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The Weekly Summary

 

Week after week, Wall Street shakes off the persistent impact of the COVID epidemic in order to look resolutely ahead to a healthier and more economically vibrant future. While the Dow Industrials still needs to recover a little ground, the S&P 500 has now repaired all YTD damage and is now just 5% from once again challenging all-time records. The Nasdaq, rich with Technology stocks, has long since left its pre-COVID peak behind and is now 9% beyond that level.

 

Many stocks are behaving as though the pandemic shock never happened. However, this is more about investor sentiment and the Federal Reserve's easy monetary policy than a sign of economic and corporate resilience. The economy remains extremely fragile, with recent estimates of Gross Domestic Product showing a 35% decline in the recent quarter and continued weakness through the remainder of the year. Roughly 51 million Americans have filed for unemployment benefits or are relying on less formal government support to pay the bills.

 

And corporate profits are in free fall. Six months ago we were confidently looking for 10% earnings growth this year across the S&P 500 as a whole. Since then, thanks to the combined force of the COVID quarantines and the ongoing oil glut, that growth target has turned into the gloomy certainty that earnings will drop at least 20% instead. That's deep enough deterioration to push corporate cash flow to where it was in 2017, before the federal tax cuts widened margins and raised the bottom line across the board.

 

Looking solely at the fundamentals, this is not the best time to buy stocks and look for instant gratification. Until earnings start moving in the right direction again (probably late this year or in early 2021), the market revolves around hope and even a little hype. As long as investors are willing to tolerate paying a steep 22X earnings for the S&P 500, hope is all we need. Of course we always prefer strong fundamentals as well, but for now sentiment is good enough. Day by day and week by week, the market mood remains intact.

 

After all, we've already survived the worst downswing in a generation and come out of it mostly unscathed on the whole. The BMR universe is up a healthy 15% YTD, which is all we ever ask for in any seven-month period -- and the gains are especially welcome in the face of the S&P 500's flat overall performance. Not losing money is our first priority. Making more money than index funds comes after that. We're achieving both goals despite the pandemic's worst efforts.

 

That said, many of our stocks, especially on the more "defensive" side, have had a rough time as the Fed slashed interest rates to zero and then flooded the market with easy cash for investors chasing growth at any price. Paradoxically enough, Real Estate and High Yield investments, normally the bulwark of any healthy portfolio, have been a drag for us, keeping our aggregate performance a few steps behind the Nasdaq. We aren't worried. When the market turns, defensive will feel good again and money will rotate back into the havens that currently look more than a little neglected.

 

And the market will turn. Whether the catalyst is a fresh flare in COVID cases or some other currently intangible threat, we will ultimately see growth give way to yield stocks. The November election is over three months away and will bring its share of doubts and worries no matter who wins or loses. While we would like a COVID vaccine as fast as possible, we also recognize that the development process takes time and is not without risk. However, we are well aware that the Fed is not going to allow another 2008-style market crash if they can help it. That awareness in itself is the best cushion a nervous investor can have.

 

So where are we? Remember, not all stocks are created equal. Fed policy supports all companies, but some business models are better suited to this environment than others. Technology companies remain almost entirely insulated from the virus and its effects, for example. Elsewhere, simply reducing the weight of obvious sore spots in the economy in our portfolios helps to eliminate a lot of the pressure that the S&P 500 still struggles to overcome.

 

We aren't in a lot of Energy, for example, and our Financial holdings are minimal compared to the market as a whole. Our primary Consumer stock is Amazon, about which we don't need to brag much after its 56% YTD rally. And we have avoided the Materials sector and most Industrial stocks as well. Since this is where the earnings pain is concentrated, our relative absence liberates us from most of the fundamental drag weighing on the market. If anything, our universe is still delivering earnings growth this year, albeit at a reduced expansion rate. Companies like Apple are not deteriorating. They just aren't growing as fast as we expected to see six months ago.

 

It's almost like there's no recession at all for our stocks taken as a group. There's a slowdown in growth, but the numbers still point up. That's all it takes. In a world of free Fed money, investors will still favor quality over the alternative.

 

 

There's always a long-term bull market here at The Bull Market Report! Gary Jefferson has the week off, but we have a special installment of The Big Picture that lays out our view of why stocks can sustain these multiples and even keep breaking records. The High Yield Investor takes a fresh look at our Municipal Bond funds and a few more esoteric recommendations, and then we have a full array of earnings reviews and previews to get in front of you now that the 2Q20 season has formally begun.

 

We are still reviewing our COVID-19 schedule but for now expect to see you in two weeks.  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

 

 

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BMR Companies and Commentary

 

The Big Picture: Why Valuations Can Stretch

 

Some food for thought on this “overvalued” stock market. We’ve been thinking for months now that the market is overvalued. Every day the virus gets worse and we expect the market to recognize this and sell off. And every day the market goes higher. Not every day of course, but you know what we mean. Could there be a reason for this strong stock market?

 

How about this concept: We’ve heard some very astute money managers talk about asset prices compared with note and bond yields. We all know the 10-year Treasury is “ridiculously” cheap at 60 bp. But that’s because we’ve never seen it this low. Could it go lower? You say that’s impossible? But the market is there because half think rates will go up and half think rates will go down. Hmmmm. How could rates go down from here? Well, we were saying that when the 10-year hit 2.0%; then 1.5%; then 1.0%. Look at it now. What if the 10-year went to 20 bp? What if it went to -20 bp? Is that possible? What if it went to -100 bp?

 

Some very sophisticated people think 3-month T-bills could go from 12 bp where it is now to negative rates, and in fact as low as -200 bp. Yikes. What if that were to happen? Well, people holding notes and bonds today would be VERY happy because they'd get to sell at a healthy profit. However, investors looking for safe investments would have to PAY interest in order to invest. The end result of all of this would be that stocks would become the only game in town and there is talk of potential huge gains in stocks if this were to happen. S&P 500 at 5,000 has been mentioned.

 

So there you have it: The bullish scenario for the “over-valued” stock market. Apple at $400? Oh right – we forgot. It’s already there. Ha. But $500? Amazon at $5000? Think about it. Watch carefully. Be nimble. And above all, buy quality. You don't need perfection. You just need the best assets the market provides . . . and we know we're overweight on that.

 

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Johnson & Johnson (JNJ: $149, up 5% this week) 

 

Johnson & Johnson had a ho-hum response after the company reported 2Q20 results on Thursday. With the stock 6% off April’s $157 all-time high, we see this as an opportunity to pick up more shares in a great company. Looking at last quarter, sales fell 11% to $18.3 billion versus last year, and earnings were $3.6 billion, down 35%. Obviously, we don’t like to see a company’s top-and-bottom lines moving in that direction. But in this case it is understandable, with COVID-19 hurting its businesses as people put off consumer purchases and elective surgeries. With hospitals reopening, we expect the company’s sales to rebound in the current quarter. The good news in the quarter is that its largest business, Pharmaceuticals, saw sales rise 2% to $10.8 billion. Consumer Health’s sales dropped 7% to $3.3 billion, with the pandemic causing people to put off purchasing skin health and beauty products. No doubt, shoppers will go back to buying these great products. After all, its over-the-counter products, with strong brands like Tylenol and Listerine, will always do well. Medical Devices was particularly weak, experiencing a 34% sales drop to $4.3 billion. People had to put off surgeries. But as surely as the sun will rise, this won’t last. With a rare AAA-rated credit, the company hiked its dividend in April again (2.7% yield), running its streak to a remarkable 58 straight years. When a stock is this good, we don’t bother putting out a Sell Price. Our Target Price is $168. And when it hits this number, we’ll raise it!

 

 

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Financial Select Sector ETF (XLF: $24, up 2%) 

 

With Financial stocks bouncing back after getting routed earlier this year, the ETF has jumped 37% from March’s 52-week low of $17.49. The fund tracks the S&P 500’s Financial Sector, with Berkshire Hathaway representing 14%, followed by major financial institutions JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo. With earnings reports coming in, these have generally been better than the Street expected. Rounding out the fund’s top 10 holdings, it holds BlackRock, S&P Global, Goldman Sachs, American Express, and Morgan Stanley. With the Fed doing what it can do to keep the financial system functioning, these companies will get through the pandemic just fine. For those seeking a diversified Financial portfolio, this ETF fits the bill. It's already getting close to our $25 Target Price. Depending on how the coronavirus plays out, we could raise it very soon. We have a $19 Sell Price.

 

 

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Berkshire Hathaway (BRK.B: $191, up 4%) 

 

With pandemic fears ebbing and the market’s strong rebound, the stock has rallied from late-March’s $160. Those considering it merely a proxy for the overall market are missing out. Warren Buffett, the Oracle of Omaha, will take advantage of any volatility. He lives for these types of opportunities. While he has been criticized for moving too slowly, this completely misses the mark. Earlier this month, Berkshire put some of its $137 billion of cash to work when the company announced it would pay $9.7 billion to acquire a gas pipeline network from Dominion Energy. There were also reports that Buffett used some cash to increase buyback activity, increasing it to $5 billion to $6 billion in 2Q20 compared to $1.7 billion in 1Q20. Buffett and Munger have been doing this for a long time, and we are sure they know how to allocate capital. We have a $255 Target Price and we haven’t bothered with a Sell Price since we would never sell the stock.

 

One more note about the buybacks. Warren has said many times that he just can’t find a company to buy that will have a major impact on the bottom line. We find that hard to believe, but I guess we must. Thus, we have to say that the only resource we see Warren using is buying back stock at a bigger rate. But even if he just keeps up the $5-6 billion a quarter, that’s a LOT of money over the next four years. It could be almost $100 billion. This is nothing to sneeze at, and in fact, is a strong reason to have this one in your portfolio. It is a very conservative position, and in this nervous market we are living in, a strong move for the future.

 

 

 

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Blackstone Group (BX: $56, up 4%) 

 

The stock, which has made an amazing comeback from $33 in mid-March, remains off February’s $65 all-time high. The company is scheduled to report 2Q20 results on Thursday. Certainly, 1Q20 results were affected by COVID-19, which hurt global economic growth and markets. Revenue was hurt due to $4.4 billion of unrealized investment losses. The difficult environment continued in the first part of 2Q, with markets rebounding in the latter portion. We expect more volatility with cases resurging in certain parts of the country, and some states are pausing or stepping back on reopening businesses. It is important to remember that Blackstone, with $570 billion under management, invests for the long term, and it will take advantage of any fall in asset prices. It also has $150 billion of “dry powder” to invest in its core areas of Real Estate, Private Equity, Hedge Funds, and Credit. We have a $69 Target Price and a Sell Price of $52.

 

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Amazon.com (AMZN: $2,962, down 7%) 

 

Our only complaint about Amazon is that we are running out of superlatives. On Monday, the stock hit another all-time high at $3,344 before pulling back. We expect the company to post another quarter of strong revenue growth when it reports 2Q20 results later this month. After all, people continued to shop online throughout the pandemic and in fact, increased their spending. Plus, its business is so much more than that, especially when you factor in Amazon Prime.

 

1Q20 revenue rose 26% versus a year ago, from $60 billion to $76 billion. COVID-19 caused costs to rise for additional hiring and for implementing safety protocols, and that continued in 2Q20. Still, these are only temporary. After some profit-taking this week, the stock settled below our $3,000 Target Price. We don’t expect that to last long. In fact, we hereby raise the Target Price on Amazon to $3500, the highest on the Street. Note that the company is one of the select few that we haven’t put a Sell Price in place. It’s just that good. We can’t think of any reason why one would sell this stock. Down 7% last week. Could be a great opportunity to pick up some shares.

 

Price too high? OMG – Don’t even think like that. You only have $20,000 to invest? Buy six shares. Just do it. (We’d rather have 6 shares of a $3000 stock which is on the way to $3500 a share, than 600 shares of a $30 stock that is range-bound between $28 and $32!)

 

 

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Paycom Software (PAYC: $295, down 4%) 

 

The stock took a little breather, falling roughly 10% from early June’s $330 level, after doubling from April’s $163, the 52-week low. With the company scheduled to report 2Q20 results in a couple of weeks, we expect some softness due to companies instituting headcount reductions since Paycom charges clients a per-employee fee. As a reminder, 1Q20 revenue rose 21% year-over-year to $240 million and earnings jumped from $45 million to $65 million.* The company inked new clients in that quarter, more than offsetting weakness from existing clients caused by the pandemic. It will need additional deals for 2Q20 to show growth. Paycom, offering technology solutions to HR and payroll departments, will overcome any near-term weakness since its products provide strong long-term benefits to its customers. We have a $355 Target Price and our Sell Price is $279.  

*That’s 27% after tax. Stellar.

   

 

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Alteryx (AYX: $162, down 9%) 

 

The company’s rough week hasn’t deterred us in the least. After all, it is just some profit-taking after the stock hit an all-time high of $186 on July 9.  With 2Q20 earnings due at the end of the month, investors won’t have to wait long for the next catalyst. Management expects revenue to increase 15% versus 2Q19, to $95 million. This is lower than 1Q20’s 30% growth, but we’ll take this rate, especially in a tough environment. Alteryx focuses on providing data and analytics to businesses to improve their decision making. It continues to add customers, with more than one-third of the Global 2000 already on board. This is a company that will post strong revenue growth for a long time. Undoubtedly, this will turn into sustainable profits. We have a $188 Target Price and our Sell Price is $154.

 

 

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Alphabet (GOOG: $1,516, down 2%) 

 

On Monday, the stock hit an all-time high, $1,577, before selling off. There’s no need to worry since even all-time great companies need a breather. It reports 2Q20 results later this month. With advertising making up about 85% of the company’s revenue, the soft economy may have hurt 2Q20 revenue. But if that is the case, this is temporary. As the economy continues to open and thrive, companies will return to push their products and services on Google’s platforms like Search and Maps. Then, there are its non-advertising products such as Cloud, Google Play, and YouTube subscriptions. 1Q20 revenue, which saw some softer advertising in the quarter’s last month, increased 13% to $41.2 billion. Not if, but when the stock tops our $1,600 Target Price, we will raise it. When we feel this strongly about a company’s long-term prospects, there’s no Sell Price.

 

 

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US Energy Sector ETF (IYE: $19.47, up 3%) 

 

It wasn’t that long ago that crude oil prices were plummeting, crushing the Energy sector. No surprise that this ETF, which tracks the sector, took it on the chin. The stock has leaped 61% from March’s $12.13. Crude oil is above $40 compared to the mid-teens in March. This helps out the fund’s holdings immensely. Some of the biggest Energy companies are in the fund, like Exxon Mobile (24% weight) and Chevron (21% weight). There aren’t just Energy and Production companies in the index, either. For instance, other holdings are Kinder Morgan, Schlumberger, Williams, and Valero.

 

The stock is below our $28 Sell Price, so you have to decide whether you want to stay in the name. For us, this is an excellent way to invest in the Energy sector. Our Target Price is $38 which is obviously outdated, coming from $60+ oil days in 2019. We’re a bit nervous about the world economies right now, all of which run on oil. So we are going to drop our Sell Price to $18. If it hits this, we’re out. As to the Target, we’d be happy with $25. This will tell us that the world is strong. Conversely, if the $18 price is hit first, this will tell us things are weak out there. IYE is a good barometer of worldwide financial health.

 

 

 

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MetLife (MET: $38, up 4%) 

 

The stock has made a nice comeback from March’s $23. Even if local governments impose stricter shutdowns and the economy remains sluggish, MetLife is going to come out just fine. A major insurance company, it has a strong presence in Group Benefits, Life, Dental, and Disability. It manages its operations well, with a combined ratio of 91% (anything below 100% means the company is making money on its insurance underwriting) and an ROE of 27%. 1Q20 revenue was up 12% to $18.3 billion and earnings more than tripled to $4.4 billion. The company bumped up its 2Q20 dividend from $0.44 to $0.46, giving the stock a 4.8% yield. What better signal could management give about its prospects? In the near-term, we are turning our attention to 2Q20 results, which the company will report in about three weeks. Barring any surprises, we expect the stock to trade above our $39 Target Price. When that happens, we’ll happily increase it. Our Sell Price is $29.

 

 

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

 

The equity markets had a good week with corporate earnings rolling in. We are not out of the woods yet though, with 1.3 million initial unemployment claims reported for the previous week. There is also troubling news on the pandemic front, with cases rising nationwide and several states rolling back reopening plans. That would delay an economic recovery.

 

Typically, when investors look to riskier assets like stocks, they pull out of bonds, causing yields to rise. That didn’t happen last week, with yields flat across the curve. The 2/10 spread is 50 basis points compared to 51 last week.

 

The upshot is that with high unemployment and a tough economic road to recovery, risk-free yields are absurdly low. This makes it challenging for you to generate income. Don’t despair since we scour the universe to find income-generating equities depending on how much risk you want to take. This week, we talk about four investments: two municipal bond funds and two more exotic vehicles for those of you who can tolerate a little more risk.

 

Invesco Municipal Trust (VKQ: $12.18, flat, yield = 4.8% tax free)

 

Investing in municipal bonds, the fund seeks to maximize federally tax-exempt income. The pandemic sharply curtailed state and local governments’ revenue and raised expenses, which naturally wreaked havoc with their budgets. The good news is that the Federal Reserve established the Municipal Liquidity Facility, which was set up to purchase short-term debt from states, cities, and counties. This allows these municipalities access to funding for essential services. Invesco Municipal Trust (Target Price: $15) takes a conservative approach with 60% of assets invested in single-A to AAA-rated bonds as of May. Paying a $0.049 monthly dividend, it provides a 4.8% yield. Note that the fund cut the payout in October from a $0.052 rate. The tax-equivalent yield (calculated as the current yield/(1-your tax rate) is higher. So, the higher your tax bracket, the more this fund will appeal to you.

 

 

New Residential Investment (NRZ: $7.71, up 13%, yield = 5.2%)

 

New Residential invests its $36 billion portfolio mostly in non-agency residential mortgage-backed securities (RMBS), along with mortgage-servicing rights and consumer loans. At the end of March it had $25 billion in non-agency RMBS, which are riskier since they are not guaranteed by the U.S. government or one of its agencies. In early-April, the company lowered its risk after agreeing to sell RMBS with a face value of $6.1 billion, receiving $3.3 billion of proceeds. With a book value of $10.71 as of March 31, the stock appears like it is a bargain. With the asset sale and volatile asset prices, w’ll get a better idea when the company reports 2Q20 results on Wednesday.

 

The stock had a great week, up 13%. Hovering above our $7 Target Price, we are holding off on raising until the stock shows it can sustain the higher level. In May, New Residential slashed its quarterly dividend from $0.50 to $0.05. Interestingly, the board doubled the rate to $0.10 for July, which is a good sign of more increases in the future. At the new rate, it offers an attractive 5.2% yield, 455 basis points more than the 10-year Treasury yield along with strong appreciation potential. For more conservative investors, New Residential has three classes of preferred shares, series A, B, and C that are currently between $19 and $21, below the $25 liquidation preference that it should trade at in typical times and that offer 9.0% yields.

 

 

Nuveen AMT-Free Municipal Credit Income Fund (NVG: $15.67, flat, yield = 5.0% tax free)

 

This is another fund that invests in municipal securities that are exempt from federal income taxes. While it can invest up to 55% of its assets in bonds rated BBB or below, it has weighted its portfolio towards higher-rated credits. At the end of June, the portfolio managers invested 54% of the fund’s assets in bonds rated single-A or better. 19% were in BBB-rated bonds. The top five states were Illinois (15%), California (10%), Texas (7%), Colorado (6%), and Ohio (6%). Its assets are in more conservative sectors like Healthcare, General and Limited Tax Obligations, U.S. Guaranteed, Transportation, Education, Utilities, and Water and Sewer. There is a higher interest rate risk here with this fund since most of the bonds mature quite a ways out. 44% come due between 20 and 29 years and 13% in 30 or more years. Nuveen AMT-Free Municipal Credit Income Fund (Target Price: $19) tax-equivalent yield is higher than the stated 5.0%, calculated as the current yield/(1-your tax rate).

 

 

PIMCO Dynamic Income Fund (PDI: $24.55, up 1%, yield = 10.8%)

 

This fund invests in different fixed income classes, tilting towards riskier assets. Typically, at least 25% of its assets are placed in non-agency (i.e. bonds not guaranteed by the U.S. government or one of its agencies). At the end of June, 51% of assets were invested in non-agency mortgage securities. High Yield securities were the next largest sector, with 17% of assets. Emerging Markets accounted for 5%, well below the 40% it is allowed to invest. The U.S. represents over 80% of its investments, followed by the U.K. and Spain. The fund manages risk by diversifying across various sectors, including Electric Utility, Banks and Aerospace/Defense. Additionally, PIMCO’s portfolio is weighted towards shorter-term maturities, with 31% due within a year, 19% between one and three years, and 17% from three to five years. With a 10.8% yield, this is more than a 1,000-basis point spread over the five-year Treasury yield.

 

With a net asset value of $23.88, it is trading at a slight premium. This is something to watch, but it shows us that the stock is highly regarded.

 

 

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