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The Weekly Summary

As new COVID case reports break records and a fresh round of federal stimulus remains elusive, investors can be forgiven for a few fraying nerves, especially with a fractious election looming on the horizon. What's ironic, of course, is that the Federal Reserve's heroic efforts to cushion the underlying economy have largely succeeded. Unemployment has receded to 2012 levels as corporate revenue rebounds from its lockdown low. People are still getting sick but the underlying economy seems to be more resilient than anyone dared contemplate six months ago.

Even so, as long as a vaccine remains elusive and the situation in Washington remains a cloud, stocks will have trouble holding record gains. This is not a sharp "V-shaped" recovery for everyone. At best, we are now living in a "K-shaped" economy where some industries have gotten back to work as though the pandemic never struck while others remain stuck in what amounts to lockdown conditions. We've focused as hard as we can on companies on the strong upward trajectory, which is all any investor can do.

While that effort has paid off, the road is only a little less bumpy for our stocks than it has been for the market as a whole. In the last two weeks, all major indices have taken a healthy step back and the BMR universe hasn't been immune. The S&P 500 is down 2.3% since our last newsletter. The Nasdaq has retreated 3.4%. Our stocks are down about 3.0%, which reflects our Technology-rich posture.

But in this kind of environment, success comes back to picking the right stocks. Our High Technology defied the sector trend thanks to Facebook (FB) and Spotify (SPOT), and is actually up 1% as a group despite investors' efforts to move to the sidelines ahead of the election. Special Opportunities have also been net winners, thanks to a big bounce on Twitter (TWTR) and encouraging movement on several other positions that we'll discuss in a few minutes.

Meanwhile, the year is winding down, and on that basis, our recommendations have felt zero collective pain from the pandemic. We're still up 28% YTD across all portfolios, which is great even in a good year and spectacular in the face of what is still an ongoing COVID recession. As strange as it may sound, the BMR universe keeps making money despite the worst economic climate since the 2008 crash. We are not complaining and hope you are pleased with the way the numbers are shaping up. If all goes well, next year will be even better.

There's always a bull market here at The Bull Market Report! We just have to get there first. Many of you are asking about the election and The Big Picture provides our thoughts . . . not grounded in hope, fear or partisanship but simply looking at the probabilities and the likely ramifications. Gary Jefferson swings back to earnings, which many investors have had to neglect while the Fed is in charge. 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


BMR Companies and Commentary

The Big Picture: Tough Talk On The Election

A few days ago, we heard some shocking numbers from an opt-in wealth manager poll on the election. Unlike broader polls, this one didn’t ask who people want to win the White House or even how they’re personally inclined to vote. It was a lot simpler and more realistic. The mutual fund company running the poll decided to see who advisors think will win and how the market will react. That’s it.

While the sample was small and grossly unscientific, enough people responded to show us roughly what the advisory community is thinking. Biden probably wins. And the world probably won’t end. Cut through all the electioneering and media hype and there it is. Maybe you've heard about hedge funds looking to dump their holdings if Trump loses, but that's just their effort to take a contrarian position. If the market pros polled have any sense of the way the political wind is blowing, Wall Street will continue roughly unchanged once the votes are counted.

It isn’t hope. It isn’t even fear. Almost half (48.8%) of the wealth managers who took part in the survey expect a Biden presidency and the market to deliver at least a decent (5% or more) return in 2021. That might be surprising in light of the prevailing dread that Biden will crash the market, and there is a little dread out there, with another 20.3% of the market professionals saying Biden will win but the market will drop 5% or more in response.

However, the poll didn’t say anything about policy or the macroeconomic cycle. Going back to the Great Depression, the S&P 500 dropped 5% or more about half the time in a presidency’s first year. It happened to Eisenhower, Nixon, Carter, Reagan and George H.W. Bush. Their collective policies weren’t exactly investor-unfriendly, so a weak first year market is probably more a reflection of the macro moment that brought them to  the White House in the first place.

Maybe Biden will buck the trend and destroy capitalism in his first year. We are not convinced the presidency has gotten that powerful, but welcome arguments to the contrary. The point here is that people who know the market overwhelmingly think he’s going to win and 70% of that group isn’t worried about any immediate market impact.

Naturally, those who expect Trump to win another four years are more uniformly bullish. After all, if the votes swing that way, the odds of higher taxes ahead are extremely remote. If anything, we might even get that second tax cut as well as all the stimulus it takes for the country to cheer. With that in mind, 28.8% of the people polled are looking toward a Trump victory and a market surge. Only 2.1% think that he’ll win and stocks will sink anyway, despite his best efforts. That logic is fairly straightforward. He’s established his investor-friendly credentials. There’s little chance he’ll actively get in the market’s way. The only real risk is that he’ll fail to give the market what it needs.

All in all, only 22.4% of wealth managers are looking forward to a bad 2021. From a statistical perspective, that’s pretty bullish. We normally brace for a down year about 30% of the time. Maybe the industry consensus is wrong. Maybe all the polls are completely inaccurate as well. But on this one at least, there’s zero incentive to hide your real opinion. Nobody was asked who they wanted to vote for or who they want to win. There’s no shame or even hope involved in these questions.

In the longer term, the big strategists have generally guided return expectations lower across the coming decade, but they’ve been doing that for ages. Setting market targets has become a game of setting the bar low enough that you can make clients happy when you exceed. Right now, the Fed remains in control either way, so it doesn’t matter. We’re living in a zero-rate world until at least 2022. Free money is unlikely to stop no matter who is in the White House next year.

Free money inflates stock prices even when the fundamentals look miserable. That’s just how it works.If Biden wins and he goes against the entire political history of Delaware by trying to dismantle capitalism, we'll be shocked. More likely, one way or another, he’ll do what he can to keep the economy humming. Likewise, Congress will remain closely divided. We all know how much obstruction the opposition party can throw from either end of the aisle. Sweeping changes are rare without some level of consensus and a whole lot of negotiation.

And this is just the “worst case” for the market. We don’t see tax hikes for at least a few years. The fiscal discipline to argue for them is completely dead in Washington. Trump won’t do it. Biden won’t do it. At worst, some brackets revert to 2017 levels or close to them. If that’s enough to kill the market, capitalism is a lot weaker now than at any other point in living memory. Do you believe that?


Agilent Technologies (A: $106, flat last week)  

Agilent is a testament to staying the course. After all, when a great company gets caught up in the overall market’s downdraft, it creates a compelling opportunity. On Monday, the stock hit a record of $108. For fiscal 3Q20 (ended July 31) revenue was down 1% to $1.3 billion due to COVID-19, which hurt access to its facilities. It did hold down costs, allowing income to increase from $190 million to $200 million. The company reports 4Q20 results next month, and we expect top-line improvement. The equipment it provides to the Pharmaceutical and Chemical sectors, and Academia, is just too important not to continue to be bought. Trading above our $100 Target Price, a company this good deserves our praise; and our strong conviction is leading us to hike it to $120. We are also increasing our Sell Price from $88 to $93.


AstraZeneca (AZN: $52, down 2%)  

The stock has been stuck in the low-to-mid-$50 range for the last three months. It won’t stay that way for long as we expect the company to break out to the upside later this year. 2Q20 results, which the company reported at the end of July, were strong. Revenue grew 8% year-over-year to $6.3 billion. It has strong franchises in Oncology, Cardiovascular, Renal, Metabolism (CVRM), and Respiratory and Immunology. The company is not just relying on older treatments, either. Its newer drugs include lung cancer treatment Tagrisso (32% growth to $1 billion), and CVRM medications Farxiga and Brilinta, which had 17% and 12% year-over-year growth to $445 million and $440 million, respectively. AstraZeneca is also working with the University of Oxford on a COVID-19 vaccine. Trials were on temporary hold in the U.S. but on Friday the company (along with Johnson & Johnson – see below) announced it was resuming trials after the FDA gave it the go ahead.  It plans to sell the vaccines without making a profit during the pandemic. So, this isn’t going to affect the company’s bottom line right away, but we believe the long term benefits will be strong. We have a $58 Target Price and a Sell Price of $44.


Eli Lilly (LLY: $142, down 3%)  

The last couple of weeks have been rough for those of you invested in the stock, falling from $157. The drop is tied to the company’s announcement that it paused its COVID-19 clinical trials over safety concerns. While producing a vaccine means a nice feather in the company’s cap, this is not going to break the company as it has so many other treatments that are doing well. As well as a pipeline of new drugs. This includes Trulicity, a treatment for type 2 diabetes, Verzenio, used for breast cancer, and Olumiant, which treats rheumatoid arthritis.

The company is scheduled to report 3Q20 on Wednesday. As a reminder, 2Q20 revenue fell 2% year-over-year to $5.5 billion from $5.6 billion, with $500 million directly related to COVID-19. Half of the $500 million was demand pulled into 1Q20 and the other 50% was from people delaying prescriptions that it undoubtedly recouped this quarter. We have a $170 Target Price, and our confidence is so great in the company’s long-term prospects that we do not have a Sell Price.


Johnson & Johnson (JNJ: $145, down 2%)  

This is another stock that has sold off due to issues related to COVID-19 vaccine. In mid-month, the company hit the pause button on its trial after a participant got sick. With a huge trial, this shouldn’t surprise anyone. As with AstraZeneca, the U.S. government also announced it is allowing the trials to continue. The company is a collection of wonderful businesses, spanning Consumer Health, Pharmaceuticals, and Medical Devices.

Looking at 3Q20, COVID-19 hurt quarterly revenue, which rose 2% versus a year ago to $21.0 billion. Meanwhile, earnings more than doubled to $3.6 billion. Consumer Health (products such as Band-Aid, Tylenol, and Listerine) and Pharmaceutical had sales growth of 1% and 5%, respectively. The only laggard was Medical Devices, which experienced a 4% sales fall. This was due to doctors and hospitals pushing back procedures. These are getting filled at present, and it will bounce back in a big way in the coming quarters. Our Target Price is $168. With a forever holding period, we don’t have a Sell Price. It’s only one of two companies in the US that have a AAA rating. (Do you know the other one? Hint: Apple.)


Merck (MRK: $80, flat)  

Since we recommended Merck two months ago at $85, the stock hasn’t gone our way. It hasn’t been that long and over time you will undoubtedly feel happy with this company’s return. Why do we feel that way? Well, its core Keytruda drug, which is used to treat various cancers, continues to grow like gangbusters as the company continues to seek approval for new indications. It is reporting 3Q20 results on Tuesday. It is reporting 3Q20 results on Tuesday. Glancing backward, 2Q20 sales of the drug grew 29% year-over-year from $2.6 billion to $3.4 billion. This wasn't enough to raise the company's total sales, which fell 8% to $10.9 billion due to declines in older treatments such as Gardasil. With expanded usage for Keytruda and other drugs in the pipeline, including two COVID-19 vaccines and an antiviral treatment, Merck will work out just fine in the future. While it wasn’t the fastest out of the gate in pushing a vaccine, this tortoise may just win the race. Plus, you can enjoy the 3.1% dividend yield as you wait for triple digits. Our Target Price is $93 and we have a $71 Sell Price.


Pfizer (PFE: $38, up 1%)  

Recommending the stock at $38 in mid-August, we are at breakeven. Our confidence in the name remains unshaken. This is another company with its hat in the COVID-19 ring, and so far the clinical trial is progressing nicely. When we look at Pfizer’s results, they are a bit challenging to decipher right now. 2Q20 revenue fell 11% year-over-year from $13.3 billion to $11.8 billion. Digging a little deeper, about half of this decline was caused by the Consumer business that is no longer part of Pfizer’s top line. This unit had $860 million of sales last year, and is now part of a joint venture formed with GlaxoSmithKline (GSK Consumer Healthcare). The Upjohn business, which sells drugs that are no longer covered by a patent, is responsible for the remaining portion of the revenue drop. Sales of this division fell 32% versus a year ago from $3.0 billion to $2.0 billion. We aren’t fazed since the company is spinning this off to shareholders, and it will merge with Mylan. That leaves its core Biopharma business. How did this do? Pretty good, actually. Revenue rose 4% to $9.8 billion. That’s good news for shareholders since this is the part of the business you will own. Our Target Price is $45, and our Sell Price is $32.


DocuSign (DOCU: $220, down 6%)  

You shouldn’t feel discouraged about the company after what was admittedly a difficult week after the stock dropped 6%. With no news coming out, this was just investors taking some profit off the table. After all, the stock has just about tripled this year. Its solutions allow people and companies to electronically sign agreements. In fact, DocuSign is the leader in this fast-growing area. This allows its customers to conduct business faster, more conveniently, with fewer errors in the agreement process, and at a lower cost. The pandemic merely accelerated the unmistakable trend towards digital solutions. 2Q20 revenue jumped 45% over the prior year to $340 million. The loss narrowed a bit from $70 million to $65 million. As long as the top line keeps growing, we expect DocuSign to turn a profit down the road. We have a $235 Target Price, and our Sell Price is $180.


Carlyle Group (CG: $27, down 1%)  

Even with this week’s little breather, the stock has had a nice run over the past month, rising 17%. The Street is just taking a break ahead of Thursday’s 3Q20 earnings report. As a reminder, 2Q20 revenue rose 7%, to $1.1 billion, and income fell from $525 million to $205 million. We aren’t as concerned with short-term results since these can vary from quarter-to-quarter. What grabs our attention is the remarkable track record it has built up over three decades by investing in Private Equity, Real Estate, Energy, Infrastructure, and Credit. While taking a long-term approach, you can enjoy the stock’s 5.4% dividend yield. Our $30 Target Price remains in place and our Sell Price is $24. And we’ll say this: We wouldn’t be surprised to see a “4” in front of its price at some point down the road when Wall Street wakes up to how powerful and profitable these Private Equity companies really are. It shocks us as to the low valuations the Street puts on stocks like this and The Blackstone Group (BX).



Kraft Heinz (KHC: $31, down 2%)  

 We ordinarily don’t get excited about flat performance for YTD performance. This is not your typical year, however. Management is working on sprucing up the companies balance sheet by selling assets, writing down others, and strengthening its core brands. As we’ve discussed previously, you have to dig past the headline numbers. 2Q20 sales 4% decline from 2Q19 looks troubling upon first glance. When you strip out divestitures, the figure actually rose 7% We will decipher the company’s numbers after it releases 3Q20 results on Thursday.

While you wait for the earnings report, keep in mind a couple of things. It has strong, well-known brands like Oscar Mayer, Kraft, and Maxwell House. With renewed focus at the company and a pandemic causing people to eat out less, we will see major increases in at-home purchases, helping Kraft. Then, there is Warren Buffett’s presence – Berkshire Hathaway is the largest shareholder with a 27% stake. We need to exercise some patience as we wait for the restructuring to take effect, and the 5.1% dividend yield should help you wait while growth developments materialize. We have a $50 Target Price and our Sell Price is $25. The all-time high is in the high 90s back in 2017.


MetLife (MET: $41, up 4%)  

Starting the year at $51, the stock hasn’t fully recovered from the broad COVID-19 selloff in March. Still, it has come back nicely from the $23 low. In the short-term, the virus has hurt results, and we expect that to remain the case when the company reports 3Q20 results in early November. 2Q20 revenue fell 19% year-over-year to $14 billion and earnings were $70 million compared to $1.7 billion. A leading insurance company with a strong presence in Group Benefits, Life, Dental, and Disability, it is merely a matter of when, not if, results rebound. In the meantime, you can enjoy the company’s 4.5% dividend yield. The stock has risen sufficiently that it is above our $39 Target Price. We are raising it to $47. When we do this, we typically also increase our Sell Price so you have some downside protection. Our new Sell Price is $36, up from $34.


A Word From Gary Jefferson

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

As you know, we have always emphasized that stocks are all about earnings. The most golden rule of all investment golden rules is “price follows earnings."  Period. This doesn’t mean that stocks will instantly respond to changes in the fundamental environment, of course. Disappointment often follows when earnings are positive, yet share prices drop because they don’t meet analyst “expectations." And there are always the accounting and strategy games played from quarter to quarter to bend the numbers up or down.

But the rule always holds true over the long term. Because of the pandemic, this earnings season is unlike any we can remember. Some experts believe it will be the most important one ever. Why? The previous quarter's earnings were a complete disaster caused by the COVID lockdown. GDP collapsed by a third as earnings plummeted at their fastest rate since the 2008-9 crash. Numbers we are seeing now reveal the ways companies either learned how to survive, thrive or simply drift on the Fed's largesse. Some management teams figured out the pandemic environment. Others didn't.

From a broader perspective, we are expecting one of the greatest quarters in history in terms of market performance, and we need earnings to back it up. Compared to the dismal 2Q environment, analysts are expecting a blockbuster sequential recovery as a testament to both the underlying strength of the U.S. economy before the shutdowns happened and the seemingly unlimited ingenuity of the American people. Twenty years ago, without the technology we have today, there is no way the corporate landscape could have rebounded as quickly as early 3Q reports suggest. Moreover, U.S. households entered this government-mandated recession with the highest incomes and lowest poverty rate we have ever recorded, and this quarter will provide proof that ambient strength was enough to weather the pandemic storm.

So far, so good. With 27% of the S&P 500 on the record now, nearly 85% have reported results better than what Wall Street expected. While the year-over-year  trends show a miserable 16% decline, at least corporate profit has recovered 30% from the previous quarter. At that rate, we're looking for real year-over-year growth to resume in the next five months. And then the market can really get back to work.


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

This week we discuss three REITS that are down but certainly not out. That’s because their properties position the companies well for the long term. We also look at a closed-end fund that invests in equity and convertibles that offers a nice combination of yield and upside.

Ventas (VTR: $42, down 1%, yield=4.3%)

This REIT’s 1,200 property portfolio is concentrated in Senior Housing Facilities, Medical Office Buildings, Research Centers, Inpatient Rehabilitation Facilities, and Long-Term Acute Care Facilities. Most of its revenue comes from Senior Housing. With COVID-19 disproportionately having more severe effects on older people, this hurt Ventas’ 2Q20 results. With costs going up due to safety measures, it flipped to a $155 million loss compared to a $210 million profit. 2Q20 revenue hung in though, falling to $945 million versus $950 million a year ago.

Ventas agreed to reduce Brookdale Senior Living’s rent by 45%. This is one of its largest tenants and was a major contributing factor that caused the company to slash its July dividend by 43% to $0.45. While COVID-19 adds near-term uncertainty, this is a well-run company with favorable demographics on its side.

BMR Take: Ventas (Target Price: $57) offers a 4.3% yield, and we don’t expect any more dividend cuts. This is 340 basis points more than the 10-year Treasury yield.

Vornado Realty Trust (VNO: $34, flat, yield=6.2%)

The pandemic has taken a bite out of this company. Thus this REIT requires you to have a long-term horizon. We feel good about its future since it has great office, retail, and residential properties that are concentrated in New York City, plus prime properties in Chicago and San Francisco. With the pandemic forcing its properties like Hotel Pennsylvania to close and cancel trade shows at Chicago’s theMART, 2Q20 revenue fell to $345 million from last year’s $465 million. Rent collection is the name of the game right now, and it collected 88% of the amount due. We’ll keep an eye on that figure when it reports 3Q20 results in early-November. The short-term challenges caused Vornado to lower its quarterly dividend from $0.66 to $0.53, which still offers a 6.6% yield.

BMR Take: Our $60 Target Price is too high right now based on the current level and short-term conditions so we are lowering it to $38. Our Sell Price is $33.

Welltower (WELL: $56, up 4%, yield=4.3%)

Earlier this month, Welltower’s CEO resigned. It was an abrupt departure, and the company turned to the chief investment officer to fill his shoes, then added a board member the following week. We won’t speculate or read too much into it right now.

Here’s what we do know about the company. This REIT owns about 1,700 properties in a good space: Senior Housing Operating Properties, which includes Seniors Apartments, Independent Living, Continuing Care Retirement Communities, Assisted Living, and Alzheimer’s/Dementia Care. There are also Long-Term/Post-Acute Care and Outpatient Medical Buildings. Sure, these have been hit hard by COVID-19, hurting occupancy, which went from 86% in February down to 79% in July. Since we don’t know how long COVID-19 will last, Welltower could see continued pressure on occupancy.

Over the long haul, the aging population favors Welltower’s prospects. In terms of cash flow, tenants have been paying the rent, with 98% collected from triple-net lease tenants. At its Outpatient Medical Facilities, it has collected 87% with another 12% deferred. Welltower (Target Price: $65, Sell Price $49) cut its dividend from $0.87 a quarter down to $0.61 in May. At this level, it still provides a 4.3% dividend yield.

AllianzGI Equity & Convertible Income Fund (NIE: $25, flat, yield=6.0%)

This is an excellent investment for those of you seeking an income investment that has less volatility than just investing in equities. The fund invests 40-80% of its assets in stocks and the balance in convertible securities. It also writes call options on its equity holdings to generate more income. At the end of 3Q, the managers had 63% of the assets invested in common stock and 34% in converts (the remaining 3% was cash). Its top equity holdings include strong names like Apple, Microsoft, Amazon, Google, and Facebook.

BMR Take: AllianzGI Equity & Convertible Income Fund (Target Price: $26, Sell Price $20) offers a nice 6.0% yield plus you get potential upside from its equity exposure.

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