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The Weekly Summary

 

Summer is waning and a lot of investors are finally sneaking away for a day or two of vacation after a harrowing eight months of tension, shock and relief. Our stocks have turned the year into something rewarding after all while the lofty Dow Industrials struggle to erase their last coronavirus-spawned losses and get back to work.

 

We're up 16% YTD across the BMR universe, only lagging the Nasdaq because we remain broadly diversified where the Technology-heavy index now depends exclusively on the biggest stocks in Silicon Valley. Of course, we love those stocks too. They're all key members of our core Stocks For Success portfolio. It's just that we want to make sure you have access to good ideas in Real Estate and other areas of the market that haven't done as well. When the mood turns, we're confident that leadership in our world will rotate and the returns will keep flowing.

 

So what has changed in the last few weeks? Congress has failed to extend augmented unemployment benefits and housing relief for the roughly 51 million Americans who have lost income in the pandemic. Talk about executive orders and new tax cuts is nice, but if these households are as fragile as some economists think, we'll see the impact in the next few weeks.

 

In that scenario, the Fed will undoubtedly concoct something to ease the pain. Either way, Congress will come back in a few weeks, so the window for a true economic shock is relatively narrow. As hard as it may be to believe, we are now nearly 2/3 of the way through a tumultuous 2020. From here, kids get back to school and we hope that process is as smooth as possible. September will turn into October and then the election looms. After that, the last fear factor that has paralyzed many investors will resolve, one way or another. We'll know who will run the country for the next four years. Wall Street's famously apolitical bias will take over to seize the opportunities and roll with the challenges that emerge.

 

We will be right there with you. As you've noticed, our publishing cycle is picking up again and we anticipate more for you as the year winds up. For now, little news rises beyond the condition of mere noise, so we don't have much to say here. Perhaps once the kids get back to school and substantive progress toward a COVID recovery (a vaccine would be nice) materializes. Meanwhile, please write Todd Shaver directly at Info@BullMarket.com with any questions you have about our stocks. His goal is to respond as fast as he can.

 

There's always a bull market here at The Bull Market Report! Gary Jefferson is back to talk Tech and The Big Picture takes a hard look at the sectors that truly are not working in the post-pandemic economy. The High Yield Investor looks at a few stocks in the Real Estate world, which is not doing as badly as the stocks suggest. Yes, there are huge opportunities here. And it's still earnings season for another week or so, so we have plenty of updates on a few of our stocks that have reported at this point in the cycle.

 

 

Key Market Indicators

 

 

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BMR Companies and Commentary

 

The Big Picture: Overweight Strength, Underweight Pain

 

Some investors are rightly wondering when the market threw out all historical standards of rationality now that the S&P 500 has recovered all of its pandemic bear swoon and gotten back to breaking records again in the face of what's become a severe economic shock. Decades of statistics say stocks normally suffer in a recession. Thanks to the pandemic, at least 30 million Americans are living on restricted budgets and whole sectors of the economy are struggling to avoid shutting down completely. While the details this time are unique, the impacts add up to a serious shock to the financial system.

 

We see this in the apparent disconnect between fundamentals and sentiment. When we see earnings plunging 33% in the recent quarter, it's natural to wonder how such a dismal “growth” curve can support the market at this level. After all, the last time stocks pushed into this previously unclaimed territory, we were looking forward to another healthy growth year. Back in February, the S&P 500 deserved to trade at 19X earnings. Now, while the economic environment has gotten a lot worse for many companies, valuations have actually gone up. Index fund investors are paying a 22X multiple for stocks that are much weaker than they were six months ago. Normally that kind of valuation accompanies an economy that is more likely to overheat than freeze over, so it is definitely a paradoxical situation.

 

We can blame or praise the Fed, but this isn't all about easy liquidity. It's about the way strong stocks are compensating for pockets of obvious weakness that pandemic conditions created. Technology and Healthcare are doing well. While the quarantines slowed their growth, these sectors are still tracking better cash flow this year than they did in 2019. They're making progress. Other sectors are at worst looking at a 5% earnings hit, which is not really enough to get worried about as long as they get their growth engines spinning again in the foreseeable future.

 

But three sectors account for roughly 85% of the year's aggregate earnings decline. The Financials are hurting. When the Fed cut interest rates to zero, every company that can borrow money to support its operations felt instant relief, but those that make money lending also felt the chill. Put simply, it’s a miserable time to be a banker. The Fed has done its best to ensure that these institutions won’t melt down like Lehman Brothers and Bear Stearns did a decade ago, but that cushion comes with a price.

 

We have only a few recommendations in the sector, but sooner or later we know the Banks will come back. That's why we've maintained coverage of Select Financial Sector ETF (XLF) throughout the Fed's recent moves as a matter of long-term discipline. For now, however, we're happy with the broad sector position and a few additional stocks like MetLife (MET) that we suspect will continue to outperform.

 

Consumer Discretionary stocks are also taking the brunt of the earnings decline, which makes sense when you consider how many Restaurants, Retailers and Entertainment companies remain shut down. We have a clear favorite in this space: Amazon (AMZN). As far as we're concerned, everything else here remains dead money until the economy revives.

 

Then there are the classic Industrials. Manufacturing took a hit when production facilities had to shut down and customer order flows froze. We don't really focus on this side of the economy because the virus hit so fast that nobody really had time to digest the Trade War Truce that finally relieved pressure on U.S. manufacturers. Our most prominent recommendation here is TPI Composites (TPIC), which has rebounded so hard that BMR subscribers who bought in when we initiated coverage in 2018 are up over 60% now. Just think: this stock had dropped to $18.50 last December and conditions looked challenging. Now shareholders are happy again.

 

But these recommendations are exceptions to our strategic posture, which favors areas of the market where growth can actually be found. Most of our recommendations have shrugged off the pandemic. Their businesses simply aren't affected and many are actually accelerating their growth trends as people change their behaviors. Admittedly, we can pay a premium for growth (look at Amazon) but we'd rather know a company is dynamically rising to the historical moment than hunt wounded companies at depressed valuations.

 

Besides, it's not like the three sectors we've flagged are deeply discounted now. Because earnings are under so much pressure, the Financials, Consumer Discretionary and Industrial stocks collectively carry a 39X multiple now, which is extremely rich. The rest of the market is available for 19X earnings, which is a little high but nothing that has given investors pause in the past. Remember, we were all paying that multiple for the market as a whole back in February. In return for paying it now, we get stocks that are at worst stalled and at best maintaining a thin pulse of growth.

 

 

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Berkshire Hathaway (BRK.B: $211, up 1% last week) 

 

The Street cheered Berkshire’s 2Q20 results, sending the shares up $3 to $213 on Monday, and it has been anticipating them since July 30 when the stock was at $193. Revenue fell 10% to $48 billion. Income rose from $14 billion to $26 billion due to a $40 billion investment gain compared to $10 billion. Not too shabby considering the pandemic wreaked havoc on the economy, hurting many of its businesses like railroads. This shows the benefits of Warren Buffett’s investment approach, which owns high-quality businesses across Railroads (Burlington Northern Santa Fe), Insurance (e.g. GEICO), Utilities, Manufacturing, Service, and Retail.  The stock portfolio includes legendary names like Apple. (Buffett is the largest shareholder.)

 

The Oracle of Omaha spent more than $5 billion on buying back shares during the quarter. There’s no better sign that he believes the stock is selling at a discount. Who are we to argue? The company has put some of its huge cash stockpile to work after buying a gas pipeline network from Dominion Energy for $9.7 billion. With $147 billion to deploy, we have no doubt that he will scoop up some very attractive businesses at discount prices as the economy weakens and companies need liquidity, Berkshire will step up like it always does to provide cash to companies, producing for Berkshire, a very attractive return. We have a $255 Target Price. To borrow from Warren Buffett’s philosophy, whose favorite time horizon is forever, we feel the same way about Berkshire, which is why we don’t have a Sell Price.

 

 

 

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Blackstone Group (BX: $53, flat)

 

The stock is trading off 10% since the company reported 2Q20 results at the end of July. Nothing was surprising in the report. Asset prices started rebounding during the quarter and revenue grew from $1.5 billion to $2.5 billion. There was $1 billion more in investment income from unrealized and realized gains. That wasn’t the whole story, with Management Fees also higher by more than $100 million. With $565 billion of assets under management, we have full confidence that the company will continue to invest wisely in Real Estate, Private Equity, Hedge Funds, and Credit just like it always does. The best part is that the company has $156 billion of “dry powder” so there is plenty of cash to put to work. We have a $69 Target Price and our Sell Price is $52. Should the stock breach our lower bound, we place the decision with you. For us, we strongly believe in Blackstone’s long-term prospects.

 

 

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CBRE Group (CBRE: $46, up 2%)

 

The stock rose 1% to $44 after the company reported 2Q20 results on July 31, and it has kept climbing, gaining as much as 12% before pulling back the last couple of days. Revenue fell 6% compared to 2Q19 to $5.4 billion and income was down 63% to $80 million. Results could have been a whole lot worse. We remind you that this is a Real Estate company that is not your typical Real Estate firm. This company has not merely survived for more than 100 years since it was founded in 1906, it has also thrived. That kind of staying power is phenomenal. Its broad business, encompassing Advisory Services, Global Workforce Solutions (contract-based facilities management), and Real Estate Investments, help soften the blow in a down economy. We have a $51 Target Price and our Sell Price is $35.

 

 

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Alteryx (AYX: $110, down 9%)

 

Investors clearly didn’t like what they heard after the company reported 2Q20 results on August 6, pushing the stock down from $179 to $107 on Tuesday. Revenue came in slightly ahead of management’s expectation, at $95 million, 17% year-over-year growth. Investors are used to a higher rate, including 30% in 1Q20 and thus the major cause of the selloff. In a pandemic, which hurt sales, we understand this quarter’s figure. Remember, many companies are seeing their sales obliterated. The 2Q20 loss widened to $35 million from $5 million. The quarterly revenue and higher loss are not what caused the selloff. Management’s 3Q20 guidance calls for revenue of $115 million, 11% growth, and $460 million for the year, or 10% higher than 2019.

 

The stock was near the $186 all-time high set last month, so nervous investors quickly sold. Companies are becoming more cautious in the COVID-19 environment. This is only temporary, and its data and analytics platform is crucial to companies making better decisions. Even in a difficult environment, the company added 270 new customers, and is approaching 7,000. This includes more than one-third of the Global 2000. We are adjusting our Target Price from $188 to $135. We still believe in the company, and we believe the stock will get there after this setback. It will just take a little longer. The stock is below our $154 Sell Price, so if you sold on the way down, you can safely buy back now. But only you can decide if you want to stick with the company.

 

Our personal opinion is that sales will ramp up again next quarter. If they don’t, then it will be time to move on. We like fast-growing young companies like this but when they disappoint, gains can be taken away quickly. We’re moving our Sell Price lower today as well, to $95.

 

 

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CyberArk Software (CYBR: $109, down 1%)

 

The stock, which was at $120 when the company reported 2Q20 results on August 4 slid to $105 on Tuesday before gaining back some ground. Compared to last year, revenue grew 6% to $105 million. The company lost $5 million, reversing 2Q19’s $15 million profit. The environment is tough out there, and management expects 3Q20 revenue of $110 million, flat compared to 3Q19. After all, companies are hunkering down – temporarily. This doesn’t take away from the long-term growth story. Providing security solutions against the ever-present and growing threats is a great space. Ultimately, companies will start spending money and CyberArk is going to be one of the early beneficiaries. We have a $120 Target Price and our Sell Price is $91.

 

Now you may wish to review this in your own portfolio is light of the slowdown. Will growth continue to come slowly from here? We think they will rebound next quarter, but what if they don’t. This is the time to make decisions about the tremulous future. Many, (including JP Morgan back in the early 1900s after the crash of 1907), have changed their philosophies to stick with quality. Super good quality stocks. Putting stops in place can be another way to let the market tell you when to sell.

 

 

 

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Paycom Software (PAYC: $303, up 2%)

 

The stock has recovered nicely from the selloff after the company reported 2Q20 results on August 5. It went down to $282 on Monday and closed at $303 on Friday, higher than the $302 right before it released earnings. Speaking of which, revenue grew 7% to $180 million, quite a comedown from 2019’s 30% rate and 1Q20’s 21% year-over-year growth. Income fell from $50 million to $30 million. Providing technology solutions to companies’ HR and payroll departments, we expected some sluggishness since it charges a per employee headcount fee. With clients cutting staff, this hurt its existing business.

 

The good news is that the company continues to add clients and sell more applications to existing ones. In other words, its revenue growth will pick up again when the economy gains steam. This is merely a cyclical downturn. Even in a recession, management expects 3Q20 revenue to increase 9% to $190 million. How many companies can make that claim? The stock may take a little more time than we thought to get to our $355 Target Price. Undoubtedly, it will get there. Our Sell Price is $279.

 

 

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TPI Composites (TPIC: $33, up 15%)

 

Good things sometimes take time. The initial reaction to  2Q20 results was muted. Reporting on August 6, the stock hit its stride last week, reaching an all-time high of $34 on Friday. Sales rose 13% to $375 million, another double-digit gain. The company did lose $65 million versus a narrow profit last year. Part of this was due to an extra $50 million tax burden this year. The other main cause was the higher cost of goods sold from warranty remediation and COVID-19 expenses. The warranty issue was only caused by one model from a specific customer, and management claims to have beefed up quality control.

 

A maker of blades for wind turbines, TPI Composites is a great way to invest in renewable energy to take advantage of the green trend. Revenue is growing by double digits when oil and natural gas prices are low. When these go up, the chatter for renewable, reliable, and clean energy will increase even more. The stock is now close to out $35 Target Price and we look forward to raising it when it crosses that level. We have an $18 Sell Price and hereby raise is to $27.

 

 

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The Carlyle Group (CG: $27, flat)

 

Since reporting 2Q20 results on July 30, the stock drifted down from $30. It’s just a little break after the stock doubled from March’s 52-week low of $15. 2Q20 revenue edged up to $1.1 billion versus last year, with higher investment income offsetting some weakness in management fees, and income fell to $205 million from $525 million. The upshot here is that, while results may vary from quarter to quarter, Carlyle has been around for more than three decades. During that time, it has built up a remarkable track record in Private Equity, Real Estate, Energy, Infrastructure, and Credit. There’s no doubt in our mind that the crème de la crème of asset managers will continue to perform. The cherry on top is the steady $0.25 quarterly dividend, which equates to a 3.7% yield. Our Target Price is $30 and our Sell Price is $24. But when things get rolling again in our economy we wouldn’t be surprised to see $40 in the future. That’s how well-run this company is.

 

 

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MetLife (MET: $40, up 2%)

 

For 2Q20 revenue fell 19% to $14 billion and earnings dropped from $1.7 billion to $70 million. These numbers seem terrible, but keep in mind the results were skewed by COVID-19 that made business tough. For instance, going on sales calls was challenging, to say the least. It is worth remembering that before the pandemic hit, results were humming along. This is a leader in Group Benefits, Life, Dental, and Disability.  Even in 2Q20, its combined ratio was about 91%, with anything below 100% considered good since that means its insurance operations are profitable. While you wait for the situation to normalize, you can enjoy the 4.6% dividend yield. Just above our $39 Target Price, we are holding off on bumping it up until the stock shows it can sustain itself at the higher level. Our Sell Price is $34.

 

 

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Occidental Petroleum (OXY: $14.64, down 5%)

 

You know that we don’t pull punches. The stock had a rough week after reporting 2Q20 results on Monday. The company produced more oil than management expected, 1.4 million barrels of oil equivalent per day (boe/day), 36,000 boe/day higher than their guidance. Occidental only realized about $23 a barrel, down more than 50% from last year. This caused revenue to fall from $4.5 billion to $3.0 billion. With $6.6 billion of write-downs, including some of the assets acquired from last year’s Anadarko deal, the company lost $8 billion compared to a $635 million profit last year. During the quarter, Warren Buffett exited his preferred stock position, not particularly good news. Positively, management continues to position the company for stronger commodity prices, taking out $1.5 billion of annual costs. The company has also been addressing near-term debt maturities, including recently issuing $3 billion of debt. With its fortunes tied to energy prices, this is a good stock to own if you are patient. Crude oil is above $40 a barrel, which is already quite a difference from April when it was in the teens. We have an $18 Target Price and our Sell Price is $12.

 

 

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A Word From Gary Jefferson

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

 

Three narratives drive the market today and, with the arguable exception of earnings, have been driving it all year long: the Fed, the virus and the election. Add them up and we suspect the market has what it takes to hold its current level and even make another leg up once weak sectors show signs of recovery. Although specific industries such as Restaurants, Airlines, Cruise Lines and Hotels have been the hardest hit, the worst performing sector has been Energy.

 

Dividend-paying stocks, normally a safe haven in bear markets, have also woefully underperformed the high-flying large growth stocks. Now called the “Four Horsemen” of the market, Facebook, Apple, Amazon and Google/Alphabet have basically carried the market while leaving the smaller and midsize companies, along with value stocks, in the dust.

 

There is, however, much historical evidence that markets always revert to the mean. The best performing areas, sectors and stocks eventually make room for the underperforming ones to get a moment in the spotlight. We certainly are not recommending the immediate exit from great growth stories. In fact, the “Four Horsemen” had blow-out earnings and proved their meteoric recovery thus far had substantial merit behind it. Facebook beat the earnings target by nearly 30%. Alphabet beat by over 20%, Apple came in 25% above expectations and Amazon turned in seven times as much profit as investors wanted to see.

 

Earnings season is still going strong with about 500 companies still on the schedule before the cycle ends. There is a feeling of disappointment because Congress didn’t pass a fourth coronavirus relief bill before the summer recess. However, the market is acting as if it is going to happen sooner than later. Meanwhile, there are four vaccines in advanced trials, with another 160 programs in development worldwide along with hundreds of possible treatments. A viable vaccine still looms as the biggest “game changer” for the market and, in our humble opinion, it is now only a matter of when this will become a reality.

 

Bottom line: There are likely some nice bargains in the areas that have lagged the large cap growth stocks, especially when it comes to savaged dividend-paying stocks. What’s that rascally old saying, “buy low and sell high?" And innovation will continue to change the way we live and do business – think 5G, Cyber Security, Biotech, the Cloud, the Internet of Things, Robotics and Artificial Intelligence.  These are huge opportunities. The key for investors is not to let disappointment in an underperforming allocation (for example dividend-paying stocks) make you start chasing one or two “hot” areas. Rather, the key is to stay diversified, stick with quality and maintain a long-term perspective.

 

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

 

The equity market celebrated after new unemployment claims dropped below one million for the first time since March. That’s where we are right now - getting giddy over such a dubious achievement. Actually, the equity market has been in an ebullient mood for some time now. Even the government’s failure to reach a deal on pandemic aid could dampen its spirits. The increased risk tolerance has led to rising yields at the longer end of the Treasury curve. The 10-year yield rose from 0.57% a week ago to 0.71%, with the 2/10 spread at 57 basis points compared to the prior week’s 44 basis points.

 

If the market’s level is causing you sleepless nights, we present four REITs with varying risk profiles that all provide a nice yield advantage over Treasuries.

 

JBG Smith Properties (JBGS: $28, down 3%, yield = 3.3%) 

 

With the economy in a recession, this is an especially good time to have Amazon and the U.S. government as tenants. In its residential properties, many tenants work for one of these organizations. That’s why we’ll accept geographic and industry concentration. You don’t have to worry about the government paying its rent and its employees have greater job security than those that work for the private sector. Amazon? Pretty much the same story. We don’t need to add anything here given how well the company is performing, only to repeat that the stock will come back.

 

JBS Smith’s 2Q20 revenue fell from $160 million a year ago to $145 million and the loss widened to $40 million from $3 million. In this environment, collecting rent is very important. Here, JBG showed its stuff. 2Q20 rent collections for Office and Residential were approaching 99% for each. The only laggard was Retail, which was 58%. This is a much smaller part of the company’s portfolio, and only $3.4 million is unpaid. Management is working on deferral arrangements. We are lowering our Target Price from $41 to $32. The stock is below our $36 Sell Price, so the ball’s in your court. For us, the portfolio is too good. The 3.3% yield is 255 basis points more than the 10-year Treasury yield.

 

This one has been a true disappointment. We added it $41 in 2019 and expected a slow and steady rise for the reasons noted above. So if we take ourselves 1-2 years into the future when COVID is not a worry and business is booming, we can’t see any reason why the stock wouldn’t be in the 40s. Do you have the patience to wait that long? Only you can decide. We’re lowering our Sell Price to $25.

 

 

Omega Healthcare Investors (OHI: $31, down 6%, yield = 8.6%) 

 

Omega Healthcare Investors’ 960 properties are mostly Skilled Nursing and Assisted Living Facilities. Other long-term Healthcare properties are Independent Living Facilities. This was a challenging space earlier this year with pandemic hurting occupancy and raising expenses to keep the facilities clean. With everything going on, the company collected over 99% of the rent and mortgage payments due, and this continued in July. 2Q20 revenue rose to $255 million from 2Q19’s $225 million and income grew 35% to $100 million. It has kept the dividend constant since November while other REITs slashed their payouts. Owning strong properties in an attractive space that will only see increased demand as the population ages will benefit Omega in the years to come. The stock (Target Price: $45) has been below our $38 Sell Price since March. You can certainly decide to exit your position. For us, with the long-term potential and an 8.6% yield, which is 790 basis point spread over the 10-year Treasury yield, we can show patience. We are lowering our Sell Price to $27.

 

 

Ventas (VTR: $41, down 6%, yield = 4.4%) 

 

This REIT’s 1,200 properties are Senior Housing Facilities, Medical Office Buildings, Research Centers, Inpatient Rehabs, and Long-Term Acute Care Facilities. 2Q20 revenue dipped to $945 million from 2Q19’s $950 million due to lower interest income. But it lost $155 million compared to a $210 million profit. Senior Housing Properties have been hurt by COVID-19 and Ventas agreed to work out a reduced rent with Brookdale Senior Living. It cut July’s quarterly dividend from 79 cents to 45 cents. As long as the pandemic doesn’t rear its ugly head up again, we are comfortable it can maintain this level. With Baby Boomers aging, the long-term supply/demand dynamics are favorable for the company. Ventas (Target Price: $57) offers a 4.4% yield at the reduced payout. This is still 370 basis points higher than the 10-year Treasury yield. Our Sell Price is $35.

 

 

Vornado (VNO: $36, flat, yield = 6.0%)  

 

With prime properties in New York City, Chicago, and San Francisco, this REIT has obviously been hurt by the pandemic. This caused Vornado to close the Hotel Pennsylvania, cancel trade shows at Chicago’s theMART, and pause certain development projects, among other steps. No wonder 2Q20 revenue was down to $345 million compared to 2Q19’s $465 million. The company went from a $2.4 million profit to a $185 million loss. Even with the quarter’s challenges, it still collected 88% of the rent due. This included 93% from office tenants and 72% from retailers. The properties are under pressure right now. This won’t last forever since they are too good not to do well. Recognizing the short-term challenges, Vornado (Target Price: $60) did cut this month’s quarterly dividend from $0.66 to $0.53. At the reduced level, this is still a 6.0% yield. We have a $33 Sell Price.

 

  

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