The Week Just Passed and the Week Ahead
Amazon set fire to the market on Friday as they announced a major deal to buy Whole Foods. Grocery stocks plunged as everybody wonders how much havoc Amazon will have in the new industry vertical. The M&A announcement re-energized the market that had been sagging due to FAAMG* stocks slowing down. But clearly there is a reason the FAAMG stocks are market leaders: they are the most innovative, the most savvy, and the most aggressive companies on the planet when it comes to raising the bar. The bull market in Technology that everybody was questioning just last week is alive and well!
* FAAMG – Facebook, Apple, Amazon, Microsoft and Google.
We are pleased to see the market come back strongly today, Monday, as we write this. The market is up 110 points on the Dow, with Apple, Facebook and Shopify making strong moves. And good old Amazon, which we profile below, just hit $1000 a share again. Go Bull Market.
There is always a bull market here at The Bull Market Report! This week we highlight the following stocks: Amazon, Apple, Facebook, Tesla, Annaly, and Google.
Highlights From The Past Week
Trump Says ‘Very Good’ GDP Numbers Are Coming. He May Be Right. President Donald Trump said Thursday that “some very good numbers” are coming out soon on U.S. economic growth. If he’s talking about the second quarter, he’s probably right, though the figures are about six weeks away from publication. While the White House didn’t immediately respond to a request to clarify Trump’s comments, there are wide expectations among researchers that the rate of expansion in the April-to- June period will rebound from a first-quarter slowdown. The pace of gross domestic product gains was dragged down earlier this year by temporary factors such as warm weather that resulted in lower utility bills. Seeing a pick-up in GDP growth is a major positive for the stock market.
The Sweetest Stretch of Bull Run Since 1995 is At Risk as Buy-The-Dip Strategy Fails. The sell-off in the Tech sector that started a week ago has erased $250 billion from the value of technology shares and is threatening to end the industry’s longest stretch of uptrend in more than two decades. Down around 4% since the decline started, this move has put the Tech sector on the edge of breaking its 50-day moving average. It’s stayed above the threshold for 131 consecutive days, the longest stretch since 1995. Are the good days ending? The last two times when the 50-day average was broken, Tech shares did poorly in the next few months. What do we make of this? Stocks can’t go up forever. We are seeing the Tech sector take a breather and would buy this weakness.
Don’t Be Tempted To Buy High-Flying Equities. Stick With Solid Stock Picks Recommended By The Bull Market Report. Bond investor Bill Gross warned on Tuesday that investors should reduce their risk appetite, given the U.S. growth rate is stunted by secular forces "which monetary and even future fiscal policies seem unable to reverse." In his June investment outlook letter, Gross of Janus Henderson said: "Strategies involving risk reduction should ultimately outperform 'faux' surefire winners generated by central bank printing of money.” He continued, "It’s the real economy that counts and global real economic growth is and should continue to be below par." Gross runs the $2.1 billion Janus Henderson Global Unconstrained Bond Fund.
BMR Companies & Commentary
Amazon (AMZN; $988, +1% for the week; up $23 on Friday)
Amazon is guided by four principles: customer obsession rather than competitor focus; passion for invention; commitment to operational excellence; and long-term thinking. Customer reviews, 1-Click shopping, personalized recommendations, Prime, Fulfillment by Amazon, Amazon Web Services - AWS, Kindle Direct Publishing, Kindle, Fire tablets, Fire TV, Amazon Echo, and Alexa are some of the products and services pioneered by Amazon.
Amazon and Whole Foods Market announced that they have entered into a definitive merger agreement under which Amazon will acquire Whole Foods Market for $42 per share in an all-cash transaction valued at $13.7 billion, including debt. This is Amazon’s biggest acquisition ever. Whole Foods will continue to operate stores under the Whole Foods Market brand and continue to buy from trusted vendors and partners around the world. John Mackey will remain as CEO of Whole Foods and the headquarters will stay in Austin. The deal is expected to close by the end of this year.
For Amazon, the deal marks an ambitious push into the mammoth grocery business, an industry that in the United States accounts for around $800 billion in annual sales. Amazon is also amplifying the competition with Walmart, which has been struggling to play catch-up to the online juggernaut. Amazon has designs on expanding beyond online retail into physical stores. The company is slowly building a fleet of outlets, and much attention has been focused on its supermarket dreams. It has already made an initial push through AmazonFresh, its grocery delivery service. Now, BANG, just like that, they will have 430 stores in place for delivery and warehousing. Is Bezos smart or is Bezos smart?
BMR Take: The current consensus EPS outlook calls for almost $7 this year going to $27 by 2020. That’s explosive growth and the innovation machine known as Amazon is far from done. Amazon remains one of our top favorites. And DO NOT be disconcerted by the price of the stock. If you want to buy $15,000 of Amazon, buy 15 shares. Don’t agonize over it. Just be invested in this great company.
Apple (AAPL; $142, down 4.5%)
After an action-packed world-wide developers conference (WWDC) with a plethora of new software and hardware announcements last week, the stock was under pressure all week. The sell-off in Apple represents yet another buying opportunity. With the expanding capabilities of Apple's network of hardware and software products, Apple is very well-positioned to capitalize on the trend toward more "things" becoming a computer. Last week, Apple filled key gaps in its portfolio with entry into the digital home assistant market with HomePod, combined with new AR and VR initiatives* to support these important trends. This further expands the breadth and depth of Planet Apple, making it more difficult for competitors to offer an experience at the same level of Apple.
* Augmented and Virtual Reality
BMR Take: Earnings are expected to be $9 this year and increasing toward $11 over the next 2 years. The business is steadily generating a massive amount of money – $800 million a week, totaling over $255 billion now. The naysayers will be proven wrong on Apple again – remember when it hit $91 exactly a year ago, after peaking at the $125 level in 2015? Well guess what – the new all-time high is $156 set just last month. That number is sitting there ready to be broken again
Facebook (FB; $151, up 1%)
Facebook is focused on building products that enable people (better yet – the world) to connect and share through mobile devices, personal computers and other surfaces. The company's products include Facebook, Instagram, Messenger, WhatsApp and Oculus.
Facebook has hired more than 150 counterterrorism experts and is increasingly using artificial intelligence that can understand language and analyze images to try to keep terrorists from using the social network for recruiting and propaganda. Facebook says, “We agree with those who say that social media should not be a place where terrorists have a voice.” The move comes as Facebook is being hounded by governments to do more to combat terrorism.
Mark Zuckerberg, Facebook’s co-founder and chief executive officer, has also been trying to position the company as a positive force for building communities both online and off. This new emphasis from Zuckerberg has followed discussion over Facebook’s role in the proliferation of false news accounts during the U.S. election campaign last year, as well as the spread of extreme content posted to Facebook.
Many of these new hires have backgrounds in law enforcement and they collectively speak almost 30 languages. In addition, Facebook has thousands of employees and contractors around the world that respond to reports of violations of its terms of service, whether that’s online bullying, posting inappropriate content or hate speech.
BMR Take: One of the major risks in front of Facebook is dealing with free speech rights versus meeting obligations to be a model corporate citizen. We are glad to see steps in the right direction. EPS is expected to go from almost $5 this year to $9.50 in 2020. This stock can go much higher if the company can avoid a few key risks.
Google (GOOG; $940, down 1%)
Google spans Internet products, such as Search, Ads, Commerce, Maps, YouTube, Google Cloud, Android, Chrome and Google Play, as well as its hardware initiatives. Google is engaged in advertising, sales of digital content, applications and cloud offerings, and sales of hardware products. This is a mouthful, so one other way of looking at Google is: Most of their revenue comes from search. Period.
This week Google launched a new cloud computing platform in Singapore that aims to reduce data transmission delays for its cloud customers here, as it seeks to gain ground against rivals Amazon and Microsoft globally. It has opened dedicated cloud platform servers - called a "Google Cloud Platform (GCP) region" - in Singapore and this is the group's first GCP region in South-east Asia.
The Singapore cloud platform is the company's third in Asia, after Taiwan and Tokyo, and it is looking to launch dedicated servers in Mumbai and Sydney as well, they added. The launch of the Singapore service has significantly reduced latency, which refers to delays in data transfer over a network connection, for Google's cloud platform customers and users in Singapore and South-east Asia. The platform offers products and services such as application hosting, security, language translation and analytics.
Businesses can save anywhere from 50-70% by using a cloud platform in general compared to other options such as hosting data storage themselves. The migration to the cloud is a mega-trend and Google is in the forefront of this new world.
We mention these new events to give you the scope of what this company is doing. While you and I worry about what’s happening here in our own little worlds, Google is out there setting the stage for controlling and profiting from places around the world this year, next and for decades to come.
BMR Take: EPS is on track for $34 this year going to $55 by 2020. We see a compelling opportunity in this large cap tech giant.
Upcoming Economic News
Current Account
Tuesday, June 20th, 8:30 AM
Period: Q1
Actual: N/A
Consensus: -$121B
Prior: -$112B
Notes: The international transactions accounts are a quarterly statistical summary of transactions between U.S. and foreign residents organized into three major categories: The current account, the capital account, and the financial account. The current account includes exports and imports of goods, services, income, and current transfers. The capital account includes capital transfers, such as debt forgiveness. The financial account includes transactions for official assets, for U.S. Government assets other than official reserve assets, for direct investment, for portfolio investment, and for other investment.
Existing Home Sales
Wednesday, June 21st 10:00 AM
Period: MAY
Actual: N/A
Consensus: 5,545,000
Prior: 5,570,000
Notes: Each month, the National Association of Realtors (NAR) collects data on existing single-family home sales from Boards or multiple listing services (MLS) nationwide. NAR estimates that it captures between 30-40% of all existing home sale transactions with its monthly survey. The data provide the total number of closed existing home sales in each area as well as total sales within price categories ranging from less than $30,000 at the bottom to more than $500,000 at the top.
Leading Indicators
Thursday, June 22nd,10:00 AM
Period: MAY
Actual: N/A
Consensus: 0.40%
Prior: 0.30%
Notes: Leading indicators are economic series that tend to change direction ahead of shifts in the business cycle. There are 10 components of the U.S. Leading Composite Indicator published by The Conference Board. The index is constructed by averaging the individual components in order to smooth out a good part of the volatility of the individual series. Historically, the cyclical turning points in the leading index have occurred before those in economic activity.
New Home Sales SAAR
Friday, June 23rd, 10:00 AM
Period: MAY
Actual: N/A
Consensus: 600,000
Prior: 569,000
Notes: The U.S. Census Bureau collects new home sales based upon the following definition: "A sale of the new house occurs with the signing of a sales contract or the acceptance of a deposit." The house can be in any stage of construction: not yet started, under construction, or already completed.
Tesla Week
Tesla (TSLA: $371, up 4%) had a great week, in spite of the Fed and the Tech sell-off and everything else. Up 4%. Huge. The stock was upgraded by Berenberg Bank from a "hold" rating to a "buy" rating. They now have a $464 price target on the stock, up previously from $193.
BMR Take: This is a car company and this is a Tech company, and it is run by a one of the smartest men on the planet.
Annaly Update
We love this stock. We have been following Annaly Capital Management (NLY: $12.36, up 2%) since 1997 when they first went public. They have survived thick and thin: bull markets and bear; high interest rates and low; recessions and boom. And they continue to give you a 10% dividend, year in and year out.
With that said however, it may be time to take some profits in the stock. We added the stock in early 2016 at $10 and it is now over $12, up 25%. The key is book value. It is currently at $11.23, thus trading at 10% over book. Annaly generally sells right at book, so it is getting ahead of itself. Our Target is $12, so one could certainly sell now and be happy campers. Or you could watch and wait. We are going to watch book like a hawk. If it keeps moving higher we are golden. But if it stalls, and the stock moves back towards $12, we will most likely be saying so long to a great company.
Letter to the Editor about Shopify (SHOP: $87, down 5%)
From: John Hoogerheide [mailto:johnhooger17@xxxx.net]
Sent: Thursday, June 15, 2017 11:23 AM
To: Todd at The Bull Market Report
Subject: SHOP
Todd - A while back you had suggested Shopify as a stock just to own and forget in your portfolio as it will have very large daily bounces. In your reports you indicated the stock COULD be a likely candidate for a buyout and that their fundamentals looked solid. Shopify had been on a tear but the Nasdaq fallout has killed the stock. I assume the Nasdaq fallout is only temporary and things will go back to normal. BUT has anything changed in your attitude towards Shopify? Thanks Todd
Hi John –
No. Just the price. And it is very frustrating. I’m trying to be patient and get through the Fed raise which is just about done. The bond market was WAY up yesterday (10-year Treasury down big to 2.13%. Up a tad today, but not much.) Then the question is – are we in a Tech AND overall stock selloff? If so, then we should move to high yield, like Apollo, Annaly, etc., and bide our time until things become normal in Washington. If not, then the bull market continues. Where ELSE can you put your money? And this is not an idle question. People have been say it for YEARS, with interest rates at historic lows. And they are STILL at historic lows, really. Thus, we have this amazing bull market since 2009.
Note that I don’t believe we ever said you could put it away and not look at it. But we certainly feel that it is a long term hold and the prospects look good.
Todd Shaver, Founder and Editor in Chief
And then on Friday we wrote to him:
Nice bounce-back yesterday and today, John, after hitting $81.50 at the low point yesterday.
This one is real.
The sell-off was not.
Let’s hope it holds.
Todd Shaver
[Note that the stock closed at $87 Friday. Our take? This is a volatile stock in a nervous Tech market right now. If it’s too hot for you get out of the kitchen. Again, we are trying to be patient here with this amazing company.]
More (Good) News on Shopify
Shopify sold 5.5 million shares at $91 on May 24th in a secondary, raising $500 million. Then just last week they completed the overallotment. Do you know what that is? It is an extra block of stock that can be sold as part of the original secondary if there is demand. Well, there was, and Shopify sold another 825,000 shares at the same price worth $75 million. Not bad. So now the company is sitting on a ton of cash (we believe the total to be close to $1 billion), they have no debt, and revenues are growing like a weed.
So here dear Bull Market Reader, are a few thoughts on Sell and Target prices:
When we add a stock to our portfolio we have a Target and a Sell Price. The Target is where we think it can go and the Sell Price is the price that if it hits, you have some thinking to do. The Sell Price is usually 10-15% below the price where we added the stock. Taking a 10-15% hit is a big deal, and some may even say that if a stock drops 5-7% you should get out. Everyone has their own rules to follow. However, there are companies that are young and unproven that we feel have the potential to be 2-baggers and 5-baggers and more. Cloudera, Twilio and Nutanix are three of these. What happens with these stocks is that the world as a whole doesn’t recognize their greatness yet, and aren’t willing to hold them through tough times. It’s called the Market. (There were times in Amazon’s young life when the market sold off the stock because of various reasons. The strong held on, the weak got out.)
The problem however, is that hindsight is 20-20 and we at The Bull Market Report a) might be wrong on a stock, or b) might be early. Both of these scenarios can cause a Cloudera to go from $23 on June 6th when we added it, to the level it is at today. Not pretty, but this is the life we lead when we invest.
Now, with that said, what do we mean with the Sell Price? The answer actually is not what do WE do, it is what YOU do. The Bull Market Report very rarely tells you to SELL a stock. We SUGGEST things to you based on FACTS. We leave it up to you to decide as intelligent human beings. In this case we believed in Cloudera at $23, and now at $17.40 we believe in it more. Why? The only thing that has changed is the PRICE. It is less expensive than it was. We still think it can go to $28, and $40 and beyond, and now it is cheaper. Yea! BUT – WHAT IF IT GOES LOWER FROM HERE? What if it goes to $14? What if it goes to $10? Then we have a big problem as you can see.
So the safest thing to do is to “Sell.”* We take a licking in our portfolio, and if you follow suit, you do too, and it prevents a disaster if it goes to $14 or $10. BUT, what if this recent Tech sell-off is over now. What if Apple and the rest of them start to shoot higher over the coming weeks, which we fully expect? And what if Cloudera heads back into the 20s like we believe it will do?
No guaranteed answers here as you can see. But plenty of food for thought. Speaking of thoughts, if you have a question about this or anything else, please write us at Info@BullMarket.com.
* No one at The Bull Market Report buys or owns the stocks in our portfolios. We don’t play that game.
The High Yield Corner
By Michael Foster
The biggest news of the week was the interest rate hike, but before we get to that, let’s talk a little bit about Digital Realty Trust (DLR: $117, up 4%, plus a 93 cent dividend paid on Tuesday.)
This data center REIT has been a Bull Market Report pick since March last year. Since then the stock has gone up 38% while paying 4% in dividends. A 42% return in a little over a year is breathtaking for any type of investment, but it’s relatively uncommon in the high yield world where you often sacrifice big short-term gains for cash flow. But Digital Realty is different.
The reason is simple: Digital Realty isn’t just a high yield stock; it’s also a Tech stock. Digital Realty has a very simple business model that positions it to benefit from the hypergrowth of tech companies: it rents out server space for firms that exist in the cloud. Any cloud computing startup depends on Digital Realty for the bare infrastructure that makes their product possible; and, unlike startups, Digital Realty’s revenue stream and profitability come first.
From that perspective, Digital Realty is a very attractive business; it’s part utility and part a hypergrowth tech stock. It’s rare to find a company that combines the two extremes of the finance world - dull safety with cutting-edge high-risk technological innovation - but Digital Realty has combined the best of both worlds for years. As a result, the company has attracted capital slowly over time, but the stock was limited until the middle of 2015 by one risk factor: competition from others in the space. At the end of 2015, Digital Realty initiated some expansion efforts that essentially gave the business a “moat” and protected it from competition. The firm very smartly placed facilities in ideal geographical positions to get the attention and demand from telecommunications giants and government agencies, putting the company at a distinct competitive advantage.
The stock market swiftly reacted, and the stock has doubled since the middle of 2015. Insiders have also taken notice, which is why DuPont Fabros Technology (DFT: $64) announced it would merge with Digital Realty in an all-stock transaction*. What exactly does this merger mean for Digital Realty shareholders? Well, the stock initially fell on the news but very swiftly recovered (it’s now up about 4% for the week following the initial decline). Apparently the market first thought the merger was a bad idea and then changed their minds. The market loved the news for DuPont, however; that stock is up 20% following the news.
* June 9, 2017 San Francisco's Digital Realty Trust has agreed to acquire Washington, D.C.-based data center developer Dupont Fabros Technology for $7.6 billion in stock, bolstering its reach in and around Silicon Valley. The companies operate as real estate investment trusts that rent out space to corporations to house their high-powered computer servers, used in cloud supercomputing, streaming video and data storage. Dupont Fabros has a dozen such complexes, including one in Santa Clara, two near Chicago and nine in Northern Virginia.
The merger is extremely good for Digital Realty shareholders for one simple reason: it adds a new dimension to the company’s incremental expansion efforts. Now with DuPont’s properties, Digital Realty will have 157 properties in 12 different countries added to its portfolio. The combined firm is going to have 26 data centers operating at 97% occupancy. Remember that Digital Realty had been mostly a U.S. focused REIT with most of its properties in Northern Virginia, Chicago, and Silicon Valley. The firm clearly saw an opportunity in providing for the government’s and tech startups’ growing digital footprint.
Note that the market cap of Digital Realty is $19 billion. After the merger it will be around the $25 billion mark.
But this also means buying and holding Digital Realty has become a very different game. When The Bull Market Report originally recommended the stock, it was yielding 4%; even with dividend hikes, the stock is now yielding a little more than 3%. The company will undoubtedly have enough funds from operations to keep growing payouts, but Digital Realty has become more of a tech growth stock than a high yielding stock. Holding it now is more a bet on capital gains appreciation than a way to capture a high stream of income.
The big news for the market last week was the Federal Reserve’s rate hike. Now for the first time in over a decade the Federal funds rate is over 1%. This sounds like big news, but the market shrugged. the S&P 500 was down slightly and the Dow and Nasdaq flat following the announcement, indicating the very risk-on and risk-averse equity investors agree that this isn’t important news.
What’s even more shocking is the bond market. With higher interest rates on the short end of the curve, you’d naturally expect higher interest rates on the long end of the curve. But interest rates barely budged following the announcement, and actually went down sharply shortly before the announcement. There are a lot of ways to interpret this, but each is a variation on a singular theme: the bond market is daring the Fed to raise rates further. Either the bond market isn’t expecting the Fed to keep raising rates (the next rate hike, Yellen pretty much said, is coming at the end of this year), or bond traders are waiting until the last possible moment to sell Treasuries, or there is too much demand for Treasuries and not enough supply. Each of these moves is either a bet on or a hope for the Federal Reserve to go more dovish in the future.
Personally, we disagree. We think the Fed will blink first and slow their rate hike plans. This is essential to avoiding an inverted yield curve, which generally portends a recession here in the United States. At the Fed’s currently stated rate of rate hikes, that inverted yield curve would likely come at the end of 2018 or the beginning of 2019, indicating a recession in the middle to end of 2019. A slower rate of increases would delay that eventuality to more like 2020 or 2021.
In either case, all indications suggest that we are nowhere near a market downturn or an economic contraction. While the interest rate hikes have been big financial news for years now, and many doomsayers have said this portends a sharp downturn soon, a more reasonable interpretation is that we still have at least two years before the first sign of trouble. So it isn’t time to sell yet, but vigilance will slowly become more and more important.
There is one more pressing issue, however, especially for the high yield world: Higher interest rates on the short end and lower interest rates on the long end cut the profitability of leverage. This makes it tougher for Mortgage REITs, although a few particularly well-managed and differently structured firms (such as Bull Market Report’s recent pick, Apollo Commercial Real Estate Finance (ARI: $18.92), and Annaly Capital Management (NLY: $12.36)) are exceptions to this rule. It’s also a concern for business development corporations, which have suffered “yield compression” for years and are now suffering higher borrowing costs on top of that.
The trend is also not good for junk bonds, although many junk bond funds have priced this in over the last two years, so it’s not a major issue. However, if the Federal Reserve continues on its promised rate hike path, high yield investors will need to get ready to rotate out of the most at-risk asset classes. We’re not quite at that point yet, but it is definitely visible on the horizon.
Good Investing,
Todd Shaver, CEO, Founder and Editor in Chief
The Bull Market Report
Since 1998