Select Page

The Weekly Summary

Last week wasn’t a great one for investors, with unexpectedly weak economic data feeding a general sense of exhaustion and uncertainty as the 4Q18 earnings season winds down. The S&P 500 dropped 2.2%. Our stocks held up a little better, down 1.7% on average with only the Aggressive portfolio falling faster than the market as a whole while our High Yield recommendations edged higher as a defensive play.

Defense remains a good posture thanks to the drumbeat of tension in Washington spilling over into trade policy. Reciprocal tariffs are hurting U.S. exporters, with companies that do most of their business overseas staring at an 11% earnings decline in the current quarter compared to a thin pulse of continued growth for their more domestically focused counterparts.

The federal government shutdown also stung the domestic economy, showing up in the prior week’s slight miss on Gross Domestic Product expansion and now the February job creation numbers, which slowed to a crawl. We haven’t seen conditions this close to a stall since late 2016. Needless to say, we survived those circumstances and our subscribers have made plenty of money in the intervening boom.

In our view, this is more seasonal shudder than serious slump. The first quarter is notoriously icy for the U.S. economy as millions of people opt to stay out of the weather and defer big purchasing decisions until warmer conditions prevail. With earnings out of the way, we’ll focus our resources on pointing you to the stocks that are defying the doldrums. Friday’s report on Anaplan (PLAN: $37, up 3% so far) is only the first taste of what you can expect.

There’s always a bull market here at The Bull Market Report! This week's Big Picture dissects what the transition between earnings seasons means for us and delivers final judgement on what the 4Q18 cycle did for our stocks. Yes, we beat the S&P 500 by a wide margin. What else is new?

That said, we’ve got one last report before the cycle ends, so it’s time to get you up to speed on what Cloudera can tell us on Wednesday. From there, Gary Jefferson returns with new arguments that in our view crush any claim that a recession is on the horizon. The High Yield Investor goes back to basics with a look at Ventas and Welltower, while updates on Salesforce.com, Facebook, Square, Amazon and Paycom Software round out the issue.

Key Market Measures (Friday’s Close)

-----------------------------------------------------------------------------

BMR Companies and Commentary

The Big Picture: From Season To Season

While we still have one company left to review before the 4Q18 cycle formally ends, on the whole it’s time to put the quarter to bed and start getting in position for the first 1Q19 numbers to hit five weeks from now.

Expectations are mixed. Average out all the predictions and Wall Street is braced for a 3% earnings decline even though we should see revenue across the S&P 500 climb 5% from last winter. That pressure on the bottom line and continued strength on the top says it all. Nobody seriously envisions a severe chill in the underlying economy at this stage. Corporate America is struggling but Main Street remains as robust and resilient as ever.

And even that weakness on the bottom line is really more a matter of a few heavily weighted stocks pivoting than widespread pain. Many of the biggest Technology companies will need at least a season or two to get their fundamentals back on track. We still love Apple (AAPL: $173, down 1%) in the long term, for example, but revenues and earnings comparisons will be tough in 2019 for the company, so it is going to cast a shadow on the market this year. Facebook (FB: $170, up 4%), likewise, is spending a lot to reorient its business, sacrificing margins for long-term sustainability.

Zeroing out these two stocks off the 2019 growth prospects translates into a drag of 15% of the entire Nasdaq. But it’s more than Technology. The Consumer sector is really all about Amazon (AMZN: $1,621, down 3%) right now, with other Retail stocks actually tracking negative growth when you factor out the giant. We’re also not optimistic about Energy, where low oil prices have a full 5% of the market watching the fundamentals shift into reverse.

A year from now it’s likely that growth will be back. For now, sector-based investment strategies are unlikely to have the numbers on their side. We don’t mind. We rarely recommend whole sectors except as a strategic hedge against specific market risks like a Fed tightening cycle or an oil price shock overseas.

Instead, BMR subscribers concentrate on specific stocks that are dynamic enough to keep the fundamentals moving in the right direction. Most of our recommendations are racking up revenue 3-4X as fast as the market as a whole, running rings around every sector. In many cases, they’re also translating those big revenue gains into profit growth as well. It’s going to take positive earnings growth to bring these stocks to higher price levels.

We’ll break down our portfolios to weigh the relative growth prospects in the next few weeks. For now, rest assured that cutting out a lot of the dead weight on Wall Street gives the BMR universe a much stronger expansion profile than the drag that index fund investors can only grit their teeth and tolerate.

If any stocks at all have what it takes to make money in the next five weeks, odds are good that you’ll recognize a lot of the leaders from our Research Reports -- and we’ll add to our coverage where the math is most attractive. Healthcare, in particular, is a good place to expand. While 4% earnings growth there isn’t huge, it’s a lot better than what we’d find elsewhere.

And of course expectations could be set too low. Surprises to the upside are always welcome. But since it will take five weeks before the next cycle begins, we could be in for a month of volatility and dithering. Investors are already retreating to a more cautious position, studying economic data and developments in Washington from the safety of the sidelines. That’s not us. We see no reason to sell and every reason to buy good stocks on a selective basis.

After all, our stocks were big winners last cycle. The S&P 500 is up close to 6% since the big Banks started the season exactly two months ago. Our stocks have gained 9% in the aggregate, with only a handful of disappointments drowned out in the sea of applause. Only Tesla (TSLA: $284, down 4%), Nutanix (NTNX: $34, up 2%) and Office Properties Trust (OPI: $27, down 7%) as well as the departed Box are down double digits in that period. Double-digit rallies outnumber them by a factor of 3.5 to 1.

We could list all the winners, but it would take up too much space, essentially repeating 25% of our overall universe. Instead, we’ll just drop a few names: Roku (ROKU: $71, up 3%), Universal Display (OLED: $147, down 4%), CyberArk (CYBR: $107, down 3%) and Paycom Software (PAYC: $178, down 2%) have all given us 35% to 80% over the last two months. That’s enough glory to cover a few foul balls. And it’s why we’re looking forward to the start of a new season.

-----------------------------------------------------------------------------

Salesforce.com (CRM: $155, down 6% -- all returns are for the week)

As we discussed in the post-earnings News Flash, Salesforce had a tremendous 4Q18, yet the stock is down 2% after 1Q19 guidance estimates came in slightly below Wall Street’s expectations. Such is the fickle nature of the stock market, yet the dip presents a fabulous buying opportunity as the company has never been on surer footing, as proven by the otherwise resoundingly positive earnings call.

Revenue grew 25% -- the same growth rate as 3Q18 -- to $3.6 billion for the quarter. Consistently strong expansion is a fabulous achievement for a company that already boasts a $120 billion market cap. And the bigger story is even deeper in the numbers. Although the core Sales Cloud still comprises 1/3 of total revenue, by far the fastest growing segment of the business is Platform Services, which grew 50% last year. This includes the recent acquisition of  MuleSoft, which helps businesses integrate and streamline third-party software into a truly unified “platform.”

Salesforce is using MuleSoft to generate awareness and interest in its new third-party app store – similar to Apple, but specifically for SaaS* – and thanks to that push platform revenue now comprises 1/5 of total revenue, the highest composition to-date.

*Software as a service is a software licensing and delivery model in which software is licensed on a subscription basis and is centrally hosted.

The core business is still growing strong – Sales Cloud grew by 13% last year – and management remains focused on diversifying strongly across business lines while establishing a real foothold for future top-line growth. The number of new contracts valued at $20 million or more grew by 50% in the quarter and the two relationships on the books already worth over $100 million keep expanding. CEO Marc Benioff predicted $20-$30 billion in revenue being “right around the corner” and raised full year 2019 guidance to $16 billion. (Last year the company booked $13.2 billion.)

Operating cash flow grew 27% YoY last quarter to $1.3 billion, while EPS surged 50% YoY to $0.70. Meanwhile, long-term debt held steady at $3 billion, where it has stood all year long. The company isn’t relying on debt to fuel its growth, so there’s zero concern of financial instability. Cash is strong at $4.3 billion.

Yet even with all of that, the stock slipped after Benioff announced on the earnings call that 1Q19 revenues are expected to grow 22% YoY. Wall Street had been expecting 23% YoY growth. And for that single percentage miss, the stock tumbled over 5%. What impresses us is that the full year guidance is still strong at the aforementioned $16 billion.

BMR Take: We couldn’t reiterate this more: the dip is an opportunity to exploit other investors’ lack of nerve. Major banks from Barclays to SunTrust to JP Morgan to Wells Fargo raised their price targets for the stock and reiterated their buy rating. We couldn’t agree more. Salesforce is an industry pioneer that is expanding its customer base and diversifying its suite of products. What more could you ask for?

-----------------------------------------------------------------------------

Square (SQ: $74, down 4%)

Even after the dip this week, is having a tremendous year so far. The stock is up 33% YTD and 4Q18 came in strong with revenue up 6% YoY to $930 million. Gross payment volume also increased 30% YoY to $23 billion and earnings practically doubled from the prior year’s fourth quarter to $224 million, $0.14 per share.

The stock dipped on forward-looking revenue deceleration, as CEO Jack Dorsey guided reduced revenue growth rates for the coming quarters. Yet growth is slowing from a lofty (and unsustainable) 60% to 40% for a very good reason: as the operation expands, keeping the needle moving requires more force. A year ago, Square had just booked a $1 billion year and was looking to add $600 million to that base within 2018. Now, here at $1.6 billion a year, it would take another $1 billion on the top line to have the same effect.

The fact that Dorsey is comfortable suggesting that he can capture another $700 million in revenue this year is more impressive than the year-over-year rates imply. There’s no reason to suspect he can’t do it. Square is investing heavily in Sales & Marketing and R&D as it looks to boost its Cash App to compete with PayPal’s Venmo.

February saw an additional 2 million downloads of the Cash App, which represents nearly 40% YoY growth for the second quarter in a row. The Cash App now boasts 15 million total users – double the number of users from one year ago. So all of that operating spend is paying off big time.

BMR Take: As with Salesforce, this latest selloff is a buying opportunity. Analysts are focused on the revenue growth numbers, ignoring the way the bottom line is benefiting from increased efficiencies of scale. We’re still looking at 60% earnings growth, which is what every company ultimately needs to succeed. Revenue is always important, but a small deceleration in the face of additional market share capture is a worthwhile trade. Square is playing long-ball here, and the bears are thinking short-term. We like Square for the long haul.

-----------------------------------------------------------------------------

Amazon (AMZN: $1,621, down 3%)

One company that’s been in the news lately (and not for the first time) is the giant Jeff Bezos built. Amazon already dominates Electronic Commerce and is now going to add some brick-and-mortar, with plans to open dozens of supermarkets across the U.S.

We don’t need to tell you how dominant a force Amazon is in Retail, and if they’re going brick and mortar, you better believe it’s for a good reason. Likely they will soon be rolling out cashier-less supermarkets, as they’ve already been field-testing this concept in Seattle. This is a total game-changer for the industry, as Amazon will be able to offer high-end groceries via its Whole Foods or similar chains at bargain-basement prices thanks to having fewer employees on the payroll.

The story of Amazon has always been one of growth, but we’d be remiss if we didn’t mention 2018’s 28% revenue growth to $230 billion, and net income of $10 billion – more than triple what it was in 2017. Yes that’s right, this company can turn a profit if it wants to, and clearly Bezos decided 2018 was a good year to bring profits to the table. Analysts have long discounted income here, as the story has always been big revenue gains and world domination. But when you can take over the world and turn a profit, that’s even better.

BMR Take: Amazon is another stock having a strong year, up 8% even despite falling like a lot of strong companies last week. This has always been an industry disruptor and there’s plenty more of that on the horizon.

-----------------------------------------------------------------------------

Paycom Software (PAYC: $178, down 2%)

After soaring 45% YTD Paycom is on track for another phenomenal year. There’s still room for more as the company dominates the payroll and Human Resources Management market, and its fundamentals are rock solid.

Paycom’s growth strategy can be summed up in one word: sales. The company is growing its sales teams and expanding them across the country and the world. Currently, the company has about 50 sales teams in 26 states. Expect those numbers to increase in the near-term, as revenue continues to skyrocket. In 4Q18, the company grew revenue 13% from the previous quarter (sequential) to $150 million, and annual revenue grew 30% to $560 million. The company foresees continued 30% annual revenue growth for the coming years, and we every reason to believe them.

The company’s EPS and free cash flow have grown 90% and 70% over the past three years, respectively, and customer retention rates have reached an astonishing 92%. What’s more, Paycom hasn’t even begun to truly diversify its services yet. The company is still focused on its core suite of Payroll and Employee Benefit Processing products on the way toward becoming a full-spectrum Human Resources platform. As new services and add-ons are introduced, there will be ample opportunities for increased revenue streams.

BMR Take: With margins above 80% and minor debt on the books, Paycom can spend all of that free cash flow on sales and marketing, which in turn grows the business and keeps revenue growth strong. Management understands how to grow this company organically, and in addition, they also repurchased over 1 million shares in 2018 to return value to shareholders. We love everything about Paycom – especially the stock’s performance! Expect more of the same for the rest of 2019.

-----------------------------------------------------------------------------

Facebook (FB: $170, up 4%)

Mark Zuckerberg made headlines last week for announcing that his company will be shifting its focus to private messaging. Facebook plans to beef up its private messaging service by offering users encrypted messaging which no one else – including Facebook themselves – can read. Additionally, they’re taking a page from rival Snapchat’s playbook and including an option for messages to automatically disappear after being viewed.

(This is really the only page in Snapchat’s book. We can’t believe Snapchat is worth $12 billion. They booked $1.2 billion in revenue in 2018 and lost $1.2 billion – this is not a misprint. But that is better than 2017 when they had $825 million in revenue and $3.4 billion in losses – again, not a misprint!)

Advertising will still exist within the messaging app, building on what’s already a $67 billion ad revenue target this year. Facebook will also leverage its messaging service to push new products like a digital wallet – again taking a page from a competitor’s playbook, this time Chinese behemoth Tencent.

Zuckerberg was clear that this new private messaging business will complement the core social media platform, not replace it. The stock is already up 29% for the year on the amazing growth prospects that lie ahead for the core business. Throw a brand new revenue stream into the mix, and things are looking up even more.

BMR Take: Facebook already has expertise in the area of private messaging, thanks to its billion-user Messenger and WhatsApp channels. If any company can turn private messaging into a money tree, Facebook can. Perhaps that’s why the stock surged this week on the news while the rest of the market sputtered.

-----------------------------------------------------------------------------

Earnings Preview: Cloudera (CLDR: $13.83, down 9%)

Earnings Date: Wednesday, 5:00 PM ET

Expectations: 4Q18
Revenue: $120 million
Net Loss
: $17 million
EPS: -$0.11

Year Ago Quarter Results
Revenue: $100 million
Net Loss
: $15 million
EPS: -$0.10

Implied Revenue Growth: 20%
Implied EPS Decline: slightly wider loss

Target: $28
Sell Price: $18
Date Added: June 6, 2017
BMR Performance: -39%

Key Things To Watch For in the Quarter

This is the quarter of truth, our first real chance to gauge the duplication between the legacy Cloudera business and the operations the company absorbed from onetime rival Hortonworks. In terms of raw numbers, our initial expectations are relatively modest: 20% top-line growth is all we really need to keep the organic growth trend alive.

Of course we’re open to a surprise to the upside. Cloudera on its own added $8 million in 4Q18 sales. Hortonworks moved its top line up $1 million. Our assumptions this time around are for barely $3 million in new revenue on the Cloudera side and nothing from Hortonworks. That’s on the low end of realistic, the equivalent of a big chill in the Big Data market last quarter.

It also doesn’t resolve any questions about how much of the two companies’ customer lists overlap. Simply adding the numbers together yields a combined run rate close to $1 billion, but if the sales team focuses on converting accounts from one platform to the other we may experience pockets of drag here and there. Different accounting systems add to the uncertainty.

The important thing is guidance. At that $1 billion run rate, we’re looking for 22% growth from here and once the united development team rolls out the first integrated products, that expansion curve accelerates.

And $1 billion in revenue is roughly our projected breakeven point on Cloudera as well, provided the combined companies can cut about $125 million a year in redundant operations. In that scenario, we’ll see profit here early next year. With $500 million in cash left to deploy, there’s very little risk they’ll stop short of that goal. It’s more likely that a larger Technology company will buy it out first down here at barely sales.

Either way, management still needs to make a convincing case for how the merger takes the company to the next level in terms of scale while putting the combined sales team on stronger competitive footing. We hoped we’d get that by now. If answers remain elusive, it may be time to decide whether we want to stick around.

-----------------------------------------------------------------------------

A Word From Gary Jefferson

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

This has been the strongest start to a year in nearly three decades. If we had to give a simple reason or two, we would say the main one would certainly be the easing of fears about both the Fed raising interest rates and an all-out trade war with China. The Fed has made it clear that it will be more “flexible” (i.e. will listen to the market) in its efforts to normalize rates and U.S. officials are preparing for a summit between President Donald Trump and Chinese leader Xi Jinping later this month.

The market has gone straight up and has almost recovered everything that was lost in the flash bear market of last year. But we all know that the market never goes up forever. There is going to be some volatility because nothing is ever perfect. We expect the doom and gloomers to harp on every stat that might be lower or weaker than last month's number.

The bottom line to us is that the economy might be growing at a slower pace but growth is growth and there won't be a recession so long as that is the case: 5% to 10% market pullbacks occur almost every year and are as normal as the changing seasons. So while we expect some downdrafts to occur at some point this year, we are optimistic that stocks have room to keep climbing as the economy continues to expand.

At this point, two things that would make us change our market opinion would be the unlikely escalation of a trade war or the non-farm payroll number falling off a bigger cliff than what we saw Friday. We are not, however, necessarily bound to this specific "indicator" (non-farm payroll number) because any indicator can be broken from time to time. An indicator should not be used to trigger buys and sells but rather should be considered to be one of many tools helping to make up an overall strategy.

Whatever the market does in the coming weeks and months, remember your investment strategy should not be based on the latest sound bite or some single "indicator,” but rather on your goals, risk tolerance and time horizon. Successful investing has always been associated with being diversified, sticking to quality and being in it for the long term.

-----------------------------------------------------------------------------

The High Yield Investor

By John Freund
VP of High Yield
The Bull Market Report 

Demographics make the Healthcare REIT industry a strong investment theme and in our view these stocks have already bottomed out relative to the money they’ll make over the decades as first the Baby Boom and then Generation X retire in large numbers. Add sizeable dividend payments in the meantime and you’ve got a core component of any well-diversified portfolio.

A pair of Healthcare REITs we love here at The Bull Market Report are Ventas (VTR: $62, flat, Yield = 5.1%) and Welltower (WELL: $75, up 1%, Yield = 4.6%). These are two of the largest actively managed companies in this space, with market caps of $29 billion and $23 billion, respectively.

By “actively managed,” we mean that these REITs make operational and strategic decisions for the majority of properties in their portfolios. They aren’t passive landlords. In this model, management decides how to improve the buildings and how much to spend, bypassing a tenant and conserving the associated management fees.

This takes shareholders one step closer to the ultimate rewards as well as the risks that owning and operating Real Estate entails. Actively managed Senior Living facilities in particular tend to perform better with residents and their families because they boast more amenities and better service. High occupancy and retention rates feed on themselves, making the facilities more desirable and giving operators more power to charge premium prices.

While both Ventas and Welltower have passively managed properties on the books, the bulk of each portfolio is actively managed. This is a good thing, because active management is going to outperform in the future. Passive REITs earn higher margins and more income than their actively managed peers as a larger share of overhead passes to the operators, who then need to invest in their buildings to maintain occupancy rates. Little is ventured but little is gained.

But that won’t last forever. As technological innovation disrupts every industry on earth, the cost of improving operations naturally decreases over time. Active REITs will be able to spend less in order to achieve the same advantages of service and customer satisfaction. Once those costs decrease, the pendulum swings to the active end of the industry, where management can intervene directly to provide upgraded services, attentive staff and continuous property upgrades.

Let’s start with Ventas. The company owns 1,100 properties segmented into three categories: actively managed Senior Housing, office buildings and passively owned properties. The main focus of the portfolio is Senior Housing, which has been under some downward pressure in recent years thanks to a glut of supply entering the market. That said, new inventory coming to the market has started tapering off and project starts have dropped to a five-year low.

Revenue last year came in at $3.7 billion, a 5% increase from the prior year. Funds from Operations dropped a little, but at $4.07 per share there’s still plenty here to pay $3.16 a year in dividends. That’s all we want while we wait for demand for Senior Housing to catch up with supply and give companies like Ventas the upper hand on pricing.

Total assets outstrip liabilities by a 2:1 margin, with a full $20 billion in Real Estate alone more than balancing $10 billion in debt. Granted, REITs generally carry a lot of debt, so it’s a pleasant change of pace to see that Ventas at least earns enough money to pay off all obligations in less than six years.

Like most REITs, management does a lot of work adjusting the property portfolio as well as the balance sheet. Ventas most recently spent $200 million to buy Brookdale Battery Park, a top-tier senior living facility in Manhattan, while locking down lease terms elsewhere in the Brookdale chain all the way to 2026.

With over 1,600 properties, Welltower is the largest Healthcare REIT in the world, with assets throughout the U.S., as well as in Canada and the UK. The emphasis here has traditionally been on Senior Housing, and like Ventas, management has been busy shedding underperforming properties in favor of higher quality assets. A full 60% of the company’s Senior Housing income comes from the Top 10 urban markets, with most of the rest in Top 30 cities.

Targeting more affluent seniors who prefer to spend a little more and have the resources to do it is a smart move. Remember: actively managed REITs can better satisfy customers who demand enhanced value and operational improvements. Welltower is leveraging that competitive advantage by focusing on markets where customers have enough disposable income to pay for the added value their facilities provide. A passive REIT, on the other hand, depends on the expertise of tenants who in turn are at the mercy of market forces.

It’s working. Revenue jumped 9% to $4.7 billion last year and FFO per share held steady above $1 per quarter, which again is more than enough to make a $0.87 dividend with cash left in reserve. Total assets outweigh liabilities by a 2:1 margin, and although there’s $13 billion in long-term debt on the books, there’s $27 billion in Real Estate to balance it along with around $2 billion a year in earnings coming in.

Welltower hasn’t cut its dividend in over 40 years, so clearly management knows how to operate with a reasonable level of debt. We see no reason why that should change any time soon.

Every long-term investor should be exposed to both Healthcare and REITs, and Ventas and Welltower provide the perfect intersection between the themes. If you bought into either or both of these stocks over the past year, we congratulate you. If you’re new to the party, don’t worry. There’s plenty more upside here.

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