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The Weekly Summary

The ticking clock on trade has now struck an alarm for investors as tariffs on $260 billion in products that pass between the United States and China rose from 10% to 25% on June 1st, penalizing importers and exporters on both sides of what was once the biggest economic partnership in history.

While negotiations currently look stalled for the next few weeks, we suspect blowback will be brief and corporate fundamentals will be more resilient than a lot of people think. That’s good news because people are evidently thinking the global economy is going over a cliff.

Futures markets now indicate that just about everyone is convinced the Fed’s next move will be to cut interest rates to keep easy money flowing. As a result, the Treasury yield curve is a mess, with 1-year bills now paying higher effective interest rates (2.21%) than their 10-year counterparts (2.14%) and 2-month yields barely 0.01% below the 2.38% that 20-year bonds pay.

Add a sense that corporate earnings have stalled for the next few quarters and for many investors the near-term rewards of holding stocks no longer seem adequate to compensate for a season of elevated risk and headline exhaustion. The CBOE Volatility Index (^VIX: 18.71, up 15% last week) is once again within sight of levels we saw in early October, giving those who remember a queasy sense of déjà vu. People are tired of not knowing what each week’s news cycle will bring. They’re tired of having to pivot as the narrative flows.

While we understand the frustration, we’ve had the psychological cushion of our High-Yield, Healthcare and REIT portfolios to support our resolve while the market as a whole works out its moods. BMR subscribers never had to rush for safe havens because you always kept one foot in some of the most reliable and recession-resistant segments of the global economy.

Want a higher dividend than anything you’ll get in the bond market while the Wall Street pendulum swings? These stocks collectively pay 7% a year to buffer the dips. After a month when every major sector lost ground except for the Utilities (up a scant 0.24%), we’re grateful for even the limited clarity that cash flow provides.

And it’s been enough to shield the BMR universe as a whole from the worst of the ongoing weakness. Our stocks declined 3.5% last month, which stings but it’s nothing compared to the 5.7% pain the S&P 500 suffered or the 6.0% drop on the Dow. Technology, Energy, Consumer, Industrials, Commodity and Financial stocks all led the retreat, leaving only Real Estate and Healthcare (and those Utilities) holding up relatively well.

That’s where we always were, and it’s where our subscribers will make money if the market mood gets worse and more money flows into “defensive” themes. But this is more than simply gyrating with shifts in sentiment. Our Technology portfolio lost only 1% last month, beating the sector by more than 7%. In the nearer term, our Aggressive stocks are collectively up this week, thanks to Anaplan (PLAN: $44, up 17%) and its post-earnings surge.

Wall Street is still rewarding the most dynamic business models and companies that prove quarter after quarter that they can grow faster than economic headwinds can blow. These companies are the future. And their performance in BMR portfolios proves that investors haven’t given up on that future yet. Let the rest of the market reel. We’re still where the upside is.

There’s always a bull market here at The Bull Market Report! This is a great week to check in on a few of our more “defensive” positions, which sat out much of the rally early this year but are now holding up better than the market as a whole: Bristol-Myers Squibb, AstraZeneca and Expedia. Alphabet, Dropbox and Facebook also deserve updates for defying much of the weakness we saw elsewhere in the Technology sector last week.

Gary Jefferson and The Big Picture attack the notion of a China-linked catastrophe from different directions, and then it’s time to preview earnings coming Tuesday night. After that, The High Yield Investor takes us home with analysis of what yield curve anxiety is doing to New Residential Investment and Annaly Capital.

Key Market Measures (Friday’s Close)


BMR Companies and Commentary

The Big Picture: Sweet Sectors

We’ve done a lot of work in recent months to quantify the real impact of rising trade barriers and a flat yield curve so some of this will feel like a review. Nonetheless, having a sense of how much the fundamentals change gives us a better sense of what only adds up to noise.

Even if all trade with China breaks down, the world as we know it will not end. This is not just our sense of human resilience, but also a factor of the corporate results we read every day. More than 70% of what the U.S. economy consumes is made here at home and while global supply chains get messy, Chinese imports in particular counted for just 3% of GDP last year.

While Americans run a massive trade deficit, it’s because we buy from the entire planet: Cars and appliances from Europe, semiconductors from Taiwan, more cars and more appliances from Korea and Japan, meat from South America and so on. As long as trade deals hold with these partners, the flow of most essential products continues.

Rare earth minerals can be mined and even processed in North America. Taiwanese factories can produce iPhones as easily as those in Mainland China. Corporate managers will continually search the planet for the best and most stable long-term places to plant their factories and lock down their supply chains. In that respect, it isn’t so much how much “China risk” a particular company represents as how much the market as a whole is exposed to international markets around the world. Sector by sector, it lines up like this:

Technology and Materials producers are obviously more dependent on foreign customers than Utilities or Real Estate. The question with these companies is how much of their output goes to Mainland China as opposed to elsewhere in Asia or other regions of the world entirely. The best numbers we’ve seen indicate that companies that break out their results send as much to Asia as a whole (including India, Japan and Korea) as they do to Europe. Losing China will sting but it won’t be fatal.

Who is most exposed? On a regional basis, only Apple in our universe has anything substantial to lose in Asia, and even then, China is barely 20% of that company’s overall revenue footprint. Again, it stings, but it isn’t fatal. More to the point, with Apple down 20% from its peak, a catastrophic loss of the entire Chinese market is already built into the stock. You can’t go lower than zero. You can only go up again in relief when a trade deal finally happens.

On the other hand, you evidently can go lower than zero where interest rates are concerned, but we aren’t running scared of the yield curve yet. Admittedly, it’s disquieting to see 3-year Treasury bonds paying what they did a year ago (about 2%) despite four 0.25% Fed hikes in the intervening time. However, this feels more like the 1998 inversion than what we saw leading up to any historical recession.

The fundamentals are similar to 1997-8. Back then, the Fed got a little ahead of itself to combat “irrational exuberance” and keep wage inflation under control, but the economy was in racing gear. Cutting rates after the Russian debt default and prominent hedge fund implosions wasn’t an admission of desperation or even surrender. It was simply a realistic pause in the tightening cycle to give the market a little breathing room.

Stocks rallied for another 18 months. That’s a long time to sit on the sidelines waiting for apocalypse. It’s not our position at all.


Bristol-Myers Squibb (BMY: $45, down 3% -- all returns are for the week) 

This Blue Chip Pharma company recently announced a $90 billion acquisition of Celgene. The stock has underperformed since, and we believe the market is over-weighting the risks here. As a result, the stock is due to bounce once Wall Street gets over its high anxiety and refocuses on the fundamentals.

First of all, management has a strong history of return on invested capital, posting 18% or better over the last five years, and over 30% the past two years. $90 billion is a lot to shell out, but Management expects $2.5 billion in immediate cost savings due to synergies, and upwards of 30% free cash flow over the next three years. That free cash flow (FCF) boost comes by way of Celgene’s focus on high margin drugs (Bristol-Myers has been pivoting into this arena recently as well, as part of a strategy to boost its own FCF). The company posted 20% FCF last year, so it’s expecting a 50% gain over the next three years, which would place it at the top of the entire industry.

The market is anxious over the $50 billion in debt Bristol-Myers is taking on to purchase Celgene. We get it. That exorbitant debt structure will mean the company carries double the industry’s average leverage ratio. That said, the equally exorbitant FCF ($45 billion in thefirst three years) will keep the dividend safe and help pay down the debt. Management also announced its 10th consecutive year of raising the dividend, so we’re not concerned about a slash any time soon.

BMR Take: Any time a massive amount of debt gets taken on, some investors are bound to panic. This is an aggressive play for sure, but one that will pan out in the company’s favor. It’s only a matter of time before the FCF story is actually produced, and when that happens, the stock will bounce. Consider the YTD dip a strong buying opportunity.


AstraZeneca (AZN: $37, down 4%)

Sticking with Pharma for just a moment, this member of our Healthcare portfolio is flat for the year, after our gains were erased this past week. But never fear: This is a fundamentally strong company with a robust drug pipeline that is sure to rebound once broader market anxieties die down.

In fact, the pipeline is so strong, it’s hard to know where to begin to describe it. AstraZeneca just received FDA approval for its promising Qternmet XR drug, used to treat Type-II Diabetes (a growing problem in America). This will add to the Type-II Diabetes pipeline which includes Farxiga, which posted $350 million in sales during 1Q19, a 17% YoY increase. Meanwhile oncology drug Tagrisso soared last quarter as well, sending the entire oncology business line 60% higher YoY (to $1.9 billion).

Symbicort (used to treat asthma) and Crestor (for cardiovascular treatment) are two additional drugs that should continue to boost sales throughout the year. Speaking of sales, 1Q19 produced $5.5 billion, which represents 6% YoY growth. The company also grew its operating margin to 20%, illustrating increasing efficiency. As a result, gross margins have increased from 17% two years ago to 25% today.

BMR Take: Pharma is a strong defensive play, and AstraZeneca is a Blue Chip in the sector. There are too many promising drugs to list here, and the company is competing aggressively in a wide variety of profitable sectors. The slight dip only came as a result of the broader market downturn. The fundamentals and outlook remain strong.


Expedia (EXPE: $115, down 1%)

We’re not thrilled with the YTD performance here and are expecting more. Expedia has cracked 10% appreciation more than once this year, but the firm has struggled to maintain that momentum as wider anxiety over the global economy is putting downward pressure on the Travel industry.

Theoretically, this makes sense. Yet, we believe the anxiety is overblown given the historically low unemployment, impressive job growth, and resilient nature of our economy – even in the face of a trade war with China. Essentially, we see way more tailwinds than headwinds. The company’s revenue growth is one of the biggest, with Expedia posting compound annual revenue growth of 16% over the last decade. We see no reason why this trend should change over the next few years.

The company is pushing Vrbo, its vacation rental platform, into a global brand. In fact, Vrbo has performed so well that parent company HomeAway (which Expedia purchased in 2015) has been rebranded into Vrbo. Until now, Vrbo has been primarily available in the U.S., with other brands operating globally. Management will now roll those global brands into Vrbo, in a bid to make Vrbo the global industry-leading vacation rental site. This opens up a whole new revenue stream for the already dominant online travel agency.

BMR Take: While it's true the Travel industry is vulnerable to broader economic conditions, those conditions are actually quite strong now, despite the recent market anxiety. We believe both the U.S. and global economies will continue to improve, and global travel will increase as a result. Expedia is already a dominant player in traditional online travel. Toss Vrbo into the mix, and you’ve got a stable Blue Chip that is poised for increased growth.


Alphabet (GOOG: $1,104, down 4%)

Although the Search giant is up 6% on the year, we’d like it to be more and are expecting as much over the coming months.

The company has been posting 20% revenue growth every year since 2016, so investors grew accustomed to that metric being hit. 1Q19 brought in 17%, which – though still quite strong – is considered a miss for the company. The miss can be contributed to the company’s emphasis on diversification away from its traditional ad-focused revenue model. Alphabet is looking to monetize platforms not named Google, such as YouTube for example. The company doesn’t disclose YouTube’s profit/loss numbers, but did notify investors that the platform was the second largest revenue contributor, behind only mobile search.

This is a company sitting on over $113 billion in cash, around 15% of its total market cap, with only $12 billion of long term debt. The company has enormous flexibility going forward in terms of acquisitions, R&D, or stock buybacks. Even with the lower growth rate, Alphabet will continue to post double-digit revenue growth for the foreseeable future, and the company banked $7.5 billion in free cash flow last quarter alone. That’s astonishing for a nearly $800 billion behemoth.

BMR Take: With dominant positions in a slew of industries, from search (the company is essentially a monopoly here), to content distribution (YouTube), to autonomous driving (Waymo), to digital advertising (AdSense), to Internet of Things (Google Home and Nest), Alphabet is and will be a fundamental fixture in the backbone of our economy for decades to come. The revenue growth (albeit lower than in previous years but still relatively high), coupled with the mountain of cash and free cash flow production tells us its only a matter of time before the company joins the $1 trillion club.


Dropbox (DBX: $23, flat)

Although it has been a choppy few months, this Data Storage behemoth is up 9% YTD, and has made it through the recent selloff unscathed. After going public a year ago, the stock is trading near its all-time low, and we’re confident there’s nowhere to go but up from here.

1Q19 revenue grew 22% YoY to $385 million, on strong user growth coupled with increased average revenue per user. The company’s addition of HelloSign, which offers a comparable service to DocuSign, is a strong boost to its core product. And partnerships with the likes of Google make the platform more accessible for users of Google Docs and Sheets.

Dropbox trades at roughly half the price/sales ratio of rival DocuSign (7.5x vs. 14x). Is this company really half as valuable? Dropbox boasts 500 million subscribers. Roughly 3% of those are paying, and the company is aggressively courting the other 97% and is converting them to paying customers at a faster and faster rate. The good news is that they only have to convert 2.5% of the remaining free customers in order to double their total revenue.

BMR Take: The company has over $900 million in cash, and just $700 million in debt. Management is also forecasting $380 million in free cash flow for 2019. So there will be some serious room to maneuver for this company by year’s end. The company also raised its revenue forecast for the year, yet the stock hasn’t budged. We’re not sure what Wall Street is waiting for, but eventually the fundamentals will kick in. They always do.  Just be patient.


Facebook (FB: $177, down 2%) 

Mark Zuckerberg's baby is back in the BMR universe, and we’re loving the new privacy pivot the company is making.

Zuckerberg has routinely had his finger on the pulse of digital trends (think the scrolling newsfeed, the ‘Like’ button, and many more), and there’s no bigger trend today than digital privacy. The company is already working on a more private version of the platform (no word yet if the new private Facebook will supplant or merely supplement the current public version). This is the right move considering not only the cultural headwinds but the fact that growth is slowing (with over 2.5 billion users, how could it not?) Daily active users growth is down to 8%, from 18% two years ago.

Additionally, the introduction of the Stories feature – while popular – has eaten into revenue growth, since Stories monetizes at a lower rate than the traditional newsfeed. That’s also true of Messenger, which the company is making a renewed push for. 1Q19’s revenue growth was 26%, well below the 50% growth rate of the previous year. Of course, Facebook can afford to think long term, given that the company is sitting on $45 billion of cash and only $7 billion of debt.

The company is also entering the crypto market, announcing plans to launch its own coin – GlobalCoin – in about a dozen countries by 2020. Zuckerberg has already met with the U.S. Treasury and Bank of England to discuss regulatory issues, as well as firms such as Western Union to discuss how best to transfer funds. This ties in well with the broader privacy push, and if there’s any crypto currency that can give Bitcoin a run for its money, its Facebook’s GlobalCoin.

BMR Take: Users have been clamoring for some time about their digital privacy, which has long been viewed by Silicon Valley as antithetical to their business model (Facebook included). But the company’s about-face could be a harbinger of things to come for the internet. If all goes according to plan, platform providers will jump on the privacy bandwagon and offer ‘private’ versions of their products and services. Facebook is first-to-market here, and we think the stock will be justly rewarded, long term.


A Word From Gary Jefferson

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

Several experts are now saying we are in a trade war with China and any "deal" will not be made. We would love to have this crystal ball that these experts apparently are using.

We don’t know when or if a deal will be reached. Negotiations may break through or remain broken down. And it’s difficult if not impossible to measure the impact of that uncertainty. But if there is a real trade war and if the consensus forecasts we have heard or read over the past few months are accurate, increased tariffs will translate into a 0.3% to 0.5% hit to GDP.

That's a far cry from undoing 3.2% GDP growth (Q1 initial estimate) and creating a full-fledged recession. Most importantly, exports only comprise about 12% of U.S. GDP, while the American consumer accounts for nearly 70% of our economy. Assuming prices don’t rise too much with the latest round of tariffs, we believe the U.S. consumer will likely weather this storm.

Meantime, we still believe both countries want a deal. But it has to be the right deal, at the right time, with the right optics.  Rather than an all-out trade war, we see each country doing their best to levy as much political and financial pressure on the other without going too far as to blow up the talks.

We expect the bulk of domestic data releases to continue to show our record-breaking economy is still doing great. Next week we should get the ISM New Orders Index. This needs to stay above 50, which we expect. If it drops below 50 for long, we would revisit our outlook on a coming recession.

As we all know, stocks love to climb a wall of worry. More importantly for investors, stocks have shown over time that solid long-term returns have come to those who wait. Waiting is often very difficult and requires patience and an ever-constructive attitude to combat the ever-negative media.

Many investors had just about made back losses from last year when the market took another dip. But the future of this bull market still looks bright based on (you guessed it) earnings.  Until earnings go the wrong way, we think this record economy with record employment still has more upside to go.

That is primarily based on the belief there will be no recession this year to trigger an earnings reversal. The five policy keys to economic prosperity are monetary policy, tax policy, regulatory policy, spending policy and trade protectionism. History shows that it takes three of these five to go bad before a recession can happen. Only the trade key is flashing a warning signal at the moment, while the remainders are all still positive.


Earnings Preview: (CRM: $151, down 2%)

Earnings Date: Tuesday, 5:00 PM ET

Expectations: 1Q19
Revenue: $3.7 billion
Net Profit: $484 million
EPS: $0.61

Year Ago Quarter Results
Revenue: $3.0 billion
Net Profit: $557 million
EPS: $0.74

Implied Revenue Growth: 23%
Implied EPS Decline: 18%

Target: $170
Sell Price: $115
Date Added: October 11, 2018
BMR Performance: 8%

Key Things To Watch For in the Quarter

The revenue trend on Salesforce is easy enough to anticipate. Management has high confidence that they’ll be able to double the top line every four years and the accountants have enough tools at their disposal to move the money around as needed. It all depends on when they decide to deliver services that have been contracted years in advance but could otherwise remain unbilled and unrecognized far into the future.

We’re reasonably sure revenue will come in within sight of $3.7 billion this time around. That’s been on the glide path since Salesforce closed its $5 billion acquisition of Mulesoft a year ago, and every quarter management confirmed that’s roughly what we’ll get. Barring any sudden catastrophes that we would have heard about already, this company is still growing its sales base 23% a year.

Where the numbers get a little hazy is on the profit side. Once again, we’re taking management’s cues here and are looking for a slight earnings decline. It’s more a matter of accounting than any weakness in the underlying operations or pressure on the margins. Salesforce routinely writes off more than $0.45 per share every quarter for stock-based compensation and another $0.15 related to acquisitions, so the quarter-to-quarter numbers are entirely in their hands. If they say earnings this quarter will come in around $0.61, we believe them.

However, they’ve also consistently aimed too low. Revenue guidance last year was 5% under what Salesforce ultimately reported and in the last few quarters the official outlook on earnings has undershot reality by at least 20%, over and over. Management explains the gap as a function of their strategic investments, which zero out in their guidance but come back once their performance can be evaluated. Either way, it builds a big cushion for upside surprise into every quarter. Odds are extremely good Salesforce will hit its own target, and more than likely beat it.

That’s the story that attracted us in the first place. Salesforce is a growth machine hungry for acquisitions to support its organic expansion. The company dominates the U.S. corporate landscape and is making deep inroads in Europe and Asia as well, where revenue is climbing 30% a year. Most recently it partnered with Audi to run all customer relationships from the moment cars are ordered to the trade-in stage. Salesforce is working with Toyota. It’s getting a toehold in Banking platforms. The best is still to come.


The High Yield Investor

By John Freund
VP of High Yield
The Bull Market Report 

This latest yield curve inversion is putting downward pressure on the entire market, and our High Yield stocks are no exception. That said, when prices are lowering because of investor anxiety as opposed to any significant changes in the fundamentals, strong buying opportunities arise. Let’s take a look at a pair of stocks where buying opportunities have indeed arisen, and for which we can confidently advise to ‘buy the dip.’

First up is New Residential Investment Corp. (NRZ: $15.25, down 8%, Yield = 13.1%). New Residential pioneered the Mortgage Servicing Rights (MSR) industry by purchasing MSRs from banks after The Great Recession. Banks were forced to offload profitable MSRs in the wake of the Dodd-Frank regulations, and New Residential spotted an opportunity and pounced on it. The company is now the largest non-bank holder of MSRs in the world, maintaining over $3 billion in their portfolio.

MSRs are a great business to be in right now, given that the overall housing market is a $27 trillion one, and $11 trillion of that is debt. That means there are plenty of mortgages to service – $600 billion in new mortgages in 2018 alone. New Residential captured $115 billion of that, 20%. Management expects that number to increase this year. Additionally, the mortgage delinquency rate fell to just 4% by the end of 2018. That’s an 18-year low. The lower the mortgage delinquency rate falls, the more valuable MSRs become. That’s because the longer people hold onto their mortgages, the longer New Residential can service those same mortgages, thereby extending the life of the revenue stream. And with continued job growth, steady wages, low interest rates, and a 50-year low in unemployment, expect housing conditions to remain relatively stable for the foreseeable future.

As a result of all of these strong tailwinds, the company’s book value increased 6% to $16.25 during 2018, and that’s including the tough 4Q18. 1Q19 also saw a 1% increase in book value (now $16.42) from the previous quarter, so they continue to trend in the right direction here. The company has over $30 billion in assets spread across its four business lines. While over 50% of its portfolio is made up of MSRs, half is divided up among Residential Securities and Call Rights, Residential Loans and Consumer Loans. The company has made some acquisitions over the past few years to buoy these business segments, including SpringCastle, HLSF, and Shellpoint Partners. The company was founded in 2013 as a $1 billion firm, and has since grown into a $6.25 billion company, with book value increasing over 60% during that time.

Perhaps the most important metric regarding New Residential is that juicy 13% yield. It’s understandable for investors to take a look at that hefty double-digit yield and get a little anxious that it won’t be covered, but this is an income-generating machine, and the company has had no problem covering the dividend with core earnings, let alone having to dip into reserves. In 1Q19, the company covered its dividend with core earnings ($0.50/share payout covered with $0.53/share core earnings). That makes 100+% dividend coverage with core earnings for every single quarter over the last three years and counting.

The stock is up 10% YTD, but that’s after the recent 7% selloff which came by way of broader market anxiety. The same thing happened in the last part of 2018. Investors got spooked over macroeconomic concerns, and New Residential took a hit, simply because investors were selling everything in sight. But the company fundamentals and outlook remain rock solid (as does the dividend). There’s absolutely no reason to think this company is worth 7% less than what it was worth a week ago. As we wait for it to crack that $17 mark and trade back in the 2018 range, we’ll be banking that 13% yield.

Annaly Capital (NLY: $8.81, down 4%, Yield = 11.3%) is another REIT we love despite the rough week it has had. The stock is down 10% YTD, which is disappointing, especially given that we were above the $10 mark by late March. The recent 17% rate cut, down from $0.30/share to $0.25, sent the stock tumbling, and we’re searching for a bottom here. The flattening yield curve also hasn’t been kind to Annaly, since the company earns money on the spreads between short and long term bonds. That said, the stock hasn’t been this low since November of 2000, and we feel the selloff is way overblown and we’re due for a bounce here.

2/3 of Annaly’s portfolio is fixed rate Agency MBS (backed by the federal government). Agency MBS carries extremely high credit safety, and the fixed rate nature hedges against interest rate volatility. Plus Annaly’s sheer size (the largest Mortgage REIT in the world, by far) means that the company often secures favorable terms on its loan originations. It’s been said that as the mortgage industry goes, so goes Annaly Capital.

Granted, the company’s book value per share has decreased from $11.50 to $10.00 over the last five years. That’s a 13% decrease, which doesn’t sound good, until you factor in the competition. Rivals AGNC and Two Harbors saw their book values decline by 30% and 40%, respectively, over that same time frame. So Annaly held up well in what has been a tough market for Mortgage REITs given lower rising rates and other macroeconomic concerns. The good news is that interest rates aren’t rising anymore, and the macro concerns – while still present – aren’t as acute as they once were. Those same housing stats we quoted earlier help Annaly’s business just as much as they do New Residential, so the future is bright as it relates to housing.

The company’s fundamentals are also on the right trajectory, with book value per share coming in at $9.67 during 1Q19, representing a 3% increase from the previous quarter. The company is now trading at a 9% discount to book, which means investors are getting a strong value on the underlying value of the company. Perhaps that’s why key executives in the company have been scooping up shares left and right. CEO Kevin Keyes purchased 300,000 in early May at an average price of $9.62, and CIO David Finkelstein purchased 100,000 shares at a price of $9.56. Insider purchasing shows confidence in the stock from the people who know the business best. Their purchase prices represent an 8% increase from the current level, so if you’re comfortable with the long term story here (as we are), now is a opportunity to buy Annaly on the super-cheap.

Remember, the dividend slash was implemented as a defensive measure – Annaly isn’t short on capital. The company is sitting on $855 million in cash with only $620 million in debt. Management felt like the right strategic decision was to make a small dividend cut now (and still leave a relatively high payout in place) and ensure against having to make a larger cut later, if the economy really sours. If – as we suspect – the economy doesn’t sour and continues to pick up steam, don’t be surprised if management raises that dividend back up to $0.30/share. The company is currently earning around $0.29/share, so covering that $0.25 payout is no problem, and earnings will increase as the yield curve steepens back up.

We expect the stock to tick up prior to that, however. There is simply no rhyme or reason for Annaly to be trading this low, even with a flattened yield curve and the dividend slash. We’re expecting to bounce back up to above $9 here, and trade in the mid-$9 range, until broader economic conditions heat up again at which point we’ll be eyeing that $10 mark. Meanwhile, as with New Residential, we’re banking a double-digit yield all along the way (even after the cut).

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