Bull Market Report Investor Notes: August 19, 2019

by Scott Martin | Aug 19, 2019 | Free Newsletter (Sent Weekly Monday at 12pm)

The Weekly Summary

If it isn’t the Fed, it’s trade. And if it’s not trade, it’s the yield curve, which really amounts to the Fed not moving fast enough to give edgy investors a smooth enough ride. As far as we’re concerned, the market isn’t about comfort, so we’re more interested in the fundamentals, which remain constructive.

This week, the S&P 500 dropped another 1%. The elite Dow industrials gave back a little more and the Nasdaq held up a little better. BMR stocks charted a similar course. Since the July peak, the market has swung in what we can call a “mini correction” pattern, with losses adding up to 3% to 7% on any given day. Our universe is down 4% over the same period.

People are selling just to get away from whatever fear factor they care to fixate on. Good stocks are falling roughly as far as bad ones, regardless of whether they’re rate-sensitive, recession-resistant, vulnerable to a backlash from China or not. A full 70% of the S&P 500 dropped last week and we suspect the mood will remain fragile until investors receive substantive good news (and not simply a pause in the dread-driven headline cycle) and get off the sidelines.

That good news can take the form of action from the Fed at the Jackson Hole central bank summit this week, although we find it hard to believe that Jay Powell and company will cut rates so soon after the last policy meeting. That’s an admission of desperation. We don’t actually want that. However, the Fed has other tools at its disposal, including the ability to manage interest rates through selective intervention in the bond market. That wouldn’t be bad.

And of course we could see a breakthrough on trade, but that’s unlikely ahead of the G-7 summit in France over the weekend. The head of the European Union might not make it to the meetings due to gallbladder surgery and besides, China isn’t actually invited. Normally we’d look to the earnings calendar, but the main 2Q19 season is over now. (We only have two companies reporting this week. You’ll get our view on them Tuesday morning.)

But if the market as a whole is losing its nerve, we see this as an opportunity. As we mentioned in Thursday’s exclusive News Flash, U.S. stocks look no less attractive now than they did a year ago, the last time the S&P 500 peaked and needed a few months to rest.

While trailing earnings growth hasn’t been great, expectations for the coming year are a little better than they were at the end of last summer. The economy as a whole is expanding at roughly the same rate. And valuations haven’t run any higher ahead of the fundamentals than they were a year ago.

Trade tension is nothing new. Last August, companies like Apple had a pretty good sense of how icy relationships with Chinese partners were getting. Sales to Chinese customers were soft or, in some cases, completely interrupted by government bans. Tariffs on Chinese products were already in the air, forcing alert executives to shift their supply chains to countries like Thailand and Vietnam in order to avoid taking even a temporary hit to their profit margins.

A year ago, all these factors triggered a lot of warnings and ultimately fed into the 4Q18 market decline. Now, however, we’ve lived in that shadow long enough that the reduced outlook is old news. In a few months, the year-over-year comparisons get a whole lot easier. Historically that’s all Wall Street needs to get the wheels turning again.

What’s different is that while short-term interest rates are where they were last September, we now expect them to go down as the absence of inflation gives the Fed more room to relax. A year ago we were looking for higher interest rates and we got them. From here on out, the rate environment gets easier.

In theory, that means corporations find it easier to buy back stock and fund lavish dividends. They can even borrow more cheaply to keep shareholders happy or reinvest in strategic acquisitions or other investments. And if a relaxed rate environment weakens the too-strong dollar, executives will cheer.

If you were in the market a year ago, we see little reason to get out now unless your psychology has shifted. Maybe you’re tired of risk and want an easier ride for a little while. We get that. Otherwise, with Treasury yields falling, stocks remain the best allocation around.

There’s always a bull market here at The Bull Market Report! We’ve de-risked our defensive recommendations for the new environment to cut out as much potential downside as we can on that side. The High Yield Investor has all the details, but that's for subscribers only. Here, The Big Picture takes a frank look at the recession calendar in light of the latest developments in the bond market.

Key Market Indicators

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BMR Companies and Commentary

The Big Picture: Ticks On The Recession Clock

We’ve been weighing each incremental wobble in the Treasury yield curve for months now, keeping you in the loop as signs of stress in the bond market add up. Last week, the rest of the world caught on and suddenly everyone is talking like there’s a recession at the door.

Granted, while most of the curve inverted a long time ago, the closely watched spread between 2-year and 10-year yields took until Wednesday to flip, with debt maturing in 2021 briefly paying more interest than bonds that come due in 2029. Since this is the relationship economists have focused on for decades, a lot of people who thought they could ignore the bond market are having to concede the tough truth.

By the strictest conventional standard, we’re now in an inverted world. You can try to move the goal posts and redefine the terms, but for most of us, the bell has now rung. While interest rates can drift in and out of inversion territory from here, Wednesday’s final break is now a matter of historical record. And that means cutting through the noise to determine what this signal really reveals and how investors need to position ourselves for the future.

First, because the 2-to-10-year spread is so closely watched, we know a lot about where markets go from here. The curve generally inverts when an economic expansion is entering its final stage before a contraction resets the cycle. Sometimes, of course, the Fed and other factors delay that recession for so long that there’s practically no connection, but in general we’ve now got about 22 months before government economists call the top.

That’s a practically luxurious amount of time in the stock market, so there’s no urgency to liquidate vulnerable positions ahead of the storm. A typical economic expansion only runs 60 months anyway, which means investors who tap out 22 months before the end evade all the recession periods but cheat themselves out of 35% of the good times as well. Follow that strategy and you’re going to spend almost half your life on the sidelines, locked out of opportunities as well as the cyclical threat.

And while stocks generally track the economic cycle, there’s usually a three-month lag at the end where the S&P 500 keeps going after the recession starts. We saw this in 2008 and the statistics say that it’s played out the same way after other yield curve inversions. In general, the S&P 500 keeps moving up in the year after the 2-to-10-year spread flips. It’s only when you look two and three years out that the market tends to hit a wall.

We admit that a recession can be gruesome, especially if you’re still nursing psychological bruises from the last one a decade ago. But dwelling on historical trauma is a sure way to cheat yourself out of the benefits of investing across the cycle. The goal is to hang in there as long as you can while the market is moving up, whether that rate of wealth creation is fast or slow. Then, when it’s clear that the economy has stalled, you can cash out well before the downswing takes you to the bottom.

Statistically, the S&P 500 has a pretty good chance of earning investors another 13% over the next year. That’s not so bad . . . in fact it’s a little better than average. And as dynamic as BMR stocks are, we’re fairly confident you’ll do at least that well, even in an inverted world. After all, since the first whiff of trouble on the yield curve about a year ago, our universe is up 11%  counting stocks we’ve cut along the way. The market as a whole hasn’t gone anywhere.

So if our stocks keep outperforming at this rate, it’s going to take a lot of pain on Wall Street to make it worth retreating to the sidelines. More likely, subscribers have the chance to attract significant wealth before the party finally shifts into reverse.

Timing is always uncertain, which is why we don’t spend a lot of effort trying to second-guess the market twists. But unless we’re looking at the shortest delay in history between inversion and recession, the rally has about 11 months left to go. More likely, the bulls will keep running well into 2021.

Either way, the last time this part of the curve inverted was in 2005, which gave investors 21 months to squeeze what they could out of growth stocks and shift into more defensive positions. Think about how far some of our recommendations have come in a fraction of that time. If you’re more concerned about risk than missing out on that level of return, it’s time to start making that defensive shift. We’d rather you feel confident now than push you beyond your emotional comfort zone.

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Apple (AAPL: $206.50, up 3%) 

Like most companies (deserving or not), Apple was dinged during the recent tough talk that took place between the Trump administration and the Chinese government. Even though things have cooled off a bit, the market is still roiling given the inverted yield curve situation. That’s less of an issue for Apple, which is why the stock has held up very well (up 28% YTD).

Apple does have exposure to China via the iPhone, but the company is rapidly diversifying away from its core product. 3Q19 was the first time since 2012 that the iPhone made up less than 50% of revenue (48%). The quarter also produced a 1% YoY revenue bump to $54 billion, even though iPhone sales were down 12% YoY. That comes by way of a growing Services segment (up 13% YoY), as well as resurgent sales of both Macs and iPads. Macs were up 10% YoY, and iPads up 8%. 3Q18 saw both products produce 5% YoY losses. So that’s a big swing in just 12-months time.

Apple’s Wearables segment is also growing. 3Q19 Wearables grew an astounding 48%, and this is rapidly becoming a core feature of the underlying business. All of this diversification is coming at just the right time, because China revenue is down 20% YoY, which makes sense given the trade war implications. It seems 4Q18’s poor iPhone performance was a blessing in disguise, as it spurred management to accelerate the diversification strategy, which is now paying dividends.

BMR Take: Even though Apple has exposure to China, that exposure is rapidly being mitigated by the diversifying product base. Also the growth of high-margin Services (which is location-independent) is a strong plus. The concern at the moment isn’t just China, it’s the yield curve, and Apple isn’t vulnerable there. We expect the stock to hold up nicely throughout the rest of the year, and the long-term is looking even rosier given the multiple revenue streams.

NOTE: In our weekly paid subscription Newsletter, we do between 5 and 7 SnapShots and also support regular Research Reports. The last three stocks we recommended are already up 5% apiece. Plus, we have the Weekly High Yield Investor, whereby we discuss the 17 stocks in our High Yield and REIT Portfolios.

And to top it all off, we send News Flashes each day during the week. Got a question about any stock on the market? We'll answer. So if your favorite stock reports earnings or there is significant news, you will hear about it here first. If you want the whole picture, join the thousands of Bull Market Report readers who are making money in the stock market and subscribe here:

www.BullMarket.com/subscription

It’s only $249 a year, and later this year we will be raising it to $499 or even $999 a year, it is just THAT valuable. But we will lock you in for life at this lower price. 

Good Investing,

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

Subscribe HERE:

www.BullMarket.com/subscription

Just $249 a year, soon to go up to $499. But you are guaranteed the SAME PRICE forever.

Bull Market Report Investor Notes: August 12, 2019

by Scott Martin | Aug 12, 2019 | Free Newsletter (Sent Weekly Monday at 12pm)

The Weekly Summary

While the week got occasionally tense, volatility has evidently peaked for the time being. Wall Street now accepts that the trade war has escalated and that sweeping tariffs are more likely to take effect before we see signs of a breakthrough on negotiations. Progress simply looks grudging at this point, while the clock keeps ticking to the moment when imports will become more expensive and exports to China will freeze.

Nonetheless, we're satisfied to see the market mood firm up. Even though major indices declined again a bit last week, breadth is no longer overwhelmingly negative. On Monday, 97% of the S&P 500 declined in unnatural unison. A few days later, 45% of the market gained ground for the week as a whole. This is part of the process of recovering from shocking news. We've seen it again and again. Investors who initially panic at the headlines ultimately return to buy back the positions they liquidated, often at a higher price.

It's also nice to see our stocks hold up relatively well. The BMR universe retreated only 0.45% last week, beating all major indices. We had a few natural advantages here. First, our REITs and Healthcare recommendations fared well as safe havens, as well as bond replacements for investors fleeing declining Treasury yields. Our High Yield portfolio was flat. However, while most Technology-driven strategies have been suffering, our High Tech stocks surged an aggregate 4% thanks to huge earnings from Roku and Shopify.

Look behind the market as a whole and money is rotating into Technology as well as High Yield havens. Investors aren't fleeing risk across the board. The mood is less panicked than opportunistic. And in that scenario, we suspect our opportunities will shine brighter than a lot of other stocks. Some are already surging. Others are simply riding the wave.

There’s always a bull market here at The Bull Market Report! Our subscribers got in-depth looks at Amazon, Microsoft and our top win of the year (among other stocks), but to give you a taste, we'd like to introduce you to a smaller company today. The Big Picture weighs the market as a whole to evaluate whether expectations are too high, too low or simply on track. After all, if you don't know which stocks we recommend, you're kind of stuck with whatever the broad market does.

Key Market Indicators

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BMR Companies and Commentary

The Big Picture: What About The Rest Of The Market?

We’ve talked a lot about the stocks we recommend over the last few weeks. After all, that’s what The Bull Market Report is all about, and since our universe has outperformed the market as a whole this season, it’s been as much a delight as a duty. When investors are back in a buying mood, BMR stocks will top the list of opportunities they just can’t resist.

Of course we’re happier when solid quarterly results are rewarded with rallies instead of retreats, but this is not one of those seasons. Too many investors are obsessing over macroeconomic headlines to digest the way specific companies are rolling with the externals and still generating the kind of cash that rewards shareholders.

As far as these companies are concerned, tariffs aren’t a concern. Many are growing fast enough to weather the policy winds and still achieve management’s long-term objectives. Others are nimble enough to adjust their operations away from trade war threats. And quite a few are insulated from the global market because they still do the bulk of their business in the United States, free from currency concerns and other external headwinds.

The rest of Wall Street isn’t so lucky, but it isn’t as awful as some people want you to think. A year ago, interest rates were exactly where they are now and moving higher as the Fed tightened. People were optimistic, thinking we’d see at least 7% earnings growth continue for the foreseeable future. There wasn’t a cloud in the economic sky.

Back then, the S&P 500 rated a 16.6X earnings multiple, which is a little rich compared to some historical cycles but reasonable in a context of significant earnings growth and low interest rates. Low rates justify higher multiples because bonds just can’t compete as well with stocks for investors’ attention. Growth reduces the amount of patience we need for valuations that may look rich today to become more reasonable as cash flow compounds.

Expectations weren’t unrealistic. People were looking for the index to rise about 10% over the next 12 months, at which point they would have been comfortable seeing stocks command levels of 18.3X next-year earnings. They came awfully close.

Now here we are. Near-term growth expectations have cratered as it becomes clear that U.S. manufacturers and commodity producers can’t fight a strong dollar and rising trade walls overseas. Look out beyond 2019, however, and the outlook is brighter than it was a year ago. These companies have weathered a lot of margin pressure. Now they’re starting to grind efficiencies out of the economic realities they see.

Six months from now, the S&P 500 has a pretty good shot at getting the growth gears moving again. In a year, the market as a whole can easily be back in rally mode. After all, interest rates are dropping, taking financing costs down with them. If the dollar retreats as well, global competition gets a whole lot easier.

And once again, expectations are relatively modest. People are looking for the index to rise about 10% over the next 12 months, buoyed by a little growth on the horizon accelerating into 2020 as the Fed’s relaxed posture takes hold. In that scenario, the market would command a next-year multiple of 18.7X 2020 earnings, which is no steeper than what investors cheerfully accepted last summer and, factoring in likely growth, even a little more attractive.

We know that it can get hard to hear the signal through the day-to-day headlines. But tariffs just aren’t a huge factor in corporate guidance right now. More companies talked about trade threats a year ago than we’ve heard from in the last few weeks. The only difference is the distribution. Manufacturers and Commodity Producers will always feel the heat in a tense global environment, but now Big Tech is worried about losing access to foreign markets as well. As always, we’ll keep you posted when we see tangible impacts.

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Paycom (PAYC: $241, up 2%) 

Paycom can do no wrong, even in a market downswing. The stock had another phenomenal quarter, and the global growth strategy is playing out exactly as management hoped it would (organically, with very little leverage).

2Q19 revenue rose 31% YoY to $170 million, and EBITDA came in at $70 million, well-ahead of the $64 million consensus expectations. No matter how high the consensus, Paycom always outperforms. Management raised its 2019 EBITDA estimate to $307 million, up from previous guidance of $297 million. That sent the stock soaring, which of course we love.

Some other notable metrics are recurring revenue, which came in at $166 million, or 3% above consensus, and gross margin which topped 85% (consensus was below 84%). These numbers prove Paycom is monetizing its current user base to a greater extent than the market expected, and that they are doing so in a more efficient manner (that gross margin beat is terrific).

BMR Take: Paycom has over 13,000 customers and growing. Continued income growth means management can expand its global footprint without a reliance on debt. How many $15 billion growth-companies can say that? The company has $95 million in cash and only $60 million in debt. If those numbers were reversed, we’d still be comfortable with the liquidity given the margin and income growth. But as is, management has a ton of flexibility should it wish to pursue acquisitions or expand the sales force. We love Paycom’s position as the industry leader in human capital management, and predict continued upside for this shining star of a stock.

NOTE: In our weekly paid subscription Newsletter, we do between 5 and 7 SnapShots and also support regular Research Reports. The last three stocks we recommended are already up 5% apiece. Plus, we have the Weekly High Yield Investor, whereby we discuss the 17 stocks in our High Yield and REIT Portfolios.

And to top it all off, we send News Flashes each day during the week. Got a question about any stock on the market? We'll answer. So if your favorite stock reports earnings or there is significant news, you will hear about it here first. If you want the whole picture, join the thousands of Bull Market Report readers who are making money in the stock market and subscribe here:

www.BullMarket.com/subscription

It’s only $249 a year, and later this year we will be raising it to $499 or even $999 a year, it is just THAT valuable. But we will lock you in for life at this lower price. 

Good Investing,

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

Subscribe HERE:

www.BullMarket.com/subscription

Just $249 a year, soon to go up to $499. But you are guaranteed the SAME PRICE forever.

Bull Market Report Investor Notes: August 5, 2019

by Scott Martin | Aug 5, 2019 | Free Newsletter (Sent Weekly Monday at 12pm)

The Weekly Summary

You know it's been a wild couple of days on Wall Street when the monthly unemployment report is at best the fifth-biggest story of the week. The good news is that that closely watched gauge of the U.S. labor market (and by extension the consumer economy) remains roughly as robust as we expected. While Corporate America has gotten a little cautious about hiring more people until resolving questions about the global trade situation, mass layoffs remain rare enough to sustain full employment.

And with peak 2Q19 earnings now behind us (33% of the S&P 500 reported last week), it's clear that most companies have no reason to make dramatic payroll cuts. The numbers may not be great, but with the market as a whole tracking only a 1% earnings decline, they're far from awful or even distressing. If we were weighing in on the S&P 500, we wouldn't sell this quarter. At worst we'd holding on for better times later in the year or at worst early 2020, which is now not far away.

Apple was the biggest earnings headline of the week and its numbers weren't bad. Tim Cook worked his magic and engineered a slight revenue uptick where we thought iPhone sales would be too weak for other units of the company to pick up the slack. Investors cheered, at least initially.

However, the next afternoon the Fed came around to make us all forget about Apple. While some wanted a deeper rate cut or a promise of more loosening moves ahead, we aren't greedy. Even rolling rates back to September's level is a rare gift that the central bank rarely bestows on Wall Street, especially when the underlying economy is this strong. Lucky for us, inflation remains dormant and the dollar is if anything too strong for exporters like Apple to comfortably tolerate. We can afford a little rate relief. Now we have it.

On Wednesday, we thought that would be the biggest headline of the week and that we were looking at another rally. But then the trade war escalated, with reciprocal promises of massive tariffs on products coming out of China and going in. While it may simply be another negotiating tactic, we can't count on it. Either way, stocks dropped enough on Thursday and Friday to push the S&P 500 down 3% and leave the BMR universe with similar losses.

It's far from the end of the world. Our stocks are still up 35% YTD and the way the losses were highly correlated without respect to sector or economic sensitivity makes us think this is more of a short-term gesture of frustration than a long-term slump. So far trade hasn't come up a lot in corporate conference calls. They're more worried about the dollar, which the Fed can correct and no tariff can make worse. The fundamentals are getting better. Headlines come and go.

There’s always a bull market here at The Bull Market Report! Our subscribers are still swimming in great 2Q19 earnings reports (one more week!) and when Wall Street gets back to work, we suspect our stocks will once again be ahead of the curve. For now, it's all about China. Hang in there.

Key Market Indicators

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BMR Companies and Commentary

The Big Picture: A Great Season

We’ve talked a fair amount in the last few weeks about how BMR stocks are keeping earnings growth alive in an environment when fundamentals for the market as a whole have stalled. This week gave us even more evidence that on the whole, our recommendations are both robust enough to keep the cash flowing and resilient enough to weather the factors that have become a drag elsewhere.

Thanks to dramatic year-over-year expansion at two of BMR stocks that only subscribers will recognize, our universe is on track to deliver 30% earnings growth this quarter. We don’t want to brag or make it appear like we’re fudging the numbers, but even factoring out those two huge trends (respectively 300% and 600% above last year), we’re still looking for 13% more profit than we saw a year ago.

Admittedly, we’re factoring out companies where year-over-year comparisons are meaningless, often because they’re still burning cash or nudging above breakeven. People who try to weigh a loss against a profit in percentage terms are really just juggling abstractions.

But where the math makes sense, we have a lot to work with. Taking just the BMR stocks that were profitable last year and are still profitable today, it will take at least a 13% rally to keep multiples from actively declining. And since we know investors are willing to buy these companies at these valuations, more earnings translate to rising stocks. Contrast that to the S&P 500, where all the upside surprises so far this season haven’t been enough to generate positive growth.

While we aren’t dead set against stocks with fundamentals going in reverse (as long as the deterioration is transitory and there’s a good reason), we’d much rather have the trend on our side, especially when the market as a whole is still this close to record territory. Experience tells us that other investors will inevitably agree. Besides, even on stocks like mighty Apple (AAPL: $204, down 2%) where profits are temporarily depressed, the results are generally better than anyone suspected a few months ago.

We’ll calculate our multiples when the season is over and we suspect the growth-adjusted results will argue that BMR stocks still have room to rally without straining the historical limits. But first there’s one more big week and a few stragglers beyond that to see.

NOTE: In our weekly paid subscription Newsletter, we do between 5 and 7 SnapShots and also support regular Research Reports. The last three stocks we recommended are already up 5% apiece. Plus, we have the Weekly High Yield Investor, whereby we discuss the 17 stocks in our High Yield and REIT Portfolios.

And to top it all off, we send News Flashes each day during the week. Got a question about any stock on the market? We'll answer. So if your favorite stock reports earnings or there is significant news, you will hear about it here first. If you want the whole picture, join the thousands of Bull Market Report readers who are making money in the stock market and subscribe here:

www.BullMarket.com/subscription

It’s only $249 a year, and later this year we will be raising it to $499 or even $999 a year, it is just THAT valuable. But we will lock you in for life at this lower price. 

Good Investing,

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

Subscribe HERE:

www.BullMarket.com/subscription

Just $249 a year, soon to go up to $499. But you are guaranteed the SAME PRICE forever.