Select Page

The Weekly Summary

When holidays break up the market week, a lot of investors simply check out until developments get more interesting. This was not one of those weeks. In the wake of an epochal Federal Reserve meeting and a make-or-break thaw on trade talks, nobody wanted to get trapped on the sidelines while all the fun was happening on Wall Street.

The S&P 500 is now not only breaking records on a regular basis but nudging toward the psychologically important 3,000-point line we suspected it could conquer before trade policy clouded the picture. The Nasdaq is back above 8,000 and even the rarefied Dow industrials, hamstrung by setbacks for many of its bellwether constituents, looks set to crack 27,000 for the first time in history.

As this past week demonstrates, investors have a right to be thrilled. BMR recommendations climbed 2.3%, eclipsing all the major indices as stocks on our list that once looked a little tired got a second wind.

With the exception of our most defensive Healthcare and High Yield portfolios, just about every major segment of the BMR universe beat the market. The core Stocks For Success group gained 3.0% and Technology jumped 3.4%, but even when you get down to the volatile Aggressive portfolio most of our names are in the money and ahead of the game.

We also got outside confirmation of that outperformance this week. First, our submission to this year’s MoneyShow Top Stock Picks competition did better than any of the other 100 participating market watchers put forward. Yes, we gave them Roku (ROKU: $98, up 8% this week), which has climbed so fast that we’re once again approaching triple-the-money returns there since 14 months ago when we added it, and we came out #1 in the competition! We still love this stock. It’s hard not to, when it’s up another 22% since the MoneyShow numbers were compiled at the end of June.

But victory is not just about one stock. Counting dividends, our active universe is up 35% YTD, which is great even by our standards. For comparison, the S&P 500 is up 19% over the same period and is in the throes of its biggest rally since 1997. However, in a year when only two mutual fund managers on prestigious lists scored even 3 percentage points better than we did, it’s nice to see that we’re not only delivering absolute numbers but staying far ahead of the pack.

In this position, our strategy revolves around expanding the lead and resisting the urge to change what clearly isn’t broken. Our recommendations are working. The ones that fizzled are gone, replaced with the most attractive stocks the market gives us in the present. As the economy shifts, we’ll shift with it. For now, no course correction is required.

Earnings are coming. The trade situation has stopped escalating to the downside. Everyone hopes the Fed will cut interest rates at the end of the month, especially after Friday’s unemployment number came in a little higher than expected. Jay Powell will give us some hints in his Congressional testimony later this week. And our companies are still racking up cash a lot faster than the market as a whole.

There’s always a bull market here at The Bull Market Report! The Big Picture takes advantage of the last lull before earnings season (our Previews start next week) to provide a strategic look at our expectations and a refresher course on why these weeks are important. Gary Jefferson shares an elegant gauge of how far the U.S. economy is from recession.

We also conclude our tour of the Healthcare portfolio with updates on Johnson & Johnson, AstraZeneca and Eli Lilly. It’s now time for the Aggressive group to get similar treatment, starting with Anaplan, Alteryx and Tesla, which had good news to report last week that surprised nearly everyone but us. And as always, we wrap with The High Yield Investor, this time focused on Vornado and Ventas in a strong economy as well as how Annaly and other Mortgage stocks may fare in a low-interest-rate world.

Key Market Measures (Friday’s Close)

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

BMR Companies and Commentary

The Big Picture: Get Ahead Of The Earnings Crush

It happens every 90 days with the big Banks officially starting the 2Q19 earnings season. We’ll see this next Monday, which means this is the last Bull Market Report before the flow of Previews and Reviews starts up again next week. As such, we have an opening here to provide a few strategic notes that will apply throughout the cycle.

First, in terms of timing, you can expect our season to start relatively calmly with Johnson & Johnson the morning of July 16 followed fast by Netflix (NFLX: $381, up 4%), The Blackstone Group (BX: $47, up 6%) and mighty Microsoft (MSFT: $137, up 2%). Every one of them will go a long way toward setting the tone for the market as a whole to follow, with the Technology names likely to grab more than their share of headlines. We’ll say more about them all in the days leading up to their numbers.

The real fun starts the week after, when almost 25% of our recommendations that report quarterly results are on the calendar, and then we wrap up July with a surge of 20 BMR companies crowded into a five-day period. After that, the flow tapers down fast. While we’ll keep reading 10-Q filings through early September, they’ll be more about weighing stock-specific nuances than figuring out the broad strokes.

For us, the broad strokes will be in place after July 30 with numbers from Apple (AAPL: $204, up 3%). Three weeks from now, we’ll have a pretty good sense of how our entire universe did last quarter and the business conditions their management teams see ahead. From there, we can extrapolate most of what’s going on elsewhere and then, if the numbers are as good as we expect, we’ll have 10 weeks to ride the wave.

That’s what every earnings season is all about. The day the 10-Q gets filed, we have absolute certainty on how well the company did in the trailing period. When our projections deviate from that reality, we adjust, and when that revised outlook changes investors’ sense of what the company is worth, the stock goes up or down in response.

But then the quarterly clock starts ticking again. The farther from that moment of 10-Q clarity we are, the more room Wall Street’s targets get to drift away from corporate reality. Eventually that drift reaches the point of maximum uncertainty and investors are more likely than ever to miss crucial clues that can sink or surge the stock.

We prefer to get most of our uncertainty out of the way as early in the cycle as we can. That way, we know what’s going on inside our stocks before other investors figure it out. If we need to raise our Targets or pivot out of a stock that’s finally hit a cash flow wall, we can do it while Wall Street is still off balance and under a cloud of suspense. And the market’s map of the new quarter’s winners fills in, we’re in a better position to make the first moves.

A few weeks from now, we’ll know which moves (if any) to make. For now, we already recommend all the stocks we can’t resist. There isn’t a lot of sizzle out there that isn’t already in the BMR portfolios. The market as a whole is still looking at 2% earnings deterioration this quarter, with growth not coming back until the end of the year. The BMR universe, on the other hand, remains on track to deliver 3% growth.

Our earnings targets have actually come up a little over the last three months. Despite all the noise distracting Wall Street since April, the signal is brighter than ever. Remember, most of our stocks have nothing to do with China. And they’re expanding sales fast enough to fight rising labor costs and other pressures on the bottom line. We’re in the hot spots. As they demonstrate that heat over the next few weeks, it’s likely that other investors will start jumping to our end of the market instead of the other way around.

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

AstraZeneca (AZN: $41, down 1% -- all returns are for the week) 

Continuing with our Healthcare Portfolio coverage from last week, this stock is up a healthy 11% YTD after strong news from its diabetes and lung cancer sectors.

The company obtained FDA approval for Qternmet XR, which is an oral treatment for Type-2 Diabetes sufferers. This is noteworthy because the drug is an add-on to traditional diet and exercise, meaning it can be prescribed to a greater number of patients, leading to increased revenue. Meanwhile, alternate Type-2 Diabetes drug Farxiga is on pace to become a blockbuster, producing $350 million in revenue during 1Q19, for a nearly 20% YoY increase.

The company’s Oncology business is also producing significant results, with non-small cell lung cancer drug Tagrisso helping boost the sector’s 1Q19 revenue by 60% to $1.9 billion. Tagrisso delivered over $500 million in revenue during the first quarter alone. Imfinzi (which we’ve written about in previous BMR newsletters), just received positive results from a Phase 3 clinical trial, and has moved one step closer to FDA approval.

BMR Take: AstraZeneca may be trading at all-time highs, but it’s there for a reason. The company is exhibiting major potential, and is on the verge of cracking through our $42 price target. Given that, we’re ready to up our Target and Sell Prices to $50 and $36, respectively. The yield is extremely high for the sector, at 3.4%. That adds an extra layer of value as a defensive play, which is what draws many to the Healthcare sector in the first place.

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

Johnson & Johnson (JNJ: $141, up 1%)

Aside from being an industry Blue Chip, this is one of the most dependable companies in existence – one of only two companies with a AAA credit rating (the other is Microsoft, another BMR pick). For reference, the United States government has a AA+ rating, so Johnson & Johnson is actually more creditworthy than the federal government.

J&J is a truly diversified Healthcare company, with a major Pharma presence. The company has a strong pipeline of drugs, with the FDA’s recent approval of Darzalex in combination with a Celgene drug for multiple myeloma patients adding another potential large revenue driver. Darzalex is already a blockbuster drug ($2 billion in sales last year), and now it can expand its market share (experts are predicting as much as $3 billion in revenue for 2019).

On top of that, the company announced plans for a Drazalex follow-up by partnering with Genmab (whom they partnered with on Darzalex) to create Hexabody-CD38. The beauty of the deal is Genmab will spend the upfront time and resources to prove that Hexabody has market potential, and only then will Johnson & Johnson decide whether to license the product. Thus there is limited downside here for J&J, and the company could land yet another multiple myeloma blockbuster like Darzalex.

The 1Q19 numbers were just okay, with U.S. sales up 2% YoY to $10 billion, while international sales fell 2% to $10 billion. The $20 billion in revenue per quarter has remained steady throughout the year, and illustrates just how consistent and dependable J&J is. With a $370 billion market cap in the Healthcare space, we’re not looking for massive growth here, just safe, consistent performance.

BMR Take: The stock is up 10% YTD, and the dividend of 2.7% is one of the most bankable in existence. That’s important given the overall market volatility. Remember, Healthcare is a defensive sector that’s primed to outperform during market downturns. Right now though, we’re looking at slow and steady growth for J&J, which is exactly what we expect. This is one of the few companies we would not sell here at BMR.

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

Eli Lilly (LLY: $113, up 2%)

Despite a 13% 1Q19 surge, we’ve had a rough second quarter here and the stock is back to par YTD. (The dividend keeps us in the black, albeit slightly.) With loads of potential in the pipeline, we’re looking for Lilly to bounce back during the second half of the year and reclaim that $130 mark.

The company has produced a wealth of positive news about its drug pipeline in recent days. Type-2 Diabetes drug Tirzepatide received excellent test results, with Lilly now planning to expand the drug’s usage by targeting NASH disorders. NASH* is expected to grow to a $13 billion market by 2026, and there are currently no drugs which explicitly treat the disease. Lilly is initiating a Phase-2 trial for Tirzepatide later this year as it looks to corner this growing market.

* NASH is an acronym that stands for Non-Alcoholic SteatoHepatitis. It is the most severe form of non-alcoholic fatty liver disease.

The company is also submitting its inflammatory arthritis drug Taltz for regulatory approval later this year. Taltz already brought in over $900 million in revenue last year for treating other types of arthritis, so FDA approval will easily turn this into a blockbuster drug (over $1 billion in annual revenue). The company also announced a partnership with Avidity Biosciences to leverage the company’s innovative antibody technology. Lilly only put up $35 million in upfront capital, and the deal could help the company further penetrate the massive asthma, allergies and autoimmune disease markets.

BMR Take: Lilly is a Big Pharma Blue Chip with a ton of growth potential. Drug approvals and strategic partnerships are primed to enhance revenue going forward. We’re looking to get back to the all-time high of $130 that it set in March, and we maintain our $145 one-year Price Target.

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

Alteryx (AYX: $116, up 6%)

The stock has nearly doubled YTD (up over 90%) to its current level at an all-time high. As a subscription-based data analytics platform, Alteryx is at the heart of the thriving Software-as-a-Service (SaaS) industry, which continues to outperform as Alteryx acquires and retains clients at impressive levels, thus locking in recurrent revenue streams.

Alteryx has revenue growth of 80% (1Q19 revenue grew 50% to $76 million), and produces positive free cash flow thanks in part to the ever increasing operating margin (now over 90%, which is phenomenal for a growing Tech company). For Alteryx to grow its revenue at such a lightning-fast pace and produce excess free cash flow speaks volumes about management’s capabilities. The company is guiding to full year 2019 revenue growth of 40%, but management has beaten analyst estimates each of the last five quarters, so the projections tend to be on the conservative side.

The company estimates that workers spend an average of 16 hours per week consuming and analyzing data. Alteryx saves its customers time, and therefore money. The total addressable market is $24 billion and expected to double over the coming years. These are some very powerful tailwinds, and Alteryx has already signed up over 5,000 customers after a 5% boost last quarter. Big names include Netflix, Twitter and WeWork. The company is doing everything right, and the only potential concern is the lightning-fast acceleration of the stock, but we remain convinced the fundamentals warrant such an emphatic upward trajectory.

BMR Take: Analysts such as Cowen and Needham boosted Alteryx after the strong 1Q19 earnings call, the latter of which is forecasting a $120 target price (10% above our $105 target). But since the stock has already crashed right through our target, we’re raising our Target and Sell Prices to $125 and $100, respectively.

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

Anaplan (PLAN: $53, up 5%)

Here’s a stock that has doubled YTD, including a huge boost this week after Goldman Sachs delivered an upgrade coupled with strong 2020 projections. Investors always love to hear analysts like Goldman Sachs express optimism about a growth company’s long-term potential. The firm highlighted growing deal sizes and increased productivity as future revenue drivers.

Indeed, Anaplan grew big-ticket clients spending at least $250,000 per year 43% to 280 total during 1Q19. That fueled revenue growth of 47% YoY to $76 million. Management guided 2Q19 revenue up roughly 5% from what analysts had been expecting, which is a great sign.

Growth is being driven in part by strategic partnerships, such as the deal inked with global consultancy Deloitte. Deloitte has 650 consultants delivering Anaplan solutions to clients, and is looking to double that number over the next two years. The company also announced an updated platform with a more modern interface, and a mobile app as well. So product upgrades are enhancing the value of the company, even as they sign big-name clients.

BMR Take: The stock went public less than a year ago, and has already tripled in that time. There was some concern about the value of planning software to enterprises, but clearly that was unfounded. For a stock to triple in nine months is astounding, and we see another potential double from here. That said, we’ll be cautious and “only” raise our Target to $70 and Sell Price to $45. Don’t be surprised if we revisit those numbers shortly.

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

Tesla (TSLA: $233, up 4%)

As we mentioned in Friday's News Flash, Elon Musk announced the production of over 87,000 vehicles for the quarter, and deliveries of 95,000 which topped expectations by a good 10%. That sent the stock soaring, which is much-needed given the decline from the $300 level.

Some analysts are even more bullish than Tesla management. JMP Securities predicts 97,000 2Q19 deliveries, on the strength of 40,000 Model 3’s. With the company fast approaching 2% total market share of U.S. vehicles sold – an astonishing feat for an Automotive industry upstart – there’s plenty of room for optimism here, especially as we put the weak sales start to the year in the rearview.

What’s more, Tesla is rumored to be tinkering with its own battery cell manufacturing, which would significantly enhance operating margin and efficiency. And with Tesla logging more autonomous vehicle driving hours than any other company out there, Musk is priming the company to lead the soon-to-be established industry. The fact that rivals Waymo and Uber are competing to be first-to-market is incidental. Tesla is competing to be best-in-class, which is a much more pertinent moniker.

BMR Take: Tesla hasn’t lived up to expectations… yet. We still believe Musk has the magic touch that he’s exhibited over and over again, and the autonomous vehicle market is shaping up to be a major long-term revenue driver. The stock is 18% above its mid-May lows, and we see continued upside as Tesla resumes its push higher. But with that said, the stock is volatile and many on the Street are predicting a $100 Target, and a few are even looking for much lower levels. The short position in Tesla is one of the highest on the Street, which is inherently bullish, but there are a lot of smart minds out there that think the company will never reach the lofty levels that some predict. Invest in this one with severe caution.

We are lowering our Target to $265 and lowering our Sell Price to $210. If it hits this latter number, we are out.

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

A Word From Gary Jefferson

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

Geronimo! As many investors had hoped, we dodged the proverbial "bullet" when President Trump and Chinese Chairman Xi agreed to proceed with negotiations during their highly anticipated meeting. The likeliest outcome appears to be a prolonged truce on trade, with neither an escalation nor a removal of tariffs. For now, talks will continue, which is a very good outcome when you consider the alternative.

While that's all really good news, many investors are still questioning what the impact to the global economy and financial markets will be. As we have reported in the past, the consensus still calls for the economic impacts of higher tariffs to be on the order of a sub-1% drag to GDP. However, it's also obvious that this is a fluid situation and, as Yogi Berra would say, "It ain't over ‘til it's over.”

The experts have mathematically worked out the GDP numbers, but the total costs from tariffs have two components: The direct hit to the economy and the effect on both business and consumer confidence. So, while the actual tariffs implemented so far are calculated to cut less than 1% from GDP, the impact from lowered business and consumer spending is a whole lot more difficult to quantify.

As we learned in Business 101, when business confidence deteriorates, the marginal employee may not get hired or capital spending (business expansion) may be put on hold. History shows that a reduction in business confidence and spending was one of the key drivers of the 2001 recession.

The Institute for Supply Management (ISM) said its index of national factory activity dropped to 51.7 last month, the lowest reading since October 2016, from 52.1 in May. There was, however, some good news for manufacturing. Factories reported hiring more workers, which included replacing retiring workers and adding summer help. The survey's factory employment gauge rose to 54.5 from 53.7 in May.

We need to see a positive number in the ISM's New Orders Index and the ISM's Factory Activity Index. Both were positive this morning, albeit just barely and both falling from prior month higher levels. The ISM's forward-looking new orders sub-index decreased 2.7 points to a reading of 50.0 last month, the lowest reading since December 2015.

Below is one of our many tools that we watch concerning recessions, and is provided by Clearbridge Investments. This chart is an easy way to "see a picture" of all the numbers that get reported each month.

Normally, it takes a majority of red Xs to signal that we are headed for a recession. As to the above signal that the yield curve is inverted, first, we would only agree that it is partially inverted, not totally inverted. It is no doubt "flat,” but the 2-yr and 10-yr are not inverted.

We believe persistent uncertainty over trade will lead central banks to ease monetary policy as they recently did in Europe. Our own Fed has reversed gears from a hawkish to dovish tempo and opened the door for easier monetary policy.  They pledged to "act as appropriate" to maintain the current economic expansion. Many experts believe they will cut rates this month.

We hope they won't because we still believe the economy is in a slowing but nevertheless expansive mode. Regardless of whether a cut takes place in July or September, any cut could cause the yield curve to steepen. And, it will certainly create an offset to any slowdown in economic growth due to the tariffs.

All in all, the fundamentals for the market remain reasonably firm.  Monetary policy is pointing to a cut in rates as soon as July or next September. Consumer confidence is still positive. One can argue that it is not a good time to be buying or staying in the market because of all the uncertainty; i.e., that “wall of worry.” But one should always be aware that the U.S. economy is resilient and that stocks have a long history of climbing the wall.

It may sound a bit incongruous, but the more concerned investors are about stories or events that could shake the markets, the more upside stocks potentially have. That is because the wall of worry creates a scenario where low expectations set a low bar, and stocks can surprise to the upside with good news and good outcomes.

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

The High Yield Investor

By John Freund
VP of High Yield
The Bull Market Report 

With the June jobs numbers blowing away expectations, there is now some chatter about the Fed maintaining interest rates next month (as opposed to lowering them, as most had been predicting they would). This is a great problem to have: Do we juice the economy by lowering rates, or do we let the economy thrive on its own, as evidenced by continued strong job growth (224,000 new jobs added last month alone)?

As far as our High Yield Investor stocks are concerned, it’s a win-win scenario. For example, with nearly 20 million square feet of Manhattan office space, Vornado (VNO: $65.50, up 2%, Yield = 4.0%) is the largest landlord in the premier Real Estate market in the world. On the one hand, if the Fed lowers rates, that will provide a boost to Vornado which – like most REITs – takes on large quantities of debt to finance long-term developments. Paying lower rates of interest definitely buoys the bottom line. That said, should the Fed hold off on lowering rates, we’re left with an expanding economy and rapid-fire job creation. Given that the company has 20 million square feet of office space, plus an additional 2.5 million square feet of Manhattan retail space, Vornado’s long-term prospects rise with a booming economy. What’s more, the stock market keeps setting new all-time highs, and since 90% of the portfolio is based in New York City, where a majority of investment professionals live and work, the longer this bull market goes, the better the outlook for Vornado.

High demand and limited supply in Manhattan keep sending office and retail rents higher. 2018 saw a 14% YoY spike in office leasing (33 million square feet). In terms of Commercial Real Estate (CRE), New York is a dream come true. The city that never sleeps boasts a diverse array of industries which attracts some of the best and brightest from around the world, thus keeping rents high. Over the last decade, New York was responsible for 8% U.S. GDP growth, and its startup and Venture Capital culture are second only to San Francisco in terms of fundraising numbers. Throw in Wall Street, Madison Avenue and 5th Avenue shopping – all of which make up a hefty chunk of Vornado’s clientele – and one can see why New York is the premier location for CRE.

Vornado already has a powerful foothold on Manhattan Real Estate, boasting flagship properties in premier locations such as 5th Avenue, SoHo, Time Square and the Upper East Side. The company courts the most premium clientele – names like Bloomberg, Google, PayPal, Disney, Aetna, Macy’s and many others. Vornado’s top-30 tenants are worth over $1 billion each, and given that most retailers sell luxury goods, they are immune to the retail-apocalypse currently being engineered by Amazon (another Vornado client). What’s more, the turnover rate remains extremely low even during harsher economic times. With a vibrant and growing economy at its back, Vornado can expect even more robust occupancy rates (97% for NYC in 1Q19).

The company brought in $535 million in revenue during 1Q19, which was about flat with 1Q18. FFO/share came in at $1.30, nearly double the year ago quarter’s figure of $0.70. That’s especially good news considering the tough year that REITs had in 2018, given all of the macroeconomic concerns. Today’s concerns are much less acute. Essentially, we’re wondering if the Fed will lower rates to artificially juice the economy, or let the economy organically grow apace. Not a bad situation to be in.

The stock is already up nearly 10% on the year, and we’re looking for more. That 4.0% yield is a nice bonus as well, especially for a company as financially stable as Vornado, which is trading at around a 25% discount to its NAV. So the stock looks inexpensive on a NAV basis. Even after the run-up this year, we’re still trading 10-20% below last summer’s mid-$70s range, so there’s room to run once the stock gets moving. With the wind at its back, we believe Vornado is primed to recapture that value and then some. The booming economy is great news for the city of New York and for Vornado, and at this point a Fed rate cut would be icing on the cake.

Another of our REITs that’s had a fantastic first half of the year is Ventas (VTR: $69.79, up 2%, Yield = 4.6%). The stock is up 23% YTD, as the company rides strong market tailwinds and a long-term restructuring plan which has investors expecting big gains in years to come.

It’s no secret that Baby Boomers are retiring at unprecedented rates – to the tune of 10,000 per day, continuing for the next 19 years. Throw in rising life expectancy and increasing Healthcare spend, and Healthcare REITs like Ventas are riding a perfect wave of profitability.

The company boasts 1,200 properties across the U.S., Canada and the UK. Its diverse portfolio includes senior housing, medical office buildings, university-based research centers and long-term post-acute care facilities. A majority of its holdings are also on the RIDEA structure, whereby the company actively manages its properties (hiring and firing, making capital expenditures and strategic corporate decisions). This provides an increased risk/reward premium, which we believe Ventas (and fellow RIDEA Healthcare REIT Welltower – another BMR pick) will benefit from as customers continue to spend more on their Healthcare, and demand better-quality facilities and services. Right now, RIDEA REITs are less profitable than their triple-net lease cousins, but that’s only because of necessary upfront costs. Those costs will decrease over time as technology continues to innovate, and given the much higher retention and occupancy rates, RIDEA REITs will improve their bottom lines at a much faster pace than triple-net lease REITs.

That said, roughly 40% of the portfolio is triple-net lease, though management is disposing of underperforming assets so that number is likely to decrease. Two of the company’s triple-net lease tenants, Kindred and Brookdale, underwent turnarounds in recent years, and Ventas subsequently disposed of its Kindred properties and restructured the Brookdale lease. This short-term pain is forecast to provide long-term gain for the company going forward. The Brookdale restructuring is expected to generate $16 million in earnings this year, and $55 million next year.

Over 30% of the portfolio is Senior Housing, which will be the most heavily impacted by the ‘graying of America.’ Ventas has a strong foothold here, and Senior Housing starts in the top 100 markets (where Ventas mostly operates) were at their lowest level during 1Q19 in the last seven years. So there’s less competition coming through the door. Management highlighted this on the latest earnings call, along with the fact that occupied units grew nearly 3% YoY for the quarter. Strong demand, plus limited supply. Small wonder the stock has surged.

Even though FFO/share declined by about 5% during the quarter (to $0.99), that metric doesn’t tell the whole story since the aforementioned disposed properties led to a decrease in FFO. What Ventas does next – the new properties it develops or acquires – will guide the company’s forward FFO levels. Given all of the tailwinds at the company’s back, plus that positive supply/demand dynamic for Senior Housing, we like the position management is in vis-à-vis new properties, and see opportunity for FFO improvement over the coming year, as do many analysts of the stock.

What’s more, Ventas has a strong Medical Office segment, which accounts for nearly 30% of its total net operational income. With high-quality tenants and $1.5 billion of properties in the Medical Office pipeline, this segment is primed to be a substantial revenue driver for the company.

Last but certainly not least, there’s that attractive 4.6% yield, which of course is the cherry on top of our 23% YTD gain. Management has kept the dividend in place or raised it every year since 2000, with the exception of 2001 and 2016. The payout ratio was 80% last quarter, so there is still substantial margin left to cover the dividend. And that’s been with the declining FFO, which again we believe will improve over the coming year.

All told, this is a fundamentally strong REIT riding some major tailwinds, and with a safe, dependably dividend to boot. A booming stock market only improves Ventas’ prospects, as it means those Boomers are retiring with more capital to their name, and thus more discretionary spend when it comes to their long-term Healthcare needs. We expect the stock to keep on the same track over the coming six months, and for the company to improve FFO along the way.

Some Quick Thoughts On Annaly And Other Mortgage REITs

No one likes Mortgage REITs more than we do. We’ve been touting Annaly since 1998 when we started The Bull Market Report. They’ve been paying above-average dividends for over 20 years now.

BUT, and here it comes…… BUT, we are moving into uncharted waters. We have a slight inverted yield curve here in the US now with the 3 month T-bills and 1 year Treasury notes paying a higher interest rate than the 2-year T-note. The 2-10 spread is less than 20 basis points. And more importantly, there are trillions of dollars of 10-year notes in Europe and Asia that are trading at negative rates.  NEGATIVE RATES.  That means when you buy a 10-year government note YOU HAVE TO PAY THEM to hold your investment.

So the question is: Can it happen here? The short answer – of course it can. 2nd question: What if it happens here? And what will happen to Mortgage REITS who’s whole business plan is borrowing short and investing longer. Well, no one really knows, but there is a possibility that the great management team at Annaly may just not be able to handle it.  We believe in them, but the forces in the world might be strong than management expects.

Please tuck this column away in the Food For Thought section of your brain.  And keep a close eye on Annaly and our new pick AGNC Investment.

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