As we discussed in the most recent wave of News Flashes, last week was all about a final pre-earnings rush of capital out of defensive sectors like Healthcare and Utilities into areas of the market that can surprise on growth as 1Q19 numbers start coming out.
The Nasdaq gained ground. The blue-chip Dow industrials sagged. The broad S&P 500 edged up a bit, but nowhere near what the growth-heavy BMR universe was able to produce. It never gets old to say that our stocks once again beat the market. On average, our recommendations climbed nearly 1% last week, nearly double the S&P 500 thanks to 2% in the Technology portfolio and more than 1% in the Aggressive, Special Opportunities and core Stocks For Success groups.
Naturally, the pivot to a strong offense left Healthcare, Real Estate and our High Yield recommendations under pressure, but their fleeting pain was barely a divot in our overall results. We’re especially pleased to see money rotated into a few of our growth names that missed last quarter’s rally. As long as coming earnings reports match our forecasts, we suspect that this is only the first taste of a strong season ahead.
Of course we need to see the numbers first. The next few months will be a busy cycle for us all, with the first of the season’s Earnings Previews coming to subscribers Tuesday morning to make sure they're in position for the stocks that report between now and Friday. If you want it, now's the time of the season to sign up.
There’s always a bull market here at The Bull Market Report! The Big Picture opens the earnings season with a look at the numbers the first wave of Banks reported on Friday. This is also our last pre-earnings chance to catch up on developments from stocks like Microsoft.
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Key Market Measures (Friday’s Close)
BMR Companies and Commentary
The Big Picture: Big Banks Looking Good
Every modern earnings season begins with the big Banks giving us the eye-in-the-sky view of how the business of keeping money moving held up in the previous quarter. This is when we hear about Credit Quality, Loan Delinquencies and other critical economic indicators, as well as how much money the biggest trading desks on Wall Street made or lost on their own market activities.
We got our first taste of 2019 on Friday with J.P. Morgan Chase and Wells Fargo. The former did extremely well last quarter, with nothing but good things to say about its activities despite fears about a slowing global economy and a tangled Treasury yield curve. Earnings jumped 17% on a 5% increase in revenue. Loan activity is up 4% so the Fed’s tightening cycle has helped add a little extra interest income to every dollar the Bank’s underwriters distribute to borrowers, which is exactly what happens in a healthy economy.
CEO Jamie Dimon sees little sign of a slowdown ahead. As he says, “There is no law it has to stop. I wouldn’t count on there having to be a recession in the short run.” He’s in a position to know. As far as he’s concerned, loan volume growth will continue at this rate for the coming year even as the Fed has stopped raising rates for the time being. Again, that’s a signal of health and not a looming economic cliff.
J.P. Morgan bankers aren’t dumb. If they see Credit Quality deteriorating or borrowers defaulting on their obligations, they’ll be the first to close the doors and conserve capital. That’s not happening now.
Wells Fargo told a less cheerful story, but its management team faces much stronger internal challenges from recent scandals and outright fake performance numbers. If we were recommending any big Bank, this would not be the one.
Citibank and Bank of America weren't as wonderful today, but since these four institutions together account for 30% of our broad sector exposure, a strong trend for the biggest Banks as a group is good news for us. We aren’t enormously bullish on the sector, but we recognize that at 13% of the market it’s important to maintain a little exposure to the best and brightest financial institutions on the planet.
Last year wasn’t great for the Banks and even in the best of times these stocks can be a dull ride. This year has given us more of a thrill, with our ETF rallying 15% YTD. If this is what these companies can do in the face of yield curve concerns, recession fears and the Fed on pause, we can’t wait to see where the stocks end up.
Microsoft (MSFT: $121, flat -- all returns are for last week)
The recent announcement by the Pentagon that only two companies are “in competitive range” for the $10 billion JEDI Cloud contract can only help this giant on its trajectory toward a $1 trillion market capitalization. Here at a record $923 billion, it only takes another 8% rally to cross that line.
JEDI is more prosaically known as the Joint Enterprise Defense Infrastructure initiative, which means working with Silicon Valley to take Defense Department computers into the 21st Century. Since it’s a winner-take-all project, booking that initial $10 billion can actually move the revenue needle for a decade to come even for a giant like Microsoft. Once again, the company’s Windows operating system and Office productivity suite give it the inside track, since the Pentagon is already paying $1 billion to use that software and would appreciate any solution that doesn’t complicate that relationship.
Admittedly, the opportunity is so big that Microsoft’s own consultants have warned the Pentagon that sharing the contract makes more sense. Nonetheless, Alphabet (GOOG: $1,128, up 1%) is already out of the running and Amazon (AMZN: $1,843, flat) is the only serious contender left, with Oracle and IBM having been passed over.
Whatever happens with JEDI, this stock is already up close to 20% this year, sprouting massive revenue opportunities that would make any smaller entity weep with envy. LinkedIn alone has boosted revenue 75% since Microsoft acquired it in 2016 and now contributes over $5 billion annually. And with Retailers shunning Amazon as a partner, Microsoft’s competing Azure computing platform is snagging major wins with store chains – partially because the enemy of my enemy is my friend, but also with Office 365 sweetening every offer.
All in all, revenue here grew 14% last year to $110 billion and we’re expecting 12% growth in 2019. Keep in mind that while the percentages are shrinking a little, it’s only because the comparisons get harder as Microsoft expands. In real cash terms, the company found ways to capture an extra $14 billion last year and will undoubtedly boost sales by the same amount this year. Given its commanding stature already, simply staying on this track is an achievement.
We’re convinced Microsoft can keep bolting about $14 billion a year onto its top line for years to come, keeping its double-digit growth ramp alive. If organic opportunities run dry, there’s always $130 billion in cash to deploy on acquisitions.
BMR Take: Microsoft will top $1 trillion, it’s only a matter of how long the next 8% push takes to play out. An expanded Pentagon relationship accelerates that journey but isn’t essential in itself. After all, if Amazon gets the nod instead, BMR subscribers still win. Look for the announcement by the end of the month.
NOTE: In our weekly paid subscription Newsletter, we do between 5 and 7 of these SnapShots, like Microsoft, above. Plus, we have the Weekly High Yield Investor, whereby we discuss the 17 stocks in our High Yield and REIT Portfolios.
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