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The Weekly Summary

 

Every new year opens wide open to the future. This one is no exception. We don't know a lot about what the next 12 months will bring, and for the time being, there are no firm winners or losers on Wall Street. Anything can happen. The next twist in the market's mood will shuffle the rankings and help establish the dominant themes.

 

For now, however, investors seem content to simply buy first and ask questions later. The S&P 500 is up about 0.2% YTD, with 85% of the stocks in the index joining the party. Even though all of our REITs started the year on the defensive, BMR recommendations are still up 0.8%. We don't have a huge lead in terms of performance, but with only two days down, it's a healthy start to the year. And once Real Estate comes back, we're looking forward to our leadership gap widening just like it did last year.

 

Remember, BMR stocks beat the broad market by an aggregate 12% in 2019. That's the equivalent of a typical year of S&P 500 performance. We literally ran a victory lap around the index funds . . . and the index funds were racing ahead to deliver one of the best results in decades. Doing it again will take subscribers even farther ahead of the curve.

 

That curve looks strong. Statistically, the market as a whole usually shifts down into "average" gear after a blockbuster year, so there isn't any reason to worry about an inevitable downswing simply because 2019 was so good. That's just not how the market works. The mood doesn't obey the calendar. Bulls run as long as the economy and corporate fundamentals provide reason to stay optimistic about the future. Only when that optimism falters do we start to suspect a downturn on the horizon.

 

If anything, we're more interested in remaining open to the chance that 2019 will turn into an equally rewarding 2020 much like 1998's robust returns held up into 1999. Statistics say this will probably be a good year. History says this could be a fantastic year. And if not, all that means is that our defensive recommendations will rotate back into the spotlight. REITs have held us back in the last few days. When they run, we might actually shift up while the market as a whole shifts down.

 

After all, the market as a whole is still making up its mind. The S&P 500 started the year in a rallying mood but Friday took the gains back as investors mulled the prospect of aggravated tensions in the Middle East. Likewise, the end of the year was on the soft side for the broad market, so the big benchmarks took a step back for the week as a whole. Success and frustration depend on your time horizon of choice. It's only over the long haul that real contrarian positions are tested and the winners reap the ultimate rewards of their conviction.

 

There’s always a bull market here at The Bull Market Report! While there isn't a lot of news to cover this week, earnings season starts in a few weeks, so we know there will be plenty to talk about soon. In the meantime, we've filled out this issue with a fresh look at our Healthcare stocks as well as Akamai and Workday. Gary Jefferson sums up the old year and The Big Picture talks about the geopolitical outlook for the new one. Then The High Yield Investor has a few things to say about yields.

 

Key Market Indicators

 

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BMR Companies and Commentary

 

The Big Picture: Bumps In The Global Road

 

While we are apprehensive about the impact of hostilities in the Middle East and the world at large, we aren't convinced that the sabers being rattled will present Wall Street with more than a temporary setback. We are a long way from the world in which foreign oil dominated the U.S. economy. The odds of a full-fledged domestic oil shock are minimal.

 

Look at the domestic Shale Oil industry. These companies are not producing at their peak capacity because they aren't eager to flood the market with petroleum and trigger a 2014-style Energy crash. They've learned discipline. However, they have the capacity to open their spigots a lot wider and get the rigs drilling again if they need to respond to a crisis. It will take a little time, but after a few weeks we suspect Big Shale will be making more money than ever. From there, it will be business as usual for U.S. consumers.

 

Foreign economies may have a harder time, but even overseas, supply patterns have shifted away from the Persian Gulf. Remember when Saudi production went offline after drone attacks on major processing facilities back in September? Global oil prices barely shrugged above $80 before dropping back to their current range. If anything, the challenge right now is not keeping the lights on in factories around the world. It's figuring out where to ship the things those factories make. Power isn't the concern.

 

In the meantime, we've seen money migrate toward domestically oriented companies. Wall Street believes that the U.S. economy is relatively well-shielded against supply shocks. The Fed might even applaud a little oil-linked inflation, even if it means sacrificing a little dollar purchasing power over the long run. And as we've mentioned, U.S. shale will cover the gaps in the Energy market. Iran, on the other hand, is already isolated, exporting barely 100,000 barrels a day over the summer. We don't buy their oil. China does, and even that is clandestine.

 

We know many BMR subscribers remember the 1970s shocks vividly. But keep in mind: While the early 1970s were miserable for stock investors, 1975 was one of the best on record. And whatever happens, we'll be watching developments and will be in touch if we need to shift course.

 

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Akamai Technologies (AKAM: $87, up 1% last week)

 

Akamai Technologies’ added 1% last week, capping off a 41% gain over the past year. Its strong product offerings position the company well for continued strong revenue and earnings growth, powering additional gains in the stock.

 

Looking ahead to when the company reports fourth-quarter results in mid-February, it expects revenue of $745 million, and earnings of $1.13 a share, or a 7% increase versus the year-ago period. This continues the robust results Akamai achieved in the first nine months of 2019 when revenue rose 6%, from $2 billion to $2.1 billion and EPS grew 27%, from $2.56 to $3.26.

 

Cloud security solutions, a major part of the company, is the most important driving factor propelling Akamai’s top-line performance. This category’s revenue increased by 29%, from $475 million to $610 million last year. With data and Internet security a pressing business issue, this area should continue to do well. Management is also focusing more of its efforts on expanding geographically, and this is reflected in the firm growing its international revenue by 16%.

 

Akamai’s results have produced strong cash flow, which the company has used to repurchase shares. For the first nine months of 2019, it spent $300 million on buybacks.

 

BMR Take: With compelling offerings and a large ongoing need for its products, we believe that Akamai’s strong results will continue going forward. With our $100 Price Target, Akamai still offers considerable upside potential from where the stock price is currently trading. We have a $77 Sell Price.

 

 

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AstraZeneca (AZN: $50, down 1%)

 

AstraZeneca’s shareholders are no doubt very happy with their 33% price gain over the past year as investors continue to benefit from the company’s solid pipeline that has produced strong results. Even better, shareholders’ total return was 36% when factoring in dividends.

 

Oncology is the firm’s largest revenue generator, with a 50% year-over-year top line increase for the first nine months of 2019. This was largely driven by Tagrisso, Imfinzi, and Lynparza, which grew between 82% and 182%. These three blockbuster drugs had $4.2 billion in YTD sales.

 

Its other product areas are also doing well. YTD, Cardiovascular, Renal, and Metabolism (CVRM) had 11% sales growth, led by Brilinta and Farxiga, while Respiratory’s 9% top-line increase was driven by Pulmicort. Fasenra, which is used to treat a type of severe asthma, appears headed for blockbuster status after year-over-year sales growth of 190%, reaching $500 million.

 

Emerging markets is the company’s largest region, and sales grew here by 35% due to strong performances in the Oncology and CVRM areas. Better yet, the future looks bright with many treatments recently approved. These include Tagrisso’s approval in China and Farxiga receiving the thumbs up from U.S. and EU regulators. 

 

BMR Take: AstraZeneca’s enviable pipeline creates a revenue and earnings machine. In an industry made challenging by competition and the constant need to invest in R&D to produce treatments, the company has earned our trust and respect with its performance. Having reached our $50 Price Target, the fundamentals remain compelling, so we hereby raise our Target to $58. Our Sell Price is $44.

 

 

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Eli Lilly (LLY: $132, flat)

 

Eli Lilly has rebounded a strong 24% over the last three months. Wall Street has increased optimism in the company after management gave upbeat guidance for 2020 last month, which boosted investors’ confidence in the company’s top-line prospects.

 

It expects 2020’s revenue growth to grow to 7%, to $24 billion compared to management’s estimated 2019 figure of $22 billion. For the first nine months of 2019, Lilly’s top line increased by a lukewarm 2% versus the prior year.

 

Management’s guidance also calls for EPS growth of 16%, from $5.80 to $6.75. This is quite a pick-up from the first nine months’ 4% pace.

 

We think their optimism is warranted. While the company was contending with the loss of key patents over the last few years, notably on Cialis (54% year-to-date sales decline $690 million), many exciting products are growing rapidly. These include Trulicity, Taltz, Basaglar, and Jardiance. Trulicity, a type 2 diabetes treatment, had YTD sales of $3 billion, 28% above the year-ago figure. But, the other three drugs had 42% to 50% growth. Two of its newer treatments, Verzenio (breast cancer) and Olumiant (rheumatoid arthritis), both continued to gain acceptance and had sales that more than doubled this year.

 

BMR Take: Eli Lilly’s revenue looks ready to roll again after dealing with expiring patents for the past couple of years. The company rebuilt its pipeline and several are producing strong sales gains. There are also a few more new drugs that could hit the market this year. With a $145 Price Target, the stock still has a lot of upside potential, even after the strong run over the last few months, along with a steadily increasing dividend. Our Sell Price is $96.

 

 

 

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Exact Sciences (EXAS: $95, up 1%)

 

We remained optimistic about Exact Sciences following a 35% selloff in the fall. Sure enough, the courage of our convictions was rewarded with a 16% gain over the past two months. There’s a lot going right with the company right now. Cologuard is the company’s at-home test used to screen for colorectal cancer. This is the second leading cause of cancer deaths in this country, with 51,000 dying annually. In the United States, there are 146,000 new cases each year. Fortunately, it is also one of the most preventable cancers, providing it is diagnosed early. This is where the company’s easy-to-use, non-invasive, screening test comes in.

 

Revenue growth remains brisk, increasing 86% for the first nine months of 2019, from $310 million to $580 million. Its operating loss widened from $110 million to $138 million since the company is increasing expenses to continue gaining market acceptance and ramping up revenue.

 

The company’s revenue growth looks to continue strong. The FDA recently approved Cologuard for people aged 45 to 50 with an average risk of colorectal cancer, expanding the potential market by $15-$18 billion. Insurance companies are also starting to approve testing at this lower age.

 

In November, Exact Sciences completed its $3 billion cash-and-stock acquisition of Genomic Health. This added Oncotype DX, which tests for breast, prostate, and colon cancers and helps inform patients and doctors about the best treatment options.

 

BMR Take: Cologuard’s simple, cost effective screening makes it an attractive option for patients. The addition of Genomic expands the company’s diagnostics into other cancer areas and even into recommending courses of action. For those concerned that they have missed out following the stock’s recent run-up, there is still significant price appreciation potential. Our Target Price is $145, 50% above the current price, while our Sell Price is a very tight $93. You may wish to give it a little room here.

 

 

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Johnson & Johnson (JNJ: $144, down 1%)

 

Despite litigation risk, particularly regarding opioid lawsuits, Johnson & Johnson still ended up with a 13% increase over the past year. True, it was a wild ride, but the company had an 8% gain over the last couple of months, suggesting more optimism in the year ahead.

 

With $18 billion in cash and $80 billion in annual revenue, the potential litigation payout appears manageable for this AAA credit firm. A lawsuit brought by Oklahoma resulted in a $570 million verdict against Johnson & Johnson (it is appealing) and there is a preliminary agreement with four states in which the company would pay $4 billion.

 

Turning to the company’s operations, Johnson & Johnson is a model of consistency, and we expect it to continue doing well, no matter the economy’s state. Its Pharmaceutical business generates the lion’s share of sales, and it led the way with 5% growth in the third quarter. There are many treatments that should continue boosting their results. These include Stelara (inflammatory diseases, Darzalex (multiple myeloma), and Imbruvica (treats a type of blood and lymph node cancer). The company also has several drugs that were recently approved for various treatments, such as Xarelto and Invokana.

 

BMR Take: Although well over a century old, Johnson & Johnson is not a stodgy company. With a strong balance sheet, bright prospects for its Pharmaceutical business, and a dividend that has increased for 57 straight years, this company is in an enviable position. In short, we think investors should include it as part of their core holdings. We have a Target Price of $150 and our conviction is so strong that we would not sell the stock. Period.

 

 

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Workday (WDAY: $168, up 1%)

  

Last month, Workday sold off 6% following the third-quarter earnings report. However, revenue growth remains on a solid trajectory. For the quarter, revenue rose 26% to $940 million, and the company improved the bottom line substantially, but it is still operating at a substantial loss.

 

Profits are much more important now on the Street in light of the Uber and WeWork fiascos so investors are taking much more scrutiny of financials now. Some were disappointed with management’s guidance. However, we see nothing wrong with a company that bumped this coming year’s subscription revenue outlook to $3.0 billion, up from $2.4 billion, and management expects next year’s figure to also increase by 20%+.

 

Subscription revenue is a key metric for Workday since these are stickier and recurring, more so than its Professional Services. The fact that this is growing indicates Workday’s business is healthy.

 

While the company continues to post 25% revenue gains, it is investing to bring more products to the market. A leading provider of enterprise cloud solutions to companies’ human resources and finance functions, it is not standing still. The company is launching Workday Cloud Platform, People Analytics and an employee experience solution next year. While these won’t move the needle until 2022, we like the continued innovation.

 

BMR Take: Workday remains a high growth company, and at this level, the stock appears attractive. Our $224 Price Target represents 30% upside. The stock is below our Sell Price now, so we are lowering it to $150.

 

 

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A Word From Gary Jefferson

Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.

 

We'd like to offer these three predictions about what's ahead in 2020.

 

Prediction one: Despite a still strong U.S. economy, there will be no Fed rate hikes in the next year.

 

Prediction two: The market winning streak will continue and the broader indexes will be up in 2020.

 

Prediction three: Stocks may be up, but there will be several periods of volatility, particularly in January, March and July.

 

In late January, we’ll get to see if there’s going to be a Brexit now that  BorisJohnson got a sweeping move in Parliament. And will he, in fact, push through a no-deal Brexit? That could make the markets very volatile and jumpy. The next thing will be the U.S. election. Number one, in early March, we will get Super Tuesday, and one-third of the U.S. populace will vote. And we’ll get to find out where Bloomberg’s strategy is. Who looks to be the leader? Has anybody locked it up? If not, then it could be a brokered convention, and that date would be in the middle of July, when the convention will be.

 

While we are comfortable with the economy, we see one potential problem with politics, and that is if Elizabeth Warren becomes the Democratic nominee. If all the billionaires decide to liquidate 40% of their portfolios to pay a wealth tax, that could cause a tsunami selloff. We think the odds of this are fairly remote, but it will be something to keep an eye on.

 

 

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The High Yield Investor

 

Any investor looking for current income from dividends needs to know what qualifies as a "high" yield. For most, anything that pays higher cash returns than Treasury bonds at a relatively low level of risk qualifies. We want to be confident that the companies we invest in are going to make their distributions for at least the immediate future. As such, we demand clarity into current cash flow.

 

But as we go farther than a quarter or two out on the horizon, the calculus gets more complicated because we can harvest a few dividends and then exit a situation that is starting to look precarious. It's a question of probability and relative distress. Companies that aren't suffering unusually high levels of distress tend to pay their quarterly obligations just as they have in the past. Those dividends are secure.

 

And when the market misjudges the pressure on a given company, we get an opportunity to capture an unusually high yield. That's what we see happening with Real Estate stocks in particular. Unlike the market as a whole, which keeps breaking records, the REITs are down an aggregate 5% from their peak. Our recommendations have borne the brunt of that downswing and have corrected 12%. Is the sector in trouble?

 

We couldn't disagree more. For one thing, leadership in the market as a whole is scattered and unusually narrow. Only a relative handful of stocks (many of them dominating our other portfolios) have taken the S&P 500 on its recent record-breaking ride. Most are lagging the curve . . . and even the BMR universe has to rally 11% just to return to the record zone. In other words, our REITs aren't any more depressed than our Aggressive, High Technology or Special Opportunities stocks. There's no "Real Estate crash" narrative playing out here.

 

Instead, these stocks simply seem to be out of favor as investors rotate into more dynamic areas of the market that deflated late last year. Yield is no longer Wall Street's holy grail. We don't mind. None of these companies has signaled any intent to cut or suspend their dividends, which means the quarterly payments will continue at their recent levels. There's no sign of long-term distress. Even in the short term, our weakest recommendation, Ventas (VTR: $57, down 1%; yield = 5.5%), looks like cash will keep flowing fast enough to support the current distribution into the future.

 

And in that scenario, any sustained weakness turns what would ordinarily be merely a "high" yield stock into a true High Yield Investment. On average, our REITs now pay an effective yield 12% higher than they offered six months ago. The dividends haven't increased. Only the stocks have gone down to improve the math. This is the kind of dip we're happy to buy.

 

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