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The Weekly Summary


Where May ended on a tentatively optimistic note, June has already provided plenty of evidence that the world is recovering from the COVID outbreak. For many, the biggest data point came on Friday, when we learned that U.S. businesses hired 2.5 million more people than they laid off last month. For us, the critical detail was the fact that New York City managed to get through an entire day without any deaths attributed to the virus. The medical emergency is finally receding. Either way, Wall Street cheered.


At this point, stocks have recovered nearly all of the near-catastrophic losses of February and early March. Thanks to practically endless liquidity from the Federal Reserve and the Treasury's willingness to buy trillions of dollars' worth of assets, alert investors see nearly no reason to stay on the sidelines when headline risk has evaporated.


Right or wrong, the Fed has demonstrated its willingness to ensure that Wall Street is happy. And with most Treasury debt now paying less interest than even minimal 0.3% inflation, bonds are practically a waste of money. The only logical place to park money is stocks with the power to preserve buying power in the near term and generate attractive returns farther into the future. We don't fight the Fed, especially when it's on the side of the bulls. Admittedly, the long-term impact of trillions of dollars in stimulus will be a fiscal concern, but that's no reason to lock in an inflation-adjusted loss in the meantime.


Besides, there is still plenty of money on the sidelines watching the Fed-fueled rally and using even the most fleeting dips as entry points. We estimate $1.2 trillion currently paying near-zero returns in the money markets is earmarked for reallocation in stocks with the next quarterly rebalancing. Mutual fund managers have nearly $600 billion in cash waiting to be put to work. That's not a huge amount of money in the grand scheme of things (maybe it lifts the S&P 500 back to record territory), but as long as the cash is flowing, stocks will find plenty of buyers willing to absorb any remaining selling.


We are pleased to report that BMR stocks have already benefited from these dynamics. As strange as it might sound to someone who vividly remembers the meltdown of the spring, our recommendations are collectively up nearly 7% YTD. Subscribers with the right diversification have actually made money this year. Start with our core Stocks For Success portfolio: up 11% in the last five months, which is remarkable in light of the fact that the S&P 500 normally needs an entire year to move that far.


Of course it's all about being overweight the hot sectors. Other than Technology and Healthcare, the market is still digging out of a significant hole. Tech dominates our Stocks For Success while our dedicated High Technology portfolio is up a healthy 32% YTD. Smaller stocks in the sector are the backbone of our Aggressive portfolio, which has delivered 44% so far this year. We are shocked by that number as well, but it only demonstrates how fast these stocks can move in both directions. Three months ago, names like Bill.com (BILL), DocuSign (DOCU) and Zscaler (ZS) made shareholders queasy. Now they're up 80-115% in the past five months, with their losses forgotten. (At least for now.)


We balance those windfall wins against weakness. Real Estate is only now recovering and remains deep underwater. Our High Yield positions are in a similar place. And turmoil in the Energy sector continues to weigh on our Special Situations. We aren't perfect. But all in all, the heat in our recommendations has overcome the spring chill. In our view, this rally can continue at least until 2Q20 earnings season starts in July and will probably go on into the run up to the November election. That gives the bulls months to run.


Naturally, we remain a little edgy. Volatility has receded but is still roughly double normal levels as occasional aftershocks rock the market. The economy itself remains fragile, with tens of millions of people out of work and relying on federal cash to pay the bills. Any twist in that delicate equilibrium can send investors running once again for cover.


But it's important to highlight the fact that people are paying the bills. Many households saw their disposable income rise dramatically when the stimulus checks came in. A lifeline for many was a windfall for others. As long as people can get back to work before the checks run out, the economy will absorb the COVID impact. Rents will get paid. Shopping carts will get filled. Cash registers will ring.


There's always a long-term bull market here at The Bull Market Report! Gary Jefferson returns in peak form with a frank discussion of where we've been and where we're going. The Big Picture has a simple economic message. The High Yield Investor focuses on the Real Estate recovery. And as always, we have updates on many of our favorite stocks.


We will see you two weeks from now as part of our revised "we'll talk when we have plenty to say" COVID-19 publishing schedule. Again, please write Todd Shaver directly at Info@BullMarket.com with any questions you have about our stocks. His goal is to respond within 24 hours.


Key Market Indicators




BMR Companies and Commentary


The Big Picture: The Shortest Recession Of All?


Jobs are back. Admittedly, ambient unemployment remains starkly high, with federal economists conceding that the 13.3% headline number undoubtedly undercounts the number of Americans who have lost their jobs or been relegated to part-time work in the last few months. But with 2.5 million people going back to work in May, the trend is now moving in the right direction.


We believe we've seen the bottom. From here, it's all about the recovery path. It won't be smooth, straight or sudden. There will be setbacks and shocks ahead, especially in areas of the country that suffer relapses in a secondary wave of COVID infections. (We haven't even talked about the mass demonstrations of the last few weeks, but odds are good that mass gatherings will have medical as well as political repercussions.)


And after only a few months of deterioration, recovery points to the shortest recession on record. Many commentators have spent the last few months wallowing in gloom. We’ve never understood that mentality.Any catastrophe we can walk away from is a learning experience. We pick up, manage our losses and start moving forward again.


If we can’t walk away, we give up. We haven’t suffered any shock big enough to make us give up on the market and neither has Wall Street. The Great Depression officially dragged on for nearly four years but decades later, the memory is fast receding now. We look forward because we don’t have a choice. While history can reveal patterns to those who study it, only antique dealers make money trading the past.


The recession happened. People had been dreading it for years because the only recent model for an economic shock was the 2008 crash. This time around, when the pandemic started locking down the economy, some people sold stocks as though they were convinced that capitalism simply wasn’t going to survive a similar disaster. Because we're here talking about the market now, that thesis was clearly incorrect.


The Fed will do whatever it can to prevent another 2008-style economic disaster. As the quarantine dragged on, the threat level dropped. We stopped asking whether the world would end and started focusing on specifics: how long the medical crisis would last, how quickly life would get back to normal, how much it would hurt in the meantime.With job losses bottoming out, we now have an answer to that last question at least. April was probably the worst phase of the outbreak, showing us exactly what the economy looks like when all non-essential businesses shut down.


It was bad. It is still bad. Profit growth is unlikely for the remainder of this year, and in the meantime we will only see margins contract as corporate executives pivot into a post-COVID world. But so far, thanks to the Fed and Congress, the cash keeps flowing. Again, barring unforeseeable aftershocks, that was as bad as it gets. And the jobs are coming back. The construction industry has already rehired half of the people laid off in April. Other sectors have a longer way to go, but they’re moving the right direction.


Maybe you held onto the stocks at the center of the storm because you were waiting for brighter days ahead. In that case, while you’ll need more time before you take profit, you’re probably feeling a lot better about life. On the other hand, if you dumped airlines, hotels and restaurants because you didn’t want your money locked up in deeply distressed business models, these job numbers are evidence that you made a mistake. Those companies are rebuilding now, more efficient than ever.


Look at the casinos. Las Vegas reopened this week. We don't recommend those names but maybe we need to reevaluate the opportunities. While it will take time for tourist numbers to recover, any occupancy at all is objectively better than zero.These hotels were empty a few days ago. Now they’re getting back to work. The future looks better than the recent past. For investors, that's the only thing that matters.




Akamai (AKAM: $99, down 6% this week) 


The stock has staged quite a comeback – rising from $80 in mid-March to a 52-week high, $108, a month later. We aren’t worried about this week’s fall – it’s just some profit taking. 1Q20 revenue growth was 8%, YoY, rising from $705 million to $765 million. This drove income up 15% to $125 million. Both divisions, Web and Media & Carrier, and Cloud Security Solutions’ sales remained strong and the current climate with the virus helped the company’s top line due to increased video, gaming, and social media customers. With the company’s focus on securing and delivering content over the Internet, it has long-term staying power. Having surpassed our $100 Target Price, we are raising it to $118. To protect your downside, we are increasing our Sell Price from $77 to $88.





Facebook (FB: $231, up 3%) 


The stock has gone on a remarkable run since dropping to $137 in mid-March, a 52-week low, going to an all-time high of $241 at the end of May. Analyzing results, 1Q20 revenue grew 18% to $17.7 billion compared to 1Q19’s $15 billion, and profit more than doubled to $4.9 billion. This is an astounding 28% after tax profit level. The company relies on advertising to generate revenue and the pandemic pressured rates, particularly in March. This will impact revenue going forward in a tough economy. Does this concern us? Not in the least. This is a company whose family of products has 2.4 billion daily active users, nearly one out of every three people in the world. Where else can you reach that audience? There has been some talk about the government regulating social media companies. So far, this is a battle between Twitter and the President but in any case, we don’t think this a concern right now.


The stock has surged well beyond our $200 Target Price so we are boosting it to $260. We also want you to have some downside protection, so we are raising our $155 Sell Price to $215. No, wait. We are changing our Sell Price to: We would not sell Facebook.





Roku (ROKU: $104, down 5%) 


Since falling to a 52-week low in March, the stock is up 80%, from $58 to $104. This comes after pulling back from $139 earlier this month. Forgive us for putting it this way during these difficult times, but the coronavirus has positively affected Roku’s results, accelerating growth. Three key metrics all did well: Active Accounts (37% year-over-year growth to 40 million), Streaming Hours (49% growth to 13 billion), and Average Revenue per User (28% growth to $24.35. Not surprisingly, this drove 1Q20 revenue 55% higher, to $320 million.


Roku has been spending more to achieve these results, with operating expenses going from 1Q19’s $110 million to this year’s $195 million. This caused the company’s loss to widen from $10 million to $55 million. With this kind of revenue growth, we firmly expect this to translate into profitability down the road. Obviously, with the stock at this level, our $205 Target Price is too optimistic right now and we are taking it down to $130. We are adjusting our Sell Price from $130 to $98.





ServiceNow (NOW: $390, up 1%)  


The stock has gone from $247 in early-April to $393, an all-time high, on Tuesday. That’s some move in just two months and we see further upside. The company builds applications that automate work processes. How well is this resonating? We’ll let the results speak for themselves. 1Q20 results at the end of April saw revenue growth remaining strong, rising 33% to $1.05 billion. Better still, the higher top line drove the company to profitability: $50 million compared to last year’s break-even result. With strong annual revenue growth, the company finally turned to a profit last year, with $67 million moving to the bottom line. We expect continued profits in the future. We maintain a $450 Target Price and a $345 Sell Price.





Shopify (SHOP: $728, down 4%) 


In early April, the stock was at $335. Incredibly, the company zoomed to $844 at the end of May, an all-time high. The company’s web-and-mobile-based software allows merchants to set up online storefronts, allowing retailers to sell goods on the web.


The company was doing well before the pandemic and growth will only accelerate. 1Q20 revenue was $470 million, up an astounding 47% compared to a year ago. Spending more on items like Sales & Marketing and R&D, operating expenses increased 53% to $330 million, leading to a $30 million loss, wider than 1Q19’s $25 million. For the whole year of 2019 the company saw revenue of $1.6 billion, up from $1.1 billion. With continued strong revenue growth rates, we expect Shopify to generate consistent profitability down the road. In April, we raised our $480 Target Price to $900. We have a $665 Sell Price.


But please keep in mind what a high valuation this company has. With a market cap of $87 billion, the company has no profits yet, and a stock that sells for 55 times sales. Do you realize how high this is? A high growth stock can sometimes sell for 10 times sales. 15 times is super high. 20 is extraordinary. Shopify, again, sells for 55 times 2019 sales. If 50% growth in sales continues for two years (a big "if"), the stock will be trading at 23 times sales at that point even if it doesn’t move a penny higher. Be very careful of this one.






Splunk (SPLK: $183, down 1%) 


The company reached new heights on Wednesday when it hit $193, more than double mid-March’s 52-week low of $94. The stock gave this week’s gains back when it issued a $1.265 billion convertible note. This typically happens due to the dilution, and certain convertible arbitrage investors shorting the shares. The company had to pay just 1.125% interest on the notes, and if converted to stock in the future they won’t have to pay off the notes in cash.


Long-term investors should rejoice. Splunk has a cool name and a cool business. What does it do? Its software allows companies to use big data to make decisions, which is what firms were talking about before the coronavirus and what they will continue to use. During the quarter, the company achieved #1 market share in several categories. Year-over-year fiscal 1Q21 (ended April 30, 2020) revenue growth was a tepid 2%, to $435 million and the quarterly loss widened nearly doubled from $155 million to $305 million. Let’s put this right out there: we are a bit disappointed, but with management changing their focus to cloud products, they expected sluggish 1H20 revenue. With the shifting business, management believes annual recurring revenue, which grew 52%, is a better figure to use. Management expects fiscal 2Q20 revenue to grow 1% to $520 million. Now, more than ever, customers need its services. After pulling back this week, the stock is a nose under our $182 Target Price. We expect to raise it very soon. We are raising our Sell Price to $162.





Square (SQ: $90, up 11%) 


On Thursday, the stock was at $93, a 52-week high. The company nearly tripled from March’s $32. A month ago, the company reported strong top-line growth. 1Q20 revenue was up 44% versus a year ago to $1.4 billion, with the quarterly loss widening to $105 million from $40 million. This was due to operating expenses increasing from $420 million to $630 million. With costs for items like Product Development and Sales & Marketing rising, we aren’t concerned since management has shown the ability to turn these into higher revenue.


COVID-19 has certainly hurt spending in 2Q20. There are signs that the economy has bottomed out, giving us some optimism for 2H20. With nimble product development and adaptability to the marketplace, we are positive about the company’s long-term prospects. Blowing past our $80 Price Target, we are raising it to $100. Our $52 Sell Price is now $77.





Exact Sciences (EXAS: $87, up 1%) 


This is a familiar story. It is still amazing when a stock goes from a 52-week low ($35) and more than doubles in less than three months. This is more than moving up with the overall market. The cream rises to the top, and that’s the case here. Its Cologuard product is used for colon cancer screening and the company purchased Genomic Health in November, adding the Oncotype DX product. This uses genomics to determine the best course of action for breast, colon, and prostate cancer. The stay-at-home orders hurt results later in the quarter a bit but people will not delay these important decisions for too long.


Even with this pullback, 1Q20 revenue more than doubled from $160 million to $350 million. We caution that this is not directly comparable since this year’s period includes Genomic. Screening revenue rose strongly to $220 million. The company is in growth mode so the 1Q20 loss was $105 million versus $85 million. We expect the company to turn profitable eventually. When it does, look out! We certainly expect the stock to reach our $145 Target Price. It’s just that at the current level, a more realistic Target is $110. Trading below our $93 Sell Price, you can decide whether you want to hold on. You know our thoughts.





Zscaler (ZS: $99, up 1%) 


The stock has nearly tripled from March’s 52-week low of $35. The latest catalyst was fiscal 3Q20 (ended April 30, 2020) results, which caused the stock to pop from $76 in late-May. Revenue growth remained strong, increasing an eye-popping 40% to $110 million. Zscaler’s loss widened to $20 million versus $15 million. This was due to customers expanding and using the company’s cloud platform, driving the cost of revenue higher. The more applications and devices customers use means the company has to increase bandwidth and data center expenses. This is a good thing and the company will see higher margins down the road as it continues growing and building scale.


The stock is now above our $95 Target Price. After these results, naturally, the company retains our full confidence. So, we are raising our Target Price to $120. Our Sell Price is now $88, up from $52.





Workday (WDAY: $179, down 3%) 


The stock rose 5% since the company reported fiscal 1Q21 results (ended April 30, 2020) at the end of May, This has been quite a ride from $108 in March, a 52-week low. 1Q21 revenue rose 23% to $1 billion.


The company, formed in 2005, lived through the last decade’s recession and not only did the company survive, it thrived, growing revenue from 2008’s $6 million to 10x that amount in 2010. Providing cloud applications to human resources and finance functions, companies need Workday’s products. 1Q21 loss was $160 million versus $115 million. Undoubtedly, this market leader will turn a profit down the road – the question is “when”, and thus the risk in this high-flyer. We remain confident and have we a $224 Target Price. Our Sell Price is $150.






A Word From Gary Jefferson

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


What the U.S. investor has gone through over the past 10 weeks is truly amazing. There is no question that the pandemic has literally shoved our economy into a severe recession – up to 40 million people have lost their jobs and untold thousands of businesses have been shuttered. The markets plunged straight down into bear territory in the shortest time in history.


Energy was the worst hit. In March, the safest component of this sector, the pipeline and storage MLPs,  had the worst single day loss, monthly loss and quarterly loss in all of history – down 27%, 47% and 57% respectively. Basically, it was the worst day, month and quarter in the history of the entire energy patch, with the quarterly performance for the exploration and production index down -65% and the oil services index down 70%. Yet, the bulls are voicing a consensus that the economic recovery will be “quick," based on three main reasons.


First, the US economy entered this downturn in very good shape with consumer and business confidence and employment at or near record levels. There were no obvious imbalances or dislocations (or bubbles) typically associated with recessions and the banking sector was in excellent shape with plenty of ability to cushion and absorb recessionary-type losses.


Second, the coronavirus pandemic is an external shock that is unique and without precedent – it is no ‘normal’ recession that came as a result of a business cycle, Fed action or a bubble. It was an engineered economic shutdown and as such, we can expect economic activity to be engineered upward with the steady lifting of shutdowns.


Third, the policy response has been unprecedented, both in terms of size and reach – Congress, the Treasury and the Fed have ensured that short-term liquidity problems don’t become systemic solvency issues that will cripple the economy for a long time.


While the market always looks ahead, we believe we still must consider what just happened and what history might have to offer as advice for the future. The financial destruction that has taken place is truly mind-boggling. When an asset like energy drops 70%, there’s only 30% left. That 30% has to grow over 200% to get back to even. Keeping that in perspective, the jobless rate also suffered the quickest collapse in history and sits at levels last seen in the Great Depression nearly a century ago. It took only 3 months to wipe out the job gains of the last 30 years. The rate at which the employment number will have to grow to get back to “even” within the next year is higher than has ever been achieved in history.


So, in historical terms, it will be nearly impossible for that to happen. In fact, even today, the economy has not “reopened." Businesses that were forced to shut down have now – in the infinite wisdom of government officials – been told they can reopen only if they promise to continue to lose money by operating at 1/3 capacity. Another thing history shows us is that as long as it takes for jobless numbers to fall back to prior levels, this time  equates to people who have no or smaller incomes and who are therefore not spending that money. With 70% of our economy being the consumer, it only makes sense that the overall recovery will likely take longer than “quick."

Today, the S&P 500 sits at 3,193. The high before the pandemic was right at 3400, so he is predicting that it will take about a year for the economy to get back close to “even”. In spite of the huge unemployment number, the fundamental data is holding up fairly well considering the slow ramping up of commercial activity. The housing data shows positive signs of life and the unemployment benefits (expiring in July) are helping our wage earners hold the line. Sentiment is riding high with the Dow over 25,000 and the S&P 500 above 3,000.


Many traders are fairly confident that we can get back to high water marks toward the end of the year. Thus, while “quick” implies a zoom shot by year end,  we think the bigger picture of at least a year is a much more reasonable period in which to frame investment expectations. We would add that stocks, at over 21X forward earnings, are presently saddled with their gaudiest forward multiples since the dying days of the Dot Com Bubble.  This is another reason for thinking it will be longer rather than quicker, as we anticipate that the broader indices potentially need to take a breather from their torrid pace. Investors should expect the typical “corrective” moves (a/k/a “volatility) and not lose patience, as there should be ample opportunity to continue to add to positions.





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


Treasury yields increased this week after economic data was reported, particularly Friday’s pleasantly surprising employment report, which showed the economy bottoming out. Investors became more willing to take risks, turning to equities. The two-year yield went from 0.16% to 0.22% and the 10-year yield increased by 26 basis points to 0.91%. With an economy that’s not deteriorating, the four REITs we discuss performed well this week.


Equity Residential (EQR: $66, up 10%, yield = 3.6%)


Equity Residential is a REIT that owns rental properties in highly desirable places like Boston, New York, Washington D.C., Seattle, San Francisco, and Southern California. These areas draw people with high wages and job growth. Before COVID-19 started hurting results in April, 1Q20 revenue grew 3% to $680 million. With over 300 properties and 79,000 apartment units, this company is going to work through the illness, stay-at-home orders, and the economic fallout just fine. If you need proof, it raised April’s quarterly dividend by 6% to $0.603. Equity Residential’s (Target Price: $85) 3.6% yield, certainly not the highest in our universe, is geared towards more conservative investors. With the 10-year Treasury yield at 0.91%, this offers a decent 270 basis point premium.



Office Properties Income Trust (OPI: $29, up 16%, yield = 7.5%)


Office Properties Income Trust is a REIT that leases its properties mostly to single tenants with strong credit characteristics. In fact, the U.S. government is its largest lessee, accounting for 25% of annual rental income. There is greater credit risk than a few years ago after the company acquired First Potomac Realty (Washington D.C. private sector office rentals) and Select Income (non-governmental office space), pushing the amount of rental income that comes from the federal government down from 50% in 2018 to 25%. Another 37% of rental income is derived from investment-grade entities, which is positive. It is these strong credit characteristics that led CEO David Blackman to declare that he does not expect COVID-19 to have a material effect on near-term results.


So far, so good. 1Q20 rents rose 4% and occupancy was 92%. Looking down the line, we expect results to falter a bit due to the economic climate. Nothing too crazy, mind you, given the diverse tenant base and strong credit characteristics. 1Q20 rental income fell from $175 million to $150 million. On a comparable basis, which leaves out properties sold and those that underwent major renovations, rental income was down less than 1%. Income dropped from $35 million to $10 million due to a lower gain from real estate sales and equities, which are volatile. No doubt, renting commercial properties in a rough economy entails risks, no matter how much you try to rent to investment-grade entities. The flip side is that 38% of annual rent comes from non-investment grade entities.


The stock (Target Price: $36) offers a compelling 7.5% yield, compensating you for the risk.



Service Properties Trust (SVC: $11.27, up 67%, yield = 0.4%)  


This REIT had a huge week, culminating in a 21% jump on Friday after surprisingly strong employment numbers came out. With Hotel and Retail properties (including Travel Centers, Movie Theaters, Fitness Centers, and Casual Dining Restaurants) in its portfolio, COVID-19 has not been kind to this REIT. 1Q20 revenue fell 8% to $485 million and the loss was $35 million, reversing the year-ago $225 million profit. With the widespread shutdown orders starting in mid-March, this trend will accelerate in 2Q.


On the positive front, the company has been working on its balance sheet. Recent steps include issuing an $800 million 7.5% note to repay its revolver, a tender offer for up to $400 million of 4.25% senior notes due 2021, and it sold a Massachusetts property for $51 million to pay down debt. There’s just a lot of uncertainty right now. TravelCenters of America, which accounts for 25% of its rent, is open for business since it is deemed an essential business by supporting truckers. At its other properties, the company only collected 45% of April’s rent and entered into deferral agreements. The company (Yield: 0.4%) slashed its quarterly dividend from $0.54 to a penny. We are willing to wait it out a bit longer to see how the economy bounces back. Our leash is not very long, though. We are cutting our Target Price from $33 to $18. Our new Sell Price is $8, down from $22.



JBG Smith (JBGS: $33, up 12%, yield =2.7%)


This REIT owns high-growth, mixed-use properties in and around Washington D.C. With high-quality office tenants like the U.S. government and Amazon, and many of its residential tenants working for one of these organizations, the company is in good shape to withstand COVID-19 and the economic aftershocks. In April, 97% of its office tenants paid rent on time and 96% of residential tenants made their rent. We are willing to accept geographic and industry concentration given the tenant’s quality. 1Q20 revenue rose from $155 million to $160 million and income nearly doubled to $50 million due to a gain from the sale of real estate. The company (Target Price: $41) has a 2.7% yield. This is about 180 basis points more than the 10-year Treasury yield for a high-quality company.



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