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The Weekly Summary

 

The first few days of 2020 were only the opening act for a classic BMR rally. Our stocks soared 3% last week, bringing our total YTD performance to 4%. That's enormous when you consider that we're only 7 days into the market year. And with earnings season on the horizon, we expect even better performance ahead.

 

What drives our optimism is simple. First, last week was dominated by our most growth-sensitive Aggressive recommendations, which soared an aggregate 7% since our last weekend newsletter. That's a huge endorsement for investor optimism. The mood that takes these little Technology stocks forward with such velocity isn't cautious. It isn't even defensive. What we're seeing here is old-fashioned confidence that the future will be better than the past . . . and that these companies that are still at the earliest stage of their development have a long way to go.

 

Indeed, the Aggressive portfolio still has 17% to rally before it matches its summer peak. These stocks don't need to break any records to get there. All we need to have happen here is for Wall Street to revert to known psychology. In that scenario, this will be where the market as a whole takes its cues.

 

We're also pleased with the way Technology is behaving all the way up the food chain. Our High Tech portfolio gained 5% last week, running rings around the NASDAQ. Even giants like Alphabet (GOOG) and Apple (AAPL) took part in the fun. As Technology-rich as our universe is, we're delighted. But this is not just Tech. Look at Exact Sciences (EXAS) in the Healthcare portfolio, up 10% last week but still down 15% from its summer peak. Growth is back. It's a good thing.

 

And earnings season starts Tuesday morning with the big Banks, so signs of corporate growth are on the horizon. We're always excited to see the quarterly season start. This one begins a little slowly for us . . . we don't see any BMR companies reporting next week, so the Earnings Previews will start next weekend. When the cycle gets moving, however, we're looking for more of the same: sluggish numbers for the market as a whole, continued expansion for our recommendations. That's why we're in these companies in the first place.

 

There’s always a bull market here at The Bull Market Report! Let's look at our Aggressive stocks to evaluate why they're soaring now. The Big Picture talks more about what drove the market as a whole last week and then The High Yield Investor focuses on one of our favorite REITs. Gary Jefferson has the week off.

 

Key Market Indicators

 

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BMR Companies and Commentary

 

The Big Picture: Stock Market Ends Higher in Volatile Week

 

The week started with geopolitical events taking center stage amid simmering Middle East tensions. Investors feared a wider conflict that would cause energy prices to spike and slow economic growth. After hostilities settled down on that front, equity markets rebounded strongly. Admittedly, predicting political events is fraught with difficulty, but an all-out war or even extended military action appears remote right now. That is good news for the worldwide economy, including ours.

 

After that, people focused on economic data. On Friday, investors took profits following a somewhat disappointing Jobs report. The economy added 145,000 jobs in December compared to the consensus estimate of 150,000, and the unemployment rate remained at 3.5%. December’s reading comes after downward revisions to October’s and November’s job figures. Average hourly wages ticked up 3 cents in December.

 

We don’t see anything in the latest report that should rattle investors. After all, the unemployment rate is at historically low levels and the economy continues to add jobs. When the unemployment rate meaningfully increases, that is the time for concern.

 

In the meantime, consumers remain optimistic, spending money, and companies continue to invest in growth initiatives. Tariffs have been an impediment to companies’ profitability, but there are some hopeful signs that the U.S. and China could reach a wider trade agreement, supposedly on Wednesday.

 

In summary, this was a noisy week, particularly in the first half. Preaching patience was the right course of action, showing that BMR subscribers should not panic when confronting negative headlines. Nonetheless, we are always keeping an eye on economic developments and are prepared to shift gears should events dictate.

 

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Alteryx (AYX: $120, up 12% last week)

 

Alteryx is off to a great start in 2020 with a 20% gain. Admittedly, the stock has been on a wild ride, hitting an all-time high of $148 in September before falling back 40% in a month and a half towards the end of 2019. While this was a buying opportunity, investors should not get dismayed since we still like Alteryx. The company continues to take advantage of the data explosion, which is driving strong revenue growth.

 

There is an ever-increasing amount of data that is spread out over an organization. Alteryx helps improve business decision by allowing people to quickly analyze a variety of data from various sources. The company’s products are not for a few select number crunchers with advanced mathematical degrees, but for everyone in the organization.

 

Revenue grew 65% in the third quarter compared to a year ago, from $60 million to $105 million. True, Alteryx reported $15 million in profits compared to $10 million, still small, but certainly on the right side of the ledger.

 

When the company reports 4Q results next month, management expects revenue of $130 million, 45% growth.

 

BMR Take: We think Alteryx is the right company at the right time, and we do not see anything impeding their growth prospects right now. The stock is bumping up against our $120 Price Target, but we anticipate raising following the company’s earnings release. Our Sell Price is $93, which we hereby raise to $105.

 

 

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Okta (OKTA: $129, up 9%)

 

This is another stock that reached an all-time high last year. Okta’s mid-summer price climbed to $140 before falling back 30% over the next two months. Since then, it has rebounded to $130, but we think there is plenty of upside potential at this level.

 

Okta provides identity management services to businesses via a cloud platform. There have been numerous data breaches over the last several years, which means its products, which allows users to securely sign into applications, are very valuable for companies, allowing them to build trust with their customers and employees.

 

The company accumulated 6,000 customers, ranging from small companies to large enterprises. Growth prospects remain bright. In the third quarter, revenue increased from $105 million to $150 million, 45% year-over-year growth rate. Importantly, the more predictable and stickier subscription revenue comprised 95% of Okta’s top line.

 

Okta is spending more to support its strong growth, including hiring more people. Its loss widened to $65 million from $30 million in the last quarter. Still, the company has plenty of liquidity for now, with $1.4 billion in cash along with just $275 million in debt.

 

BMR Take: Okta’s products are becoming increasingly important, and that is not going to change. Online theft continues to evolve, making its products an ongoing necessity for all organizations. We have a $135 Price Target and our Sell Price is $113.

 

 

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CyberArk Software (CYBR: $136, up 13%)

 

Like Alteryx and Okta, CyberArk Software pulled back after hitting record highs in the summer. It, too, has come back strongly, rising 40% since the end of October. We remain optimistic about CyberArk at this price.

 

With its “privileged access management” offerings, CyberArk is involved in protecting an organization’s data and infrastructure from hackers and internal threats. Its solutions are widely accepted, and clients include more than 50% of the Fortune 500.

 

The results speak for themselves For the first 9 months of 2019, revenue increased by 30%, from $235 million to $305 million. The company is nicely profitable, too, with income just about doubling to $40 million. Its balance sheet is in excellent shape, too, with $500 million in cash and no debt,

 

BMR Take: What’s not to like here? CyberArk has strong top and bottom line growth and a great balance sheet. We hereby raise our Price Target from $137 to $151 and raise our $101 Sell Price to $121.

 

 

 

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Dropbox (DBX: $17.86, down 1%)

 

Dropbox experienced a mid-summer swoon that has left the stock 30% below its high for the year of $26. The company went public in 2018 in a well-hyped IPO, pricing the shares at $21. Now trading below that price, the valuation has become more compelling, and we view this as a good opportunity.

 

After all, this is still a growing company. It reported 20% year-over-year revenue growth in the third quarter, from $360 million to $430 million. Management raised expenses to support this growth, and its loss tripled to $15 million. However, its balance sheet, with $1 billion of cash and no debt, is strong, providing a cushion. Analyzing Dropbox’s cash flow, it generated $230 million in free cash for the first nine months of 2019.

 

Dropbox’s business is digital data storage. The company has built a major global presence since its 2007 founding, with 600 million users in 180 countries. Its strategy is simply to obtain free sign-ups, convert these to paying subscribers, and then upgrade them. This model has proven successful by the growing number of paid subscribers, which increased to 14 million from 12 million in the year-ago period, helping drive top line growth.

 

BMR Take: This has been a bumpy ride, but the fundamental story remains the same. That’s why we still hold the same level of conviction. We have a Target Price of $30 and our Sell Price is $18.

 

 

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Paycom (PAYC: $286, up 5%)

 

After stumbling 25% in September and October, Paycom has come back strong to reach new heights. In fact, the stock finished the week up 5%, reaching a new all-time high. We believe this optimism is warranted as the company presents an attractive growth story.

 

Looking at the numbers, third quarter revenue rose from $135 million to $175 million, a 30% increase. Income grew from $30 million to $40 million. Since 2014, annual revenue has risen from $150 million to $570 million in 2018, while profitably growth was even more impressive, increasing from just $5 million to $140 million.

 

Paycom provides companies with technologies to use in its payroll and human resource functions. With over a 90% retention rate, clearly Paycom is keeping its customers happy. Yet, the company only has a small share of the market, giving management optimism that strong growth can continue, particularly as it targets larger clients.

 

The company raised its 2019 guidance, boosting revenue expectations by $5 million, to $735 million, which is 30% above 2018’s figure.

 

BMR Take: Paycom keeps rolling along, retaining existing customers and adding new ones. This formula for success shows no sign of stopping. We have a $220 Sell Price and it has broken through our $280 Target Price. Since we still like Paycom, we have raised it to $310.

 

 

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Shutterstock (SSTK: $43, flat)

 

Shutterstock has been flat for the last couple of months after spiking 25% from October to November. This breather provides investors a chance to evaluate the company, as it still presents an opportunity.

 

Revenue growth was 5% in the third quarter, from $150 million to $160 million but profitability slipped to $5 million, down 35%. This was not a great quarter, obviously continuing mid-single-digit revenue growth and lower profits this year.

 

First, the good news. Shutterstock’s larger e-Commerce business (60% of revenue), is generating high-single-digit growth. Turning to the company’s challenges, Enterprise has had flat sales for the last two quarters, which management plans to improve.

  

BMR Take: Despite sluggish growth in one of its major businesses. Shutterstock is still producing revenue gains. If its plan to improve its Enterprise unit is successful, the company will be firing on all cylinders. With all of that said, the company doesn’t meet our high standards of strong growth. Great company. Just not for us. We hereby remove the stock. The stock is a big $1 higher in the two years we have followed it.

 

 

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The High Yield Investor

 

With U.S. Treasury yields hovering at anemic, sub-2% yields across most of the curve, fixed income investors are hard-pressed to find satisfactory returns. During the past couple of weeks, Treasury yields dipped below already low levels as geopolitical events caused investors to flee into the safety of risk-free Treasuries. The 10-year note’s yield went from 1.88% at that start of January to 1.83%. Corporate bonds are based on Treasury yields, making it similarly challenging to find attractive yields in that asset class.

 

That is where we come in. Here at The Bull Market Report, we do our homework to seek out high dividend paying stocks and funds, carefully analyzing the situation. We are looking for sustainable and growing dividend payers.

 

True, these investments may be out of favor on Wall Street, who are enamored with growth, but that presents an opportunity for income seeking investors. We may even get a nice boost when the economy turns (not that we are predicting this anytime soon) and dividends again come into focus.

 

One such investment that we like is Office Properties Income Trust (OPI: $33, up 4%, yield= 6.7%). This is a REIT, which means it must pay out at least 90%of its taxable income as dividends. The company currently pays a $2.20 annual dividend.

 

The company has been diversifying from its traditional portfolio of government office buildings. This includes acquiring First Potomac Realty Trust in 2017, which added private sector office buildings in the D.C. area. Office Properties followed this up with the 2018 purchase of Select Income REIT, which diversified its properties to include single-tenant, triple-net lease (tenant pays the property’s expenses, such as taxes, insurance, and maintenance) properties. Formerly known as Government Properties Income Trust, the combination created the newly named entity. It also simplified the ownership structure since both companies were managed by the same company, RMR Group.

 

Management is not only in acquisitive mode, selling assets to help Office Properties’ balance sheet. In 2019, it raised $730 million that the company used to repay debt.

 

In the third quarter, occupancy rose to 93% compared to 92% at the end of the second quarter. Office Properties also renewed leases, averaging about 13 years, at a 5% higher rate than previous ones.

 

The company generates revenue from lease income, which rose by 60% in the first nine months of 2019, from $320 million to $520 million. Cash flow is the lifeblood of a REIT. There are different ways to measure it, but funds from operations (FFO) is a popular one. For the same period, its FFO rose from $145 million to $220 million, a 50% increase. Meanwhile, Office Properties’ operating cash flow was $150 million versus $120 million in the year-ago period.

 

Offering an attractive yield and some potential appreciation potential (Target Price: $36), we view Office Properties as an attractive risk-reward opportunity. 

 

 

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