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The Weekly Summary

Wall Street remains a prisoner of its own tendency to overthink both the likelihood and the concrete impact of all the worst-case scenarios investors can imagine. Once again, the slow grind of pandemic recovery has become a drag on sentiment as the Big Tech stocks that led the market falter and no new sector or theme steps up to provide fresh leadership. While the Fed provides plenty of support, real fundamental progress remains elusive. And with a polarizing election on the horizon, many would prefer to simply retreat to the sidelines until the political picture is a little clearer.

The numbers themselves tell the story, with the S&P 500 giving up a little of its hard-won YTD gain while the more rarefied Dow industrials drifts deeper into negative territory. Only the Nasdaq, overloaded with Technology, continues to resist the tentative tone, gaining another fraction of a percentage point over the last two weeks to further cement its post-quarantine gains after the recent sharp correction. Investors clearly recognize that while Big Tech has come a long way, these stocks are the best option in an otherwise dubious economic environment. After all, computers don't get sick . . . if anything, computer companies are carrying the weight of everyday life while we wait for a vaccine to restore the status quo.

That's where our focus on Technology stocks (large and small) continues to pay off. It should come as no surprise that the core BMR portfolio is matching the Nasdaq beat for beat . . . the index is up 22% YTD and so are our Stocks For Success, with many of the same names dominating both lists. But as our gaze moves down the Tech food chain, the gains get bigger. Our High Technology portfolio is up 71% and the smaller and somewhat speculative Aggressive group maintains 73% in profit so far this year.

These are huge numbers, and we aren't complaining. The market's drastic rotation into Tech provides plenty of cushion for our recommendations drawn from the rest of the U.S. economic landscape, which remains stable in the Fed's easy-money embrace but is unlikely to have a firm foundation to recover before early 2021. At that point, we will be a year into the COVID era. While we would appreciate a safe and effective vaccine, we can't count on it until it happens.

However, we can take comfort from a few elementary facts. First, every day we survive in the COVID era will take us closer to the new status quo, one way or another. A vaccine would begin to eradicate the disease, get people back to work and restore confidence. Until then, confidence rebuilds on its own, day by day. When the pre-COVID numbers roll off the year-over-year comparisons, we will see an economic expansion bloom again. Corporate profits may take time to rebound to record levels, but they'll be moving in the right direction. That's all investors ever really want to see: progress.

And that progress often starts once we see conditions hit bottom and then we can register that the "worst case scenario" wasn't as apocalyptic as we feared. While we rarely cover Retail directly, the fate of commercial real estate has cast a long and chilling shadow across our REITs and many of our High Yield recommendations. These stocks have suffered. But if stores and offices are indeed reopening, the landlords will survive. Their operations will improve. When needed, management will pivot to keep the property footprint aligned with the threats and opportunities the new economy poses, but that's what they do every day anyway.

The stocks will recover. We are seeing the first hints of that now, which is why the BMR universe as a whole (Tech and Non-Tech alike) has outperformed the Nasdaq in the last few weeks. As long as money rotates across themes, we are in position to keep making you money.

And with the fourth quarter on the horizon, we might even get the clarity to resume our old cycle of updates. When we have something to say, we'll tell you. It probably won't revolve around the election, which will consume most media commentary between now and November. 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 what he calls a "pep talk" for you while The Big Picture digs a little deeper into the Retail recovery. As always, we have plenty of stock updates in the main body of the newsletter as well as The High Yield Investor. This time, we're going back to Stocks For Success to confirm that the biggest names (and some of the biggest success stories) in our universe still have what it takes to deserve their "buy and hold forever" status. And there's room for a few smaller stocks too, of course.

 

Key Market Indicators

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BMR Companies and Commentary

The Big Picture: Retail Revives

The COVID-19 pandemic was supposed to deliver the final deathblow to the American mall and trigger shockwaves across the Commercial Real Estate landscape. That apparently didn’t happen. And for a lot of investors who’ve gotten out of the habit of checking government economic data, the persistence and even vibrancy of the Retail universe is going to come as an unwelcome shock.

As usual, it all starts with the numbers. The Census Bureau tracks retail sales across the entire country. In August, mainline Retailers booked a seasonally adjusted $482 billion in business, which is a lot of money even for the biggest economy in history. But the real thrill is that we’re tracking 5% bigger retail sales numbers than we were at this point last year. From a top-down point of view, it’s like the pandemic never happened. The boom is back.

Of course, once you drill down into the data, not everything is beautiful. Gas Stations are still struggling because millions of people still aren’t commuting to the office every day. Restaurant sales are down 16% from last year. Reduced seating and lingering lockdowns will do that. Otherwise, brick-and-mortar stores are doing well, category by category. That simply wouldn’t happen if the malls had died. Main Street is as vibrant as ever. While the spring shutdowns leave a hole in the full-year sales numbers, the gap is closing fast.

Admittedly, online merchants have been the biggest beneficiary here. Sales moving through what the government calls “nonstore retail” are up a healthy $15 billion from last year. But online sales have hit a near-term ceiling. The channel briefly accounted for 16% of all U.S. retail activity early in the summer and has now lost a little share of the national marketplace as brick-and-mortar rivals recover. We don't mind. As you'll see in a few minutes, we still love Amazon, Shopify, PayPal and the rest of the online ecosystem.

The real upside here, however, is that with retailers in most categories completely shaking off the pandemic pressure, their status quo business models look relatively stable. Most stores that could pay rent last year can do it now. Those that couldn’t handle the stress have already filed for bankruptcy protection and will liquidate. More relevant chains will fill the holes. The malls will survive. Real estate companies that own the malls will get back to work paying dividends and making shareholders happy. This is a great time to review our REIT portfolio if you haven't done it lately. The worst is over. And as the REITs rebound, CBRE is always worth a look.

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Shopify (SHOP: $961, up 6% last week)  

The stock has been hit hard this month after reaching an all-time high of $1,147 on September 1. But Shopify bounced back in a big way last week after it fell from $953 to $839 following the company’s announced $990 million equity and $920 million convertible note offerings last week. It is typical for a stock to drop on the news since it creates more dilution. But with $2 billion in the bank now, it is our opinion that secondaries like this are good in the long run. Why? In general, we believe management can make good usage of the funds which more than outweighs what is usually 3-4% dilution.

Between the issuance and its high valuation that we previously warned you about, the stock was due for a correction. It still sells for a hefty 50x price-to-sales. As long as the company, which has web-and-mobile based software that allows retailers to set up online storefronts, continues to perform, we terribly concerned (unless the market has truly peeked and is heading lower – which no one knows of course.) COVID-19 accelerated the trend for retailers to move their businesses online, and the company’s 2Q20 results were strong. Revenue nearly doubled from a year ago to $715 million from $360 million. Better still, this strong top-line growth led to a $35 million profit versus a $30 million loss. We are sticking with our $1,175 Target Price and $930 Sell Price.

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Alphabet (GOOG: $1,445, down 1%)   

The overall market has dragged the stock down after it reached an all-time high of $1,733 earlier this month. We get excited when a great company like Google is off 15%. (There is a potential investigation of the company from the Justice Department that has been hanging over the company all of this year. But we believe that ultimately, nothing material will happen to the company.)

In a tough advertising environment due to COVID-19, its 2Q20 top line was down 2% to $38.3 billion from $38.9 billion. Income fell 30% to $7.0 billion versus $9.9 billion. This is a rare slip by the company under highly unusual circumstances. Ads account for about 85% of its annual revenue. Once the economy gets moving again, ads will flock to its platforms like Search and Maps. There’s also so much more to the company, including Cloud, Google Play, and YouTube subscriptions. Our Target Price is $1,600. Our lack of a Sell Price shows our strong conviction about the company’s long-term prospects.

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Amazon (AMZN: $3,095, up 5%)    

This is another fantastic company that has sold off this month after reaching an all-time high - in early September, the company hit $3,552. We aren’t complaining about the 13% dip. This just creates a more compelling valuation. The company’s results actually strengthened during the pandemic as more people stayed home and ordered things online. 2Q20 sales rose 40% versus a year ago to $89 billion from $63 billion. The company is also hugely profitable with income doubling from $2.6 billion to $5.2 billion. It is not just an online seller, either. It has a Cloud Computing business that is growing nicely. In the latest quarter, that segment’s sales were up 29% year-over-year from $8.4 billion to $10.8 billion. Even with this month’s downward move, the stock is above our $3,000 Target Price. With strong long-term growth prospects, we are raising it to $4,000. As you can see we really like this company. This company is so dominant that it kills categories (e.g. Grocery) when it decides to enter. With all it has going for it, we have a strong conviction that the company belongs in your portfolio for a very long time, which means we haven’t encumbered it with a Sell Price.

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Apple (AAPL: $112, up 5%)    

The market’s recent doldrums, which have been led by the Tech sector, have not spared even world beaters like Apple. The stock is down from its record $138 reached in the early part of this month. Of course, this is double March’s 52-week low of $53. As you know, the stock split 4 for 1 a month ago, so these prices have been adjusted from our earlier reports. Meanwhile, the results just keep chugging along. Fiscal 3Q20 sales rose to $60 billion from 3Q19’s $54 billion while EPS grew 18% to $2.58. Now, you can look forward to its new iPhone coming out, which will spur further revenue growth. We have adjusted our Target to $130. We strongly believe in holding onto great companies, so that means we haven’t put a Sell Price in place.

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Microsoft (MSFT: $208, up 4%)   

This is yet another Tech stock that has experienced a correction. It fell as much as 16% this month after hitting an all-time high of $233 before recovering this week. This lower value creates a compelling opportunity. After all, with dominant positions in areas like Office and Gaming, it continues to report strong top-line growth. Fiscal 4Q20 (ended June 30) saw revenue rise from $33.7 billion to $38 billion. The bottom line fell from $13.1 billion to $11.2 billion. Digging in a little deeper, the profit decline was due to lower other income and an income tax expense instead of tax benefit. We don’t mind since these items have nothing to do with Microsoft’s core operation. We have a $235 Target and no Sell Price.

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PayPal (PYPL: $187, up 6%)    

This month has been most unkind. The stock reached an all-time high of $212 in early September before giving back some gains in conjunction with the overall market. It fell to $172 before this week’s nice recovery. If we’ve learned one thing, it’s that broad selloffs create buying opportunities. With increased online shopping, people and companies need PayPal more than ever. This trend isn’t going to slow down, either. 2Q20 revenue rose from $4.3 billion to $5.3 billion, a 22% year-over-year increase. Even better, profits nearly doubled from $825 million to $1.5 billion. The stock is still above our $165 Target Price, and after checking out the fundamentals, we are increasing it to $215. We don’t have a Sell Price.

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Visa (V: $197, down 3%)    

The company briefly reached an all-time high - $217 earlier this month - eclipsing the previous record of $212 set in February. Fiscal 3Q20 (ended June 30) results were weak due to the pandemic, with revenue falling 17% compared to a year ago, to $4.8 billion. Payment volume was down 10% and processed transactions fell 13%. We chalk this up to COVID-19, which hurt spending due to stay-at-home-orders. The good news is businesses have started reopening and people are leaving the house. While weak travel no doubt hurts, travel will rebound in time. Visa is the dominant player in the Payments industry, so it can wait out any softness. Have we mentioned Warren Buffett still owns 10.6 million shares even after trimming his stake by 575,000 shares? Our Target Price is $230. With its ultra-strong market position and growth prospects, you should hold onto this stock for a long time, so there’s no Sell Price.

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Anaplan (PLAN: $62, up 6%)  

The stock is approaching its all-time high of $64, that it hit in February. Unlike many other companies, it has held its own this month. Anaplan was at $63 in early September and it closed Friday at $62. This comes after a good August driven by a strong quarterly result. The stock jumped from $48 to $62 after the release before it reported fiscal 2Q21 results (ended July 31). Revenue grew 26% versus a year ago to $105 million. Losses narrowed to $35 million compared to $40 million.

Its technology connects people and data (Connected Planning, which Anaplan pioneered), allowing companies to make better and faster decisions. The top-line growth shows its solutions are working and resonating with customers. For fiscal 2021, management expects 26% revenue growth to $438 million. For 3Q21 results, they are looking for $110 million of revenue up from the low 90 million range last year. The company has been expanding relationships with existing customers amid the pandemic, thus we expect even better revenue growth once it can go after new business again. Now above our $55 Target Price, we are lifting it to $81. Simultaneously, we are amending our Sell Price from $35 to $54.

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Bill.com (BILL: $95, up 9%)   

The stock has been on quite a run since March, more than quadrupling to a record $107 a month ago. We added it a $61 in February, right before the pandemic started. Right after that, the stock shot to $98 after they released fiscal 4Q20 numbers (ended June 30) last month. After a good week, the company is heading back to where it belongs. Providing cloud-service software that automates back-office functions for small-and-mid-size businesses, revenue growth was 33% to $40 million. The loss doubled to $10 million from $5 million due to operating expenses rising 50% to $40 million

We’ve seen this playbook before. In this early stage, management is building the infrastructure to scale the business. We are confident they will continue to execute, and profitability will come. Our Target Price is $105, and our Sell Price is $82.

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Financial Select Sector Fund (XLF: $23, down 4%)    

The stock has been rangebound for the last three months. The fund tracks the S&P 500 Financial sector, so when the industry picks up, so will this fund. This is an excellent way to own a piece of the largest and best Financial companies. These are firms like Berkshire Hathaway, JPMorgan Chase, and Bank of America (the three add up to 34% of the fund). There are other fantastic companies like Citigroup, S&P Global, BlackRock, Goldman Sachs, American Express, and CME Group. We have a $25 Target Price, and when (not if) COVID-19 is in the rearview mirror, the index will surpass this level. In the meantime, you can collect the steady 2.4% dividend yield. Our Sell Price is $19.

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A Word From Gary Jefferson

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

There’s so much going on that it’s difficult to understand how it all is going to affect the market. There was the gross (but apparently legal) manipulation of the market by a single institutional investor that bought $4 billion of Big Tech stocks and then borrowed against that to buy heavily leveraged options, only to sell off when the trades went the wrong way. Add the Fed's easy money and a few million new “traders" who used to bet on sports and the situation is unusually volatile.

Next, pile on the politics. Many politicians are doing everything imaginable (and unimaginable) to make headlines, disrupting normal life and business in the process. The media’s drumbeat of doom and gloom has made a mockery of traditional fare, balanced and informative news that investors want and require. Basically, there is more “noise” coming from every conceivable direction than we have ever before seen. Thus, all the more reason for long-term investors to ignore the ongoing avalanche of emotions clouding long-term financial goals and objectives.

Yes, we know that most investors are aware of the dangers of allowing emotions to take hold – but we see an exceptional risk in this “perfect storm” of noise. We believe it is critical that investors keep their feelings about the pandemic and election separate from their investment decision-making process. The odds have always been 50/50 that there will be a disconnect between what investors expect to happen and what actually happens on a short-term basis. But history has always been on the side of a long-term investor while it rarely, if ever, sides with that of a market timer.

So, let’s stay focused on the what we have actually seen happening to the markets and economy. First, volatility has risen dramatically, but we were told to expect this. Pullbacks always occur after bull runs. The question, of course, is when is it going to stop? A few weeks ago we surmised that buyers were piling in to momentum stocks (think Big Tech) and setting very tight sell stop orders to get out quick. This has evolved into a pattern of general surges to the upside followed by quick cascades down. This is still what is going on and that the market has developed into a kind of trading range because the facts show us we are in an improving economy. It is getting better . . . and not worse.

More importantly (the market is always forward looking) expectations are for unprecedented growth for the remainder of the year, pushed by the tremendous tailwind of near zero  interest rates for the foreseeable future. Based on the economic reports we've seen so far, it looks like the third quarter will be the mother of all economic rebounds from the worst 2Q in history. Even if industrial production and retail sales are flat – unchanged – in September, they will still be up at 37.6% and 60.1% annualized rates, respectively, versus the dismal 2Q average. Total private sector hours worked would expand at a 25.6% annual rate. Housing starts would be up at a 218% annual rate. And finally, when a vaccine comes out, stocks could and  should soar.

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

This week’s four yield investments include those that are on the more conservative side. One is a municipal fund that will appeal to those of you in the higher income tax brackets. Then, we have options for those willing to take on more risk to earn a higher return. No matter which direction you choose, the returns are attractive compared to the risk.

 

Nuveen AMT-Free Municipal Credit Income Fund (NVG: $15.46, flat, yield=5.0% tax free)

This fund invests in federally tax-exempt municipal securities. The election is a little more than a month away, meaning we could have a new president in 2021. With Vice President Joe Biden having discussed hiking the highest income tax rate for high earners, Nuveen becomes even more attractive. The fund managers could invest up to 55% of its assets in securities rated BBB/Baa or lower. In this environment, with COVID-19 wreaking havoc on many municipalities’ budgets, it is comforting that the fund takes a more conservative approach. As of the end of August, over 48% of the assets are in securities rated A or higher. Another 18% have a BBB rating and 11% are rated BB. This puts only 3% with a B or lower rating, and 20% is unrated. The top 5 states are Illinois (15%), California (9%), Texas (8%), Colorado, and Ohio (6% each).

 

The holdings are concentrated in longer-term securities, meaning the fund has greater exposure when interest rates go up. Of course, in this uncertain environment, we don’t expect that to happen anytime soon - The Fed has told us that repeatedly. They don’t control long rates of course, but holding short rates low has an effect on long rates. Currently, 14% of the holdings mature after 30 years and 48% between 20 and 29 years. Another 25% comes due in 10 to 19 years. Nuveen AMT-Free Municipal Credit Income Fund (Target Price: $19) has a 5.0% yield. To compare the yield to taxable investments, you need to figure out the tax-equivalent yield. That is the current yield/(1-your tax rate). So, if Biden’s plan becomes law, the top income tax bracket rises to 39.6%, and your tax-equivalent yield is 8.3%.

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PIMCO Dynamic Income Fund (PDI: $24, down 1%, yield=10.9%)

This fund tends to invest its assets at the higher end of the risk spectrum. The managers have the flexibility to invest in any debt obligation, including mortgage-backed securities, investment grade and high yield corporate bonds, and sovereign bonds. They can also invest in developed and emerging markets. While it’s required to invest at least 25% of its assets in risker non-agency mortgage securities, as of the end of August, this was 50% of the total assets, with High Yield bonds another 18%. Emerging Markets make up 5%, which is well below the 40% that is permitted. The managers diversify across different industries, including Utilities, Banks, and Aerospace/Defense. The Dynamic Income Fund (Target Price: $27) has a 10.9% yield, more than 1,000 basis points more than the 10-year Treasury yield.

 

The stock trades slightly above book – a 7% premium. Some people feel this is a negative. But we view this as a positive. And note that the fund has been trading 7-15% over book for years.

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AGNC Investment (AGNC: $14.00, down 4%, yield=10.3%)

This REIT has invested 99% of its $98 billion of assets in Agency Residential Mortgage-Backed Securities. The company invests in residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by government-sponsored enterprise or by the United States government agency. The risk comes from AGNC borrowing short-term to buy these long-term securities. Thus the shape of the yield curve is important. The 2/10 spread is currently 54 basis points, which has been stable this month, so that’s good to see. One other factor that we are monitoring is prepayments, which would hurt profits.

 

Book value as of June 30 was $14.92. Our Target Price on AGNC is $16, so there is some nice upside potential, too. The yield is 10.3% after it cut its dividend in May to $0.12 per month from $0.16. It also has four preferred offerings that are appealing if you want lower risk. They range in price from $22.76 to $24.62 compared to the $25 liquidation preference, and yield between 6.7% and 7.4%. They become floating rate securities down the road.

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Equity Residential (EQR: $52, down 5%, yield=4.7%)

This $19 billion market cap company is one of the largest REITs in the country that own rental properties. They own or have investments in 306 properties consisting of 79,000 apartment units. More importantly, it owns top properties in major cities like New York, Boston, Washington D.C., Seattle, and San Francisco. 2Q20 revenue dropped 2% to $655 million and income was down 16% to $270 million. These results are fine given the extraordinary circumstances. Note this: It collected 97% of the rent due in 2Q, which continued in July, boding well for the future. While economic pressures may hurt near-term results, its strong properties in great locations will carry the day.

 

In April, the company raised its quarterly dividend from $0.567 to $0.603. At this rate, the company (Target Price: $65) provides a 4.7% yield, which is 400 basis points above the 10-year Treasury yield. We remain bullish after the stock’s recent movement caused it to dip below our $55 Sell Price. That notwithstanding, to protect yourself, you could certainly decide to cut the company loose. For us, we are sticking with this great firm.

 

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