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The Weekly Summary

While we were happy to see Big Tech leave the rest of Wall Street behind, the gap between the electronic economy and the rest of the world simply got too wide to sustain. That's why we've been hinting throughout the summer that our Technology names were due a significant step back to let the fundamentals catch up. September delivered that correction, leaving our core Stocks For Success, Technology and Aggressive portfolios with significant short-term declines. Recent volatility has not been your friend.

If you have been in our recommendations for longer than the last few months, the explosive pandemic recovery probably leaves your Technology positions with plenty of cushion to dull the pain. Apple, for example, is down 10% over the last two weeks and down 20% from its recent peak, but put these numbers in context and you'll see that the biggest corporation Silicon Valley ever spawned managed to soar a breathtaking 8% in the two-day period before the selling started. When a $2 trillion stock moves that fast, things are getting overheated. It was time for a rest.

Apple remains up more than 50% for us YTD. Amazon has retreated 12% from its record peak . . . but it's still up nearly 70% from where it closed 2019, just eight months ago. Alphabet, Facebook, Microsoft, PayPal: Big Tech had plenty of room to fall without causing long-term shareholders much concern. The profit flowed in and some has flowed out now. That's the simplest definition of a market correction we know.

Down the Silicon Valley food chain, similar logic prevails. Our High Tech portfolio is down 12% over the last two weeks, but after paying that toll these stocks are still up 62% YTD. Our smaller Aggressive recommendations have done a little better, down 10% since our last newsletter but up 64% in the last eight months. These are not bad numbers at all. As long as these stocks work this weather out of their system soon, this side of the BMR universe is still looking at an extraordinary year. And at this point, the odds of these companies plunging to pre-pandemic lows look remote. One way or another, the future of the global economy revolves around Technology. These are the winners of tomorrow.

In a pandemic year, our correction-adjusted performance is even more extraordinary. While all of our recommendations together stepped back 6% since our last newsletter, the BMR universe is still up a healthy 16% over the past eight months. To say we're beating the broad market is an understatement given the lingering COVID recession keeping whole industries on life support until the disease finally disappears and people get back to work. The S&P 500 usually needs an entire year to climb 10%. BMR stocks are tracking at least double that historical rate of return for 2020.

So what's going on? The broad economy remains more resilient than many investors feared, with local labor markets now adjusting to the post-pandemic world and unemployment rates receding. However, COVID case loads also remain elevated and the mood is brittle. People are still being laid off as their managers accept that this health crisis will last at least a few months longer than initially hoped. Demand for industrial commodities like Crude Oil has yet to recover. That's why we finally accepted market reality and cut our Energy coverage last week. These stocks simply aren't coming back in the near term. We'll be back when they do.

We are now another two weeks closer to the 2020 election and political clarity. One way or another, simply knowing the trend of the next four years will come as a relief. Investors will be able to plan around policy and, when appropriate, seize opportunities that emerge. We consider that a good thing. Then, early 2021 will bring the first wave of quarterly earnings reports that accurately reflect post-pandemic comparisons and give the market a chance to recapture real year-over-year progress. That's only a few months away. We look forward to it. And every day takes Big Pharma another step closer to an eventual COVID vaccine, one way or another.

We are eager to ramp back up when the world gives us more to say. Meanwhile, as always,, please write Todd Shaver directly at Info@BullMarket.com with any questions you have about our stocks. His goal is to respond quickly.

There's always a bull market here at The Bull Market Report! Gary Jefferson has thoughts about "market madness" and the sanity of U.S. consumers while The Big Picture keeps it short and sweet. As always, we have plenty of stock updates in the main body of the newsletter as well as the The High Yield Investor. You'll notice that all the charts are either bright red or bright green, showing deep COVID losses or massive gains. That's no accident. It's simply the world we live in right now.


Key Market Indicators


BMR Companies and Commentary

The Big Picture: The K-Shaped Market

For months, commentators have pondered what "shape" the post-COVID recovery will take. Some hoped for a "V" rebound to reflect the initial plunge we saw in February followed by an equally robust surge back to record levels. As far as the market as a whole is concerned, that's what we got. Formally, the 2020 bear market ended the moment the S&P 500 recovered its pre-pandemic peak and kept moving up from there. It only took a few months.

However, the real economy behind the market remains dependent on the Fed and the infinite cushion of zero interest rates. Jay Powell and company are not going to let the economy crash, but they haven't been able to generate self-sustaining activity either. When they do, the rebound will look more like a "U," with a steep cliff at the start, a sustained flat line in the middle, and a strong surge at the end. If you're an economist, that's where we are. The Fed holds the floor where it is, but progress as yet hasn't been enough to take the economy back to where it was in February. Odds are good we won't see that happen until early next year . . . corporate earnings will be our best signal and we aren't looking for equilibrium for months to come.

Combine these arguments with a more nuanced view of what's going on in the market and you have what some are calling a "K"-shaped rebound. Some companies reacted to the pandemic with dynamic leadership. Their businesses weren't hurt in any material way. Some are even doing better now than they were six months ago as the pandemic accelerates their ability to disrupt the old status quo and seize market share from wounded competitors. Our Technology recommendations are in this group. They form the upper arm of the "K" that emerges from the initial decline.

And then there's the lower arm that will point down until we get some clarity around these companies' ability to remain relevant in a post-pandemic world. Real Estate has been hit hard by closures, rent strikes and lease expirations. Our recommendations in that sector are down 36% YTD. It stings, but our diversified coverage has more than absorbed the pain there. Our normally defensive High Yield stocks are also struggling in a world of zero-rate lending and elevated default risk.

We find this reversal of normal performance striking but not shocking, and it is certainly not alarming. The winners have done well enough to balance their temporary deterioration. When the market rotates again, losers will get a chance to shine again . . . and we suspect BMR returns will remain high. Month after month, cycle after cycle, that's how we do it.


Splunk (SPLK: $187, down 7% last week) 

Earlier this month, the stock reached another all-time high, $226, after the Street gave a big thumbs up to the company’s fiscal 2Q20 earnings (ended July 31) before some profit-taking caused a pullback. It was trading at $204 before the report. Just think, the stock was at $94 in March.

2Q20 revenue fell 5% year-over-year to $490 million. We aren’t jeering at these results like we ordinarily would since Splunk is transitioning its business to a cloud platform. Its legacy License business was responsible, with revenue dropping from $280 million to $175 million. Meanwhile, Cloud Services’ revenue grew 180% to $125 million. This is a lower-margin business, and the company’s loss widened to $260 million from $100 million. Management’s 3Q20 revenue guidance calls for revenue to fall to $615 million compared to 3Q19’s $625 million. We aren’t worried about the noisy results right now.

The company provides software to companies that allow them to use big data to make decisions. Customers are clearly embracing its Cloud platform, and that sets Splunk up for long-term success. Our $182 Target Price and $162 Sell Price are outdated with the stock at this level. We are upping them to $230 and $175.


Spotify Technology (SPOT: $242, down 3%) 

The stock is down 10% since the company reported 2Q20 results at the end of July. Revenue growth remained strong and management continued to execute their plan to expand content beyond music into podcasts. Right before the company released earnings, the stock hit $300, an all-time high, so this is just an excuse for investors to pocket some profits. Revenue grew 13% versus a year ago to $2.1 billion. The good news is that the company generates more than 90% of its revenue from its premium subscribers, and this was up 17% to $2.0 billion. These paying subscribers tend to stick around while ad-supported customers are more fickle and reliant on the economic cycle.

Since we are in a recession, we expect Spotify’s revenue to hold up very nicely.  Monthly active users increased 29% to 299 million supporting the top line. Its loss did widen from $100 million to $350 million. This was primarily driven by higher operating expenses, which rose nearly 50% to $645 million. R&D was a big driver, increasing from $150 million to $265 million, which will lead to higher revenue down the road. We have a $265 Target Price and our Sell Price is $200.


Square (SQ: $137, down 6%) 

The stock was at $137 before it reported 2Q20 earnings last month. Then, it rocketed to $171, a record, at the start of September. Square has fallen by 19% since then. As you know, the Tech sector had been on a tear, helping fuel the market’s gains over the last few months. We believe this move is just a respite as investors rotate from the sector and take some profits off the table for now. When we look at the results, we continue to see a strong company in the Payment industry.

Despite softer spending in the overall economy, revenue rose 64% year-over-year to $1.9 billion. While revenue based on transactions was weaker, falling from $775 million to $685 million, the company more than made up for this from bitcoin revenue, which increased from $125 million to $875 million. The loss widened from $5 million to $10 million, with costs related to bitcoin rising from $125 million to $860 million. With governmental shutdown orders easing and the trend towards digital payments accelerating, Square’s strong revenue growth will quickly resume, and profits will follow. Even with the recent drop, the strong run has left our $100 Target Price in the dust. So, we are raising it to $160. Our new Sell Price is $120.


Twilio (TWLO: $224, down 4%) 

Twilio has sold off with the rest of Tech this month. The stock is down 22% since hitting a record of $289 on August 1.  This comes on the heels of a $1.25 billion equity offering a month ago which we just love. Kudos to management for raising money on the heels of an all-time high. We aren’t worried about the short-term pressure since good companies, and Twilio certainly lands in that column, find ways to use capital to generate strong returns for shareholders.

Chances are that when you receive a message, Twilio’s technology was responsible. With products used to improve texts, chat, video, and voice communications its strong revenue growth continued in 2Q20..  It was $400 million, 46% above last year’s $275 million, and active accounts were 24% higher to 200,000. Twilio continues to lose money, widening from $95 million to $100 million. The good news is that with strong revenue growth, the company started leveraging operating expenses. Higher network provider costs and cloud infrastructure fees dragged down the company’s bottom line. Since these used were to support usage growth, the company will make up for this down the line.

Management expects year-over-year revenue growth of 36% in 3Q20 to $400 million. Not that their 2Q20 guidance was for a 35% increase to $370 million, which the company blew out of the water. We prefer their conservative approach, and we believe Twilio can exceed its quarterly figure again. Trading a trigger below our $235 Target Price, we expect the stock to surpass this level shortly. We hereby raise this to $285 and our Sell Price is set at $185.


Workday (WDAY: $206, down 4%) 

We were pleased with the quarterly results which the company released in late August. The Street agreed, sending the shares from $217 to a fresh record, $249. Hence the subsequent fall to $206 has nothing to do with the company’s fundamental story. When a stock drops due to the overall market and not a company’s underlying fundamentals, this creates a situation that we like and one you can capitalize on. Fiscal 2Q21’s (ended July 31) revenue rose 20% to $1.1 billion. Even better, the company got closer to profitability, losing $30 million compared to $120 million. We can’t wait for it to cross that threshold. Once it does, there’s no looking back for this company. It was started in 2005, and quickly became a leading provider of cloud applications for human resources and finance departments, which are critical for companies. Our Target Price is $224, and have a $150 Sell Price, which we are raising today to $180.


DocuSign (DOCU: $198, down 8%) 

On September 2, the day before the company reported fiscal 2Q21 results (ended July 31), the stock hit a record of $290. Since then, it has fallen 32%. We know that kind of movement is hard to stomach, but it makes it easier to stomach when we remind you that the stock is up 215% in a year. When it moves up that quickly, investors are bound to take some profits off the table. All we can say is that the trend towards paperless documents is unmistakable and accelerating, making this an attractive opportunity at this level. This is not only an electronics agreement provider, it is the leading one.

As to the results, we sure aren’t making a fuss after a year-over-year 45% revenue increase to $340 million. Its loss narrowed a bit from $70 million to $65 million, moving in the right direction but we’d like to see a sharper move in the profitability direction. Even with the recent movement, the stock is above our $190 Target. Therefore, we are raising it to $235. We are also moving up our $145 Sell Price to $180.


Okta (OKTA: $194, down 5%) 

This is another stock that has had a rough September. On September 2, it went to $231, an all-time high, closing this week at $194. We know the market is in selloff mode right now, but before that, the Street liked its fiscal 2Q21 results (ended July 31). After all, who’s going to complain about a 43% revenue increase, growing from 2Q20’s $140 million to $200 million? Okta’s loss widened from $45 million to $60 million due to higher interest expense. As long as the company keeps growing revenue, we aren’t concerned. We don’t see any slowdown on the horizon, and management agrees. They raised their 2021 revenue guidance for growth of 37% to $800 million. Previously, management expected 32% growth to $775 million. Our Target Price is $220, and once the market gets back on track, we expect the stock to break through this level again. Our Sell Price is $175.


Twitter (TWTR: $39, down 2%) 

Earlier this month, the stock reached $44, a 52-week high before it dove a bit. Twitter rallied from $37 after the company reported 2Q20 results. The good news is that its average monetizable daily active users grew 34% to 186 million due to the pandemic (people staying at home signing up) and new features on the site. It will need to turn these users into more advertising spending since the rest of the results weren’t too hot, with revenue falling to $685 million, a 19% decrease versus last year. It generates most of its revenue from advertising, and this was weak, dropping 23% to $560 million. Management blamed the pandemic that hurt the global economy and caused an ad slowdown. We aren’t so sure since other companies, like competitor Facebook, experienced revenue increases. Twitter flipped from a $1.1 billion profit to a $1.2 billion loss. A big part of that was due to a large $1 billion tax benefit a year ago that turned into a $1.1 billion obligation this year. This is fine. What’s not so great is operating expenses going from $765 million to $810 million.

We are raising our $34 Target Price to $44. Our old Sell Price was $28, and we are increasing it to $34. Right now, we are willing to give Twitter the benefit of the doubt given the extraordinary circumstances. You should know that we are running out of patience. After all, we added the stock two years ago at $28 and see a nice return, but nothing stellar like Google (100% in four years) and Facebook (44% in one year).


Universal Display (OLED: $165, down 4%) 

The stock has taken a hit this year, falling from January’s $222, a record high, down to $105 in July. There is plenty more upside at this level. This weakness was caused by the pandemic hurting demand for OLED screens, which in turn dented sales for the company’s products that are used to make these products. These wonderful, lightweight devices emit light and are used in too many products to name. To give you some idea, they are used for mobile phones, televisions, computers, and automobiles. Put simply, OLED screens are gaining market share. What we have in the market is merely a cyclical downturn.

2Q20 revenue fell roughly in half compared to last year, dropping to $60 million. The good news is that, after a tough quarter, the company was at breakeven compared to a $45 million profit. Once the OLED market gets moving again, so will Universal Display’s revenue and profit. We just need some patience. You should also feel good that the board has not cut the dividend, maintaining it at $0.15/quarter. And further note that Apple is 34% if its business. If Apple has a good future, OLED does as well. We have a $173 Target Price and our Sell Price is $145.


Cut Coverage On IYE And OXY

In case you missed it this week, we are no longer covering Occidental Petroleum (OXY) or the U.S. Energy ETF (IYE). The latter portfolio is weighted towards large energy companies, with Exxon Mobil and Chevron representing 45% of all assets. This week, the stock fell below our $18 Sell Price, making this a good time to exercise discipline and exit. If you decide to stay invested, you should know that the underlying stocks are reliant on hard-to-predict energy prices. If crude should head to $30 again, look out below.


A Word From Gary Jefferson

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

“It’s madness! Madness,” laments Major Clipton in The Bridge on the River Kwai just as the grand achievement is destroyed right at the moment of success. And then there's It’s a Mad, Mad, Mad, Mad World, where chaos intrudes into a sedate status quo after a reckless driver (think of the virus) sets off a chain reaction that tests everyone's rational limits. The economic landscape has fractured like Humpty Dumpty. The question now is whether all the Fed's horses and all the Fed's men can put Humpty together again.

Remember, consumer spending accounts for 70% of economic activity.  Ever since the virus’ outbreak, e-commerce retail sales grew by over 30% sequentially in 2Q. Thus, there is clear evidence of the growing dependence on the Internet for all kinds of necessities. Until the pandemic, online shopping was only a small percentage of total US retail sales. But now, while strong e-commerce growth couldn’t completely offset losses from brick and mortar stores, total retail sales are only down 4%. All major retailers with a strong online presence (think Walmart and Target as well as Amazon) benefitted from the rapid shift. As old stores reopen, consumers will return, but we believe a significant percentage of shopping will very likely stay online.

Bottom Line: Even in all the “madness," consumers have kept their end of the bargain in supporting the U.S. economy. But the landscape has changed dramatically and e-commerce is no longer small potatoes.  It’s the real deal and investors now must consider it when making decisions. For example, a decline in e-commerce may mean a great deal more tomorrow than it did yesterday. As long as the consumer continues to carry the load, there is a favorable likelihood that all the Fed’s men and horses will indeed be able to put our economy together again.

As to the recent selloff, history shows that, on average, there are 3 to 4 selloffs a year of 3% to 5%, and up to 9% these dips are simply part of the market experience. There is also, on average, one correction of at least 10% or more per year. People we know with 65 years of experience on Wall Street say it is not likely that this selloff is going to develop into a bear market rout. The economic news on the recovery is still very positive, as evidenced in last month's continued improvement in new jobs and unemployment declining to 8.5%.


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

Once again, we're focused on the diversity of our income recommendations . . . there's literally something here for every risk profile and return footprint. To review, Ares Capital is a Business Development company that invests in riskier, smaller companies. Then, we turn to the more conservative BlackRock Income Trust and Invesco Municipal Trust. We round out our discussion with New Residential Investment Corporation, which offers various choices of securities, depending on your risk tolerance.

Ares Capital (ARCC: $14.57, up 3%, yield = 11.0%) 

This Business Development company invests in Middle Market companies. Management takes several steps to minimize the risk these smaller companies present. For starters, they primarily invest in first-lien (43% of assets) and second-lien loans (29%) that have a greater claim on the assets in case of bankruptcy. The portfolio managers also diversify across 15 sectors like Health Care, Software & Services, Commercial & Professional Services, Diversified Financials, Power Generation, Consumer, and Telecom. Then, they spread this across regions in the U.S. Ares Capital (Target Price: $18) pays a quarterly dividend of $0.40, providing a healthy 11.0% yield.


BlackRock Income Trust (BKT: $6.20, flat, yield = 6.7%) 

This fund takes a more conservative approach to its income-generating investments. It invests a minimum of 65% of its assets in mortgage-backed securities. Also, at least 80% of the assets are deployed into debt issued by the U.S. government or one of its agencies, or AAA-rated securities. As of July 31, 99% of the fund’s assets were invested in a security with the highest credit rating. More than 50% mature within five years. For those of you seeking safety, BlackRock Income Trust (Target Price: $6.50) fits the bill and offers a 645-basis point yield advantage over the five-year Treasury.


Invesco Municipal Trust (VKQ: $12.36, up 1%, yield = 4.7% tax free) 

We typically avoid wading into the political arena. In this case, with the election less than two months away, it is worth noting that Democratic presidential nominee Joe Biden has discussed raising income tax rates on those making more than $400,000 annually. Should this come to pass, Invesco Municipal Trust’s (Target Price: $15) yield, which is 4.7%, will look better to those of you in the higher tax brackets. That’s because the tax-equivalent yield, or its yield if it were taxable, becomes more attractive as the income is free from federal taxation. This is easy to see since the tax-equivalent yield is calculated as the current yield/(1-your tax rate), or close to 7% if you are in the 30% tax bracket. The fund invests in more conservative securities, with over 60% of its assets invested in single-A rated securities or higher as of July. Illinois, New York, Texas, California, and Ohio make up 47% of the fund.


New Residential (NRZ: $7.27, down 3%, yield = 5.5%) 

New Residential is a REIT that invests in residential mortgage-related assets. It has $27 billion in Residential Mortgage-Backed Securities (RMBS), with $23 billion in riskier non-agency RMBS. It also invests in mortgage-servicing rights. This gives it the ability to service a pool of mortgage loans for a piece of the interest payments, typically 25 to 50 basis points. It takes a riskier approach, and the stock has been punished during these times, falling from February’s $17.66. With a book value of $10.77 as of June 30, the company has significant upside.

The company (Target Price: $9) slashed its quarterly dividend from $0.50 to $0.05 in May due to the insane market turbulence at that time. It did see fit to increase it to $0.10, which is a sustainable rate for now. We fully expect a dividend increase to 15 or 20 cents, perhaps as soon as the next 10 days or so.

If you are on the more squeamish side, there are 3 classes of preferred stock (series A, B, and C) that will interest you. All have a $25 liquidation preference and trade at $22.25, $20.96, and $18.90, so there is some significant upside. Their yields are around 8.4%. Each becomes a floating rate security down the road, meaning your return will change based on short-term interest movements. But this doesn’t happen until August 2024 for the series A and B preferred shares and February 2025 for the series C, so you don’t have to worry about it for a while.

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