and Marketing, Selling, and Administrative costs rising by 11% to $1.6 billion). Part of this was due to the $125 million it spent on developing a COVID-19 therapy. As we’ve seen with other companies, there is room for other treatments once governments give their approval.

With newer drugs like Trulicity (Type 2 diabetes, 9% increase to $1.1 billion), Taltz (plaque psoriasis, 34% growth to $455 million, and Verzenio (breast cancer, 49% growth to $235 million) doing well, Eli Lilly is set up well for further revenue gains. No wonder management raised their 2020 guidance a couple of weeks ago. They have upped their revenue expectation to $24.5 billion - 10% annual growth. Management’s revised earnings outlook is $6.38, up nicely from 2019’s $5.00.  Their 2021 guidance calls for $27.2 billion of revenue and earnings of $7.80 a share. When the stock is comfortably above our $170 Target Price, we will raise it. One of our “forever holdings,” we don’t have a Sell Price.

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Merck (MRK: $82, up 2%) 

We recommended the stock at $85 four months ago, and we are in the red. While it is painful, we are advising patience with this name. After all, Warren Buffett, the world’s greatest investor, invested nearly $2 billion as part of a broad Healthcare investment (he invested $135 million in another of our favorites, Pfizer – see below, as well as Bristol Myers Squibb and AbbVie). We feel good about our recommendation when we are on the same side as the Oracle of Omaha.

It’s more than that, though. The fundamentals remain sound, which we can see by looking at results. The company’s 2Q20 sales were down 8% versus 2Q19 due to top-line declines of its older treatments. 3Q20 sales increased by 1%. Keytruda, which is used to treat various cancers and continues to receive approval for expanded usage, continues to lead the way with a 21% increase to $3.7 billion. Plus, the company is broadening its offerings, including collaborations in Oncology, Phase 3 trials for a Pneumococcal Conjugate Vaccine, and a treatment for Chronic Cough. It also is developing COVID-19 vaccines and a treatment. After the company raised the dividend by 7% to $0.65, you can sit back and collect your 3.2% yield while waiting for new drug developments to unfold. We have a $93 Target Price, and our Sell Price is $71. 

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Pfizer (PFE: $37, down 1%) 

We initiated coverage in mid-August with the stock at $38. Since then, there have been a lot of positive developments. As expected, the company spun-off its Upjohn division to shareholders and it merged with Mylan, now called Viatris. The division sells drugs that are no longer protected by patent and was dragging down sales. Then, Pfizer was the first company to receive U.K. and FDA approval for its COVID-19 vaccine. Aside from the vast market opportunity, this shows that the company’s remaining business, drug development, is strong. After all, it put out a vaccine in less than a year!

When we look at 3Q20 results, Biopharma, the remaining business, saw a 3% revenue increase compared to a year ago to $10.2 billion. Our Target Price is $45, and our Sell Price is $32.

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Don't Count Out Zoom Video Communications (ZM: $337)

We added Zoom to our Special Opportunities Portfolio on December 14 at $390, after it had hit a high of $560. We thought we had waited long enough but we were a bit early. Since that time two vaccines were approved and a third is on the way. Johnson & Johnson will be bringing out another in the spring. The thinking of many investors is that the world will be "back to normal" in three months: everyone will go back to the office and Zoom will slide into oblivion or be eaten up by competitors like Microsoft Teams, Cisco, GoToMeeting and Google Meet.

We are here to tell you that these investors are way off. We’re here to tell you that fundamentals will win out in the end. We are here to tell you that revenues always win out in the end.

Here’s an update on some numbers that can only be considered astounding. We are going to repeat a few of the things we said in December and add some new information that we have uncovered as well.

As of the end of October, Zoom's most recent figures, the platform has 300 million daily meeting participants, compared to just 10 million in December 2019. This is an astounding accomplishment. (30X)

They have dramatically increased the number of larger customers, which typically sign up for a year. The number of customers with more than 10 employees grew from 25,000 in 2018 to 80,000 in 2019. There are now 435,000 customers with more than 10 employees, up almost 500% from a year ago (that’s 6X - 6 times), adding 65,000 in the recent quarter. Again, this is outstanding, unprecedented growth.

In recent years, revenue was doubling annually, which is great, but things have changed – to the upside. In 2018 the company’s top line went from $330 million to $625 million. In 2020, they are on track to produce $2.7 billion. Revenue growth isn’t slowing anytime soon, either. For the third quarter of 2020 revenue was up an astounding 370% year-over-year to $775 million. That’s almost 4X growth. Management’s guidance for the current quarter ending January 31st calls for revenue of $810 million, 330% higher than last year’s $190 million. Again this is 4X.

What’s even more impressive to us is that this was accompanied by improved profitability. Zoom went from breakeven in 2017 to a $25 million profit in 2019. In 2020 they may make as much as $500 million, having produced $200 million in profits in each of the last two quarters.

And the balance sheet is stellar. There is $1.9 billion of cash and only $70 million of debt.

The company has given away their software at no charge to 100,000 schools in the United States. Think about what this means for a second: Most kids in the U.S. are familiar with the software, use the name of the company as a verb (Zoom me tonight, please), and will grow older ordering software from the company as they move into the business world.

For all of these reasons we believe that Zoom will take out the $560 high in 2021 and move higher in the coming 5-10 years.

We believe Zoom is going higher, but it might have to make a stop at $300 or lower before it heads higher. An interesting way to get into the stock if you are worried that it might have more to go on the downside before it resumes its move higher is to use buy stops. These are orders that you place above the current price, that are executed only if the stock goes higher. For example, if you ultimately want to own 500 shares, you could place good-til-canceled (GTC) orders for 100 shares each at say 360 stop, 390 stop, 420 stop, etc. Thus if the stock is on the way to $600 or higher, this would make sure you didn't miss it. On the flip side, if the stock goes to $300 first, you could then lower your stops to $330, $370, etc. If you're not exactly sure about your understanding of buy stops, get some outside professional input, or call Todd Shaver.

Good investing in 2021!

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The High Yield Investor
By Larry Rothman
VP High Yield Investments
The Bull Market Report 

As we close out the old year and look toward a new one, this is a good time to look at REITs whose results have been hurt by COVID-19. With vaccines getting distributed, these four income investments are poised to have better results down the road, even if the timing is uncertain. That’s because each is in a great position to generate strong results and increased payouts for those of you with a long-term view.

On a final note, we know many people have had a challenging 2020 and are glad to turn the page to a better year. We wish you that better year, too.

Omega Healthcare Investors (OHI: $36, down 2%, yield=7.4%) 

The pandemic caused occupancy to drop and the firm had increased costs for safety-related items. The combination continues to hurt near-term revenue and profitability. In 3Q20 revenue fell to $120 million, half 3Q19’s $235 million, and it lost $95 million versus a $145 million profit. Even in these difficult times, Omega continued to collect over 99% of the contractual rent and mortgage payments due. This REIT owns 900 Healthcare properties: Skilled Nursing Facilities (755 properties), Assisted Living Facilities (114), Rehabs and Acute Care Facilities (28), and Medical Office Buildings (2), plus it plans to sell 13 properties. It holds the mortgage on 64 other properties (57 Skilled Nursing Facilities).

The short-term headwinds shouldn’t distract you from the company’s long-term story. The demographics, with an aging population, strongly favor their properties and businesses. In the meantime, the REIT has paid the same dividend since November 2019. In this environment, that’s more than acceptable to us. When conditions improve, so will the payout. While you wait, Omega Healthcare Investors (Target Price: $45) provides a 7.4% yield, 645 basis points more than the 10-year Treasury yield. Our Sell Price is $26, now raised to $31.

Ventas (VTR: $49, down 1%, yield=3.7%) 

Ventas’ 1,200 properties are Senior Housing Facilities, Medical Office Buildings, Research Centers, Inpatient Rehabilitation Facilities, and Long-Term Acute Care Facilities. It organizes its business in three segments: Senior Housing Operating Portfolio (28% of the portfolio), Triple-Net (38% - they lease to tenants such as Brookdale Senior Living, Ardent, and Kindred), and Office (31%). While revenue is tilted heavily towards Senior Housing, the 3Q20 top line declined to $920 million from last year’s $985 million and profit was $15 million versus $85 million. 99% of rent due was paid. Very satisfying.

At the start of the quarter, Ventas agreed to cut Brookdale’s rent by $100 million annually. This was a factor in their cutting the dividend to $0.45 from $0.793 starting with the July payout. The yield is 3.7%, 280 basis points more than the 10-year Treasury yield. Since it didn’t do this for free, there is a lot of upside for Ventas’ shareholders. The company received warrants that it can exercise in the next five years. If it does, it will own 8% of the company. With Brookdale’s stock at over $4 and a strike price of $3, these have been a good bet so far. Our Target is $57 and we have a $42 Sell Price, up from $35.

Vornado Realty Trust (VNO: $37, up 3%, yield=5.7%) 

Vornado’s residential and commercial properties are located mostly in New York City. It also owns real estate in Chicago (theMART) and San Francisco (a majority interest in a three-building complex). The pandemic hurt rental income due to Retail tenants forced to close their doors, and the company was forced to take steps like canceling trade events at theMART and shutting down the Hotel Pennsylvania, to name just a few things. Hence, it is unsurprising that 3Q20 revenue was under pressure, falling by 22% year-over-year to $365 million. Profit was $70 million, down from $365 million. Cash flow is the key, and Vornado is doing a nice job, collecting 93% of the rent due (higher than the 88% figure for 2Q20), with another 2% deferred. This came about despite only collecting 82% of the amount owed by Retailers, having had to write off some due to bankruptcies and other reasons.

Near-term headwinds have caused the firm (Target Price: $43, up from $38) to cut August’s dividend from $0.66 to $0.53. This is still a 5.7% yield for a company with great properties in great locations. The pandemic may have forced some temporary dislocation away from cities. Management believes a more normal environment is coming in months as vaccines get distributed and people start returning to the office. We agree that people aren’t permanently abandoning New York and other cities en masse, even if the timing takes longer than Vornado claims. Our Sell Price is $33.

Welltower (WELL: $65, up 2%, yield=3.8%) 

Welltower is a REIT that owns approximately 1,700 Senior Housing Properties (including Seniors Apartments, Independent Living, Continuing Care Retirement Communities, Assisted Living, and Alzheimer’s/Dementia Care). Last year was challenging, to say the least, due to events outside of the company’s control. Occupancy, which was 86% in February, has fallen throughout the year, to 78% in September. It has done a nice job on rent collections, garnering 98% from its Triple-net lease tenants and 97% for the Outpatient Medical properties.

Earlier this year, the firm (Target Price: $71, up from $65) lowered its dividend from $0.87 to $0.61 which works out to a 3.8% yield. This is another company that will benefit over the long term as the U.S., Canada, and U.K. sees their populations trend older. Our Sell Price is $49.

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