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