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The Weekly Summary

The Bull Market Report team had family in town this weekend, which contributes to our decision to send this issue out today. We hope that the delay did not interfere with the rhythm of your investment activities . . . after all, today was spectacular for many of our key stocks and, by extension, the market as a whole. When Apple jumps 6% and Microsoft climbs 5%, we don't need to do much but cheer. Facebook, Alphabet, Berkshire Hathaway, Visa: The numbers speak for themselves.

As it is, our stocks are now up 32% YTD, having completely absorbed the COVID impact and come back stronger than ever. Of course, this isn't evenly distributed across all of our portfolios, but on the whole, the odds are good that a diversified portfolio of BMR recommendations has done extremely well. Technology has been unstoppable and we are overweight that sector. As of this week, our Tech-heavy Aggressive portfolio has doubled YTD and the slightly larger and more settled High Tech portfolio is only a little behind it. These are huge numbers under normal circumstances. In a pandemic year of recession and huge question marks, it's absolutely extraordinary.

We still have questions. The election is only three weeks away. While we aren't overly concerned, we know that a lot of investors are incredibly nervous. One way or another, someone is going to be disappointed with the results. All we know is that it won't be the end of the world. Life will go on, the country will go on and the market will go on. The Fed will make sure of that. Everything else is up to us.

Of course, a vaccine would be nice. One day, it will come. Life will get back to normal. Until then, as we discuss in The Big Picture, it's just a matter of holding on. We're now more than halfway through a COVID year. After this, one way or another, we get closer to the point where the comparisons get easier and the world will feel more like it's making progress again. Many of our best-performing stocks are already there. And we have consciously avoided or cut exposure to areas of the economy that are still feeling serious pandemic pain.

There's always a bull market here at The Bull Market Report! Gary Jefferson digs into the election angst and finds only signs of a resilient economy rebounding fast.  As always, we have plenty of stock updates in the main body of the newsletter as well as The High Yield Investor.  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.

Key Market Indicators

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BMR Companies and Commentary

The Big Picture: When Will Earnings Season Matter Again?

Tomorrow starts another quarterly earnings cycle. While we don't see a lot of reason to pay extremely close attention this time around, we admit we're happy to be three months closer to returning to a world where the numbers reveal anything important about how dynamic and vibrant any particular company is relative to its peers. The market works best when good stocks are free to prosper and failing ones are free to falter. Ultimately, earnings season is all about giving investors the hard numbers we need to know the difference.

Admittedly, we appreciate the Fed's promise of endless life support for all companies that might need help navigating the COVID economy. It's almost impossible to run out of money when central bankers ensure that you have all the free money you need to keep your employees on payroll while we're waiting for conditions to normalize. However, that freedom from failure only puts a floor under these companies. It doesn't nudge them toward sustainable success . . . and that's what we actually want to see. When conditions favor stronger cash flow year after year, stocks can keep climbing without straining the fundamentals.

For now, that dynamism just isn't easy to find anywhere beyond the stocks we already recommend. We expect to see every single sector show negative earnings "growth" in the coming season, ranging from a relatively mild 0.4% decline in Healthcare through a harrowing flip to aggregate losses in Energy. (We're glad we pulled the plug on that sector when we did.) The current quarter isn't shaping up too much better, but at least we're looking for a return to year-over-year expansion in Healthcare and Technology to tide us over.

That's the signal we're waiting to see. When we can look at where a company is today and say without hesitation that it's in a better place than it was a year from now, the stock has what it takes to run with the bulls. From there, we can start weighing the fine points: speed of growth, whether it is decelerating or accelerating, the premium investors need to pay to participate in its story. That's how healthy markets work. It's the stage of the cycle we love.

The numbers start coming our way three months from now. In six months, we're looking for real growth to return to the market as a whole. Until then, the numbers we see are probably just numbers. While we will be happy to be wrong, those numbers are going to be scary. Earnings deterioration hasn't been this fierce since 2009. The Airlines are hurting. Industrials are reeling. Energy is a crater. Hotels, Auto manufacturers . . . all in all, the bottom line has dropped 20% from where it was last year.

That would ordinarily be a miserable development. But before you think back to 2009, don't forget that the Fed learned from that disaster. They'll do what it takes to keep it from happening again. And in six months, the year-over-year comparisons get a whole lot easier, whether there's a vaccine in place or not and no matter who is in the White House. That's when Wall Street can get serious again. For now, the world remains on life support.

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Salesforce.com (CRM: $266, up 7% last week)  

 A month ago, Salesforce struck a new record, $285 before falling back 18% to $234 three weeks later. This was just the overall market correcting, and the company has resumed its ascent. That all-time high came after another strong quarter, which saw the stock shoot up from $216 to $278 immediately after the company reported results in late August. Digging into the numbers, its fiscal 2Q21 (ended July 31) revenue jumped 29% year-over-year to $5.2 billion. Earnings increased an eye-popping 25 times from $0.11 to $2.85 a diluted share. Part of this was due to a large income tax benefit. Even without this, pre-tax income was $840 million versus $165 million. In other words, this dominant customer relationship management company is performing at an extremely high level and will continue to do so.

Management shares our optimism. Their FY21 guidance call for 21% revenue growth from $17.1 billion to $20.8 billion. We’ve grown accustomed to these better than 20% annual increases. They expect earnings to go from $0.15 to $3.12 a share. With results like these coming in, we are raising our Target Price from $205 to $305. It is also time for us to increase our Sell Price from $155 to $220.

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Berkshire Hathaway (BRK.B: $216, up 2%)  

As you’d expect given the market’s volatility, the stock has had its ups and downs this year. It reached $232 in January, an all-time high, before dropping to $160 in March. September saw it fall from $223 early in the month, closing this week at $216. While the economy and stock market affect its results and stock, this is not merely an index fund. Warren Buffett has been investing money professionally for more than six decades, and he has built a tremendous record. We will gladly tie our fortunes to him and his team. They’ve started putting some of the company’s $147 billion in cash to work. This includes buying back $5 billion worth of shares in 2Q and paying $9.7 billion to buy a gas pipeline network from Dominion Energy. In August, Berkshire announced it shelled out $7 billion to purchase 5% stakes in five leading Japanese trading firms with operations spanning several industries like mining, energy, food aerospace, retail, and finance. With COVID-19 cases rising, the company will use their cash astutely, like always. We have a $255 Target Price. With all of Berkshire’s virtues, we wouldn’t part with the stock, which is why we don’t have a Sell Price.

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Blackstone Group (BX: $55, up 2%)   

The stock has been rangebound for the last four months, trading in the mid-to-upper $50 range. With COVID-19 cases on the rise and the on-again, off-again stimulus talks, many fear the economy could teeter. This is bad news for Blackstone in the short-term. Over the long haul, it will benefit as it invests in assets at attractive prices. With $156 billion of “dry powder” at the end of 2Q20, it is poised to jump on opportunities. Remember, it has been around 35 years and built up $565 billion in assets.

The company invests in Real Estate, Private Equity, Hedge Funds, and Credit. 2Q20 revenue rose to $2.5 billion from 2Q19’s $1.5 billion. There was $1.1 billion of unrealized investment gains. Positively, Management Fees also increased from $840 million to $970 million. This is important since this is based on the amount of assets under management. The company continues to attract dollars to invest. While you patiently wait for the portfolio’s investments to pay off, you can also enjoy the 3.4% dividend yield. Our Target Price is $69 and our Sell Price is $52.

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CBRE Group (CBRE: $50, up 4%)  

This stock has been trading in the mid-to-upper-$40 range since mid-June. We don’t mind a stock holding its own for a while. We hope this week’s movement represents a breakout. If not, it will happen at some point. This is a real estate company that has been around for an eye-popping 114 years. That means the company has learned a thing or two about surviving tough economic periods. Its businesses are Advisory in nature, in leasing, sales, mortgage origination, property management, and valuation; and offers Global Workplace Solutions (e.g. outsourcing services for things like facilities management); and Real Estate Investments.

We were pleased with how the company performed in 2Q20 in the face of COVID-19. Revenue dropped 6% year-over-year to $5.4 billion. Earnings fell to $0.24 from $0.66. It is not as dramatic when you factor in additional costs and a donation to a relief fund. These items shaved $0.10 off this year’s figure. Looking forward, CBRE will get through this period just fine. Its diverse revenue streams and the shift to a more contract-based business help buffer CBRE from any economic fallout caused by the pandemic. The company has also moved to cut costs. We have a $51 Target Price, but we are raising it today to $58. Our Sell Price is currently $35, and hereby raised to $42.

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Alteryx (AYX: $152, up 34%)  

Well, this is more like it. The stock soared on Tuesday from $114 all the way to $148 and closed the week at $152. You read those numbers right. This movement came after management announced its fiscal 3Q20 revenue was $127 million, a 23% year-over-year increase, easily besting their $115 million guidance. Full results are due in a month. You’ll recall that Wall Street punished the stock in August, sending it down from $179 to $110 after reporting “only” 17% growth and issued 3Q20 guidance calling for an 11% increase. The Street is used to 30%+ growth. With its ability to continue signing new clients even in the face of the pandemic, we were sure this was just a blip. Thankfully, we were proven right.

There was another important piece of news. Co-founder Dean Stoecker stepped down as CEO. He will remain Chairman. The company named Mark Anderson, a board member, as his replacement. We aren’t reading anything into the change since Stoecker is in this 60s, so he is merely stepping away from his day-to-day duties.

This week’s movement left our $135 Target Price in the dust. We are increasing it to $169. Recognizing the need for you to limit your downside, we are also raising our $95 Sell Price to $136.

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CyberArk  (CYBR: $114, up 6%)   

The stock moved back in the right direction this week after a rough August and September that saw it fall from $121 to $96. As a reminder, 2Q20 annual revenue growth was just 6%, to $105 million. The company will report 3Q20 results in a month, and management expects revenue to come in at $110 million, flat versus a year ago. We know that’s tough to swallow.

Now for the good news. With companies constantly under threat, the security solutions provider has a good long-term potential. This quarter will provide clues on whether companies have started spending again on IT. We have a $120 Target Price and our Sell Price is $98, up from $91.

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Paycom Software (PAYC: $366, up 10%)   

Like the overall market, September was not kind to this stock. It reached $312 on the first day of the month, only to fall to $258 a week later. It traded in the $270 to $280 range for the balance of the month. October has been much better. It roared back to reach $368 on Friday, a new record. 2Q20 revenue only grew 7% versus last year to $180 million. Profit declined from $50 million to $30 million.

The company reports 3Q20 results in three weeks and management is looking for 9% revenue growth to $190 million. It had been growing much faster, with 2019’s revenue increasing 30% to $740 million. With the economy in the doldrums, the lower growth rate is far from devastating. The fact is, in a recession and pandemic, it still managed to grow the top line. The company provides technology solutions to HR and payroll departments, but thus seeing an impact when headcounts weaken. When things get moving again, Paycom’s revenue and earnings will accelerate to a rate in which we have become accustomed. Paycom will come out of the current environment even stronger after pouring money into advertising, which helped it win new accounts. The stock’s performance has been so good lately that it soared past our $355 Target Price. This is a good time to lift it to $420. Our new Sell Price is $332 compared to $279.

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TPI Composites (TPIC: $36, up 22%)  

Any time a stock gains 22%, we’d say that was quite a week. Going back a little further, the stock is up nearly 50% in the past two weeks. It just goes to show that sticking with good companies when the market hits a snag pays off. Making the blades for the wind turbines, this is an excellent way to invest in renewable energy. The company reports 3Q20 results in a month. 2Q20 sales grew 13% versus a year ago to $375 million, and we are looking for growth to remain strong. It lost $65 million compared to an breakeven result. But this was largely due to a large $50 million income tax expense. Plus, there was a warranty remediation issue with one customer that raised costs. Assuming these don’t repeat, TPIC will return to profitability. The stock is above our $35 Target Price which we are sticking with for now, at least until it stays higher for a while. Our Sell Price is $27.

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Virgin Galactic Holdings (SPCE: $21, up 3%)  

The stock has recovered nicely from $14.92 a couple of weeks ago. There’s short-term volatility with this name. Hang in there because over the long-term we see this as having a huge upside. It is at the forefront of individual space exploration. At the end of July, the company had 600 reservations, collecting $80 million of deposits for the $250,000 ride in space. Since February, it took small deposits from another 700 people.

There’s not much in the way of revenue right now. So, we are looking for progress and we’ve been pleased on this front. We won’t have to wait long for the next milestone. At the end of this month, it is scheduled to launch two test flights. If these are successful, Richard Branson (yes, this is the genius entrepreneur’s vision) will take a flight in 1Q21. We have a $30 Target Price that will look absurdly low if everything progresses as we expect. Our Sell Price is $12 which we are raising to $15.

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Zscaler (ZS: $152, up 7%)  

After hitting $164 in early-September, the company dropped to $124 in the middle of the month. Then, it recovered nicely, including a 7% gain last week. When we look at fiscal 4Q20 (ended July 31) results, we understand why the Street is so excited. Revenue grew 46% over last year to $125 million. It lost $50 million compared to a $5 million loss. That’s because the company spent more on certain items, particularly Sales & Marketing and R&D, with operating expenses going from $75 million to $140 million. This will lead to higher sales, and eventually the company will become profitable. We are confident because it’s expanding its product offerings, and its cloud security business is so critical to businesses.

Next year, it is full steam ahead. Management’s 1Q21 guidance calls for 40% revenue growth to $130 million. For the year, they anticipate a 35% increase from $430 million to $585 million. It keeps surpassing our Target Price, so we are raising it from $142 to $175. We are also lifting our Sell Price from $112 to $134. Trading at more than 40x sales more than double where it was trading at the start of the year, there isn’t a lot of room for error, so we’ll keep an eye out for any slip up in sales. Right now, we don’t see any issues. But the valuation is extremely high at 40x sales, so be very careful with this one. 

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A Word From Gary Jefferson

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

Here we go again. The mainstream media reported last month's Employment Report as “hugely disappointing," as “job growth slows sharply” and  “recovery is losing momentum." The headline number showed we gained 661,000 new jobs in September, which was under the 894,000 consensus, but the meaningful numbers showed that private payrolls were much stronger at 877,000 new jobs vs. a consensus calling for 900,000. Hardly a “sharp slowdown."

The biggest miss came mainly from the public sector where 216,000 jobs were lost, many of them temporary positions such as Census workers. We know that private payrolls are much more important to our economy than government ones, so this report was really a little better than expected and actually a net gain for the economy.  And unemployment actually dropped from 8.4% to 7.9%, handily beating expectations of a drop to 8.2%.

Unfortunately, most of the positive employment headlines were lost when the markets were jolted by the report that the president had contracted COVID-19 and was being taken to the hospital. He has since returned home and appears to be well on his way to a full and speedy recovery.

The takeaway, however, should be that last month produced its share of progress as the economy rebounds from the initial pandemic strain. We are doing much better than anyone suspected six months ago. About half the jobs lost in the quarantines have been regained and the unemployment rate has been nearly cut in half. While the stock market still has fits over each shocking or negative headline, it has consistently kept its eye on the future . . .  where our economy is headed. While we are still far behind where we thought we would be a year ago, from here, that direction points up.

That said, we expect exceptionally choppy market conditions until the election is over. Expert opinions for the recovery’s time frame range from two quarters to two years as the second half of the recovery will probably be a longer, more difficult and challenging climb back up the ladder. We are confident the Fed will continue to escort the economy to the other side of the abyss until a vaccine can be distributed, but a lot of damage has yet be fully evaluated and may present unexpected obstacles.

Speaking of delays, there is a great deal of angst over  the threat to disrupt the normal election process. Recent comments from Goldman Sachs said the fear of a delayed election result is overblown as it seems fairly likely that there should be enough information on election night from states that will report results quickly for the market to be able to gauge the likely winner. In other words, the S&P 500 can trade the likely outcome, even if the AP doesn’t call the race on any definitive basis right away.

Let’s once again look at history. The last time an election was contested was in 2000 between Bush and Gore. That lasted for 36 days before a winner  was declared. During that time the S&P 500 lost just 4.24%. We’ve been through worse than that multiple times in the last six months.

Bottom line: A contested election doesn’t change the underlying fair value of the market. It isn’t going to change what the Fed does, the progress of the economy or the number of iPhones sold. Yes, it will certainly feed uncertainty, but investors simply need to maintain a “steady as she goes” mentality and keep in mind that earnings are still growing while interest rates will remain low. Regardless of politics, this combination has always been a historical recipe for a growing economy.

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

We turn to 4 different REITs this week. The Bull Market Report likes to give you a variety of choices, and these present differences in their holdings, riskiness, and yields. Undoubtedly, you will find something to like in at least one of the investments we discuss.

Office Properties Income Trust (OPI: $21, down 1%, yield=10.3%)

This REIT concentrates its holdings in office buildings. After acquiring First Potomac Realty Trust in 2017 and Select Income REIT the following year, it diversified its properties from solely office buildings leased to the U.S. government. They still get 25% of their rental income from this ultra-safe source, which is particularly good in this environment. Management cites the fact that 63% of its rents come from investment grade entities. At the end of 2Q20, about 92% of its space was leased, in line with the previous quarter, and it collected 98% of the rent due. It’s good to know that the company has a strong tenant base in case things get tougher.

Our $36 Target Price looks too high right now given the stock’s level. We are lowering it to $27. The stock is trading below our $22 Sell Price. This makes it a good time for you to reevaluate the company to see if you want to remain invested. If you decide to stick with the company, it offers a 10.3% yield, which is 950 basis points more than the 10-year Treasury.

Service Properties Trust (SVC: $8.31, down 2%, yield=0.5%)

This REIT’s portfolio consists of Hotel and Retail properties. To put it bluntly, these are not easy to own right now. The space is so tough, it slashed May’s dividend from $0.54 all the way down to a penny. If you can hang in there, there is a big pot of gold at the end of the rainbow. With 25% of its rent coming from TravelCenters of America, this provides some measure of stability since these stayed open to supports truckers. It is working on getting rid of problem assets, including announcing on Wednesday that it was canceling contracts with Marriott after the chain missed a payment, and will sell the 24 hotels.

Most importantly, Service Properties Trust has previously been through hard times and it has always come roaring back. Its predecessor company suspended the dividend in 1999 and cut its payout by 75% in 2008. Our Target Price is $9.00. If you are willing to take the risk, the bet is the company hunkers down and survives this period. Once that happens, it’s business as usual as the company gets back on a roll. Then, you’ll make money from the price appreciation and the return of cash via dividends, as it has in the past.

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

We love this REIT’s tenants, which include the U.S. government and Amazon. Could you get any more stability? By the way, Amazon has been doing phenomenally well and has been hiring more people in their front yard of Washington DC - Virginia. Rent collection has taken on an increased prominence in the COVID-19 environment. For its Office and Residential properties, it received 99% of the amount due. We aren’t concerned that Retail was a laggard with a 58% rate since this is a small part of its holdings. Only $3.4 million was due, and the company is working out arrangements. JBG Smith (Target Price: $32) has kept its dividend constant since May 2019. That may not sound like much, but it is an accomplishment with so many other REITs slashing their payouts. It provides a 3.3% yield, which is 250 basis points more than the 10-year yield.

Omega Health Investors (OHI: $31, down 2%, yield=8.6%)

This REIT is in prime position to take advantage of the country’s aging population. Its 960 properties are mostly Skilled Nursing and Assisted Living Facilities. They also own Independent Living Facilities. While its recent results took a temporary hit due to the pandemic, which hurt occupancy and raised expenses for safety items, results will bounce back. Despite these challenges, 2Q20 revenue rose to $255 million from 2Q19’s $225 million and income grew 35% to $100 million. Better still, it collected over 99% of rents due. Its quarterly dividend has been constant since last November. Omega Health Investors (Target Price: $45) offers an attractive 8.6% yield and favorable demographics give us confidence that the stock will get back to the mid-$40 level that it traded at before COVID-19 became a pandemic.

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