We were having a great earnings season until this week set our stocks back; not the companies, mind you. The stocks. Today's report could close the week on a high note or a low one but either way, in the grand scheme of things we're still well ahead of the game.
It feels a little counterintuitive to talk about outperformance when stocks we recommend like Roku, Expedia and TPI Composites lurched lower after their earnings reports. Twitter, Twilio, Exact Sciences, Shopify, Ventas . . . plenty of strong quarters have been punished with double-digit downswings.
We've seen it before. When investors decide a winner needs a break, there's nothing the company can say to keep the rally going. And when the results are less than spectacular, great stocks can drop hard. Three months from now, management gets another shot at changing the mood. If they can't do it, we'll review the numbers then and see if the stock deserves its place in our world.
In the meantime, it's tough to see even one of your stocks going the wrong way when the market as a whole keeps crawling from record to record. A full eight of our recommendations are down 30% or more from their 52-week highs. But even so, the BMR universe is still up 28% YTD, 19% over the last 12 months and not counting recent IPOs these stocks have soared 49% since the end of 2017.
Compare that to the S&P 500, which is up 23% YTD, 10% since last November and just 15% since the end of 2017. Even with those big recent declines, the BMR world as a whole continues to lead the way. (It's also worth meditating a little on what those numbers tell us about long-term performance as well. This year's surge masks a weak 2018 that was a drag on everyone. Nonetheless, we keep powering ahead on the upswings and so far the downswings have evened out.)
Granted, a few of the stocks that have been a drag on our results will take a little more time to pay off because we came in near the recent top. It happens. One day, if we're patient and our conviction doesn't waver, the market tide will turn and take these stocks back to the peaks and then beyond. And again, when we no longer have faith in any given company, we'll turn it loose. We stay focused on the best mix of opportunities the market gives us, season by season.
But what's driving the S&P 500 on its gentle upward trajectory? Technology has given up leadership of the market as a whole but quite a few BMR stocks are still doing most of the heavy lifting. Microsoft and Berkshire Hathaway are both massive companies and are at new 52-week highs. The Financial Select Sector ETF also gives us broad-based exposure to the big Banks that are finally rallying . . . this might be the time to expand your allocation to that end of the market.
Otherwise, market leadership is scattered and a little on the dull side. Barely 20% of the S&P 500 is anywhere near a historical peak. The rest are in our world, down about 5% to 15% in recent months. They've come a long way off last year's bottom and are now idling ahead of their next move. As long as we maintain our share of leaders, rotation will keep doing its job, distributing gains throughout the BMR universe.
Earnings Preview: Service Properties Trust (SVC: $25, down 2%)
Earnings Date: Friday, 8:00 AM ET
Revenue: $587 million
Net Profit: $44 million
Funds From Operations: $0.95
Year Ago Quarter Results
Revenue: $603 million
Net Profit: $117 million
Funds From Operations: $1.06
Implied Revenue Decline: 3%
Implied EPS Decline: 72%
Implied FFO Decline: 11%
Sell Price: $22
Date Added: May 18, 2018
BMR Performance: -1%
Key Things To Watch For in the Quarter
Service Properties, once known as Hospitality Properties before buying $2.4 billion worth of diversified Retail Real Estate, is a great example of a company waiting for its turn in the grand rotation. Before changing its name and ticker symbol this was a $28 stock and BMR subscribers were in the money. Here we are now, waiting for our faith to be rewarded again.
This was always going to be a transitional quarter given the shift in lease mix. The old Hotels and Service Centers now need to make room for Restaurants, Fitness Clubs and Movie Theaters generating an aggregate $172 million a year in rent. Management says that on the whole this is a stronger company now.
From our perspective, we're looking past the results (especially earnings, always volatile in the world of REITs) to focus on long-term income. As long as Service Properties captures enough Funds From Operations to pay $0.54 per share in dividends, shareholders can count on receiving an 8.6% yield. That's the critical factor here.