October 15, 2017
by Todd Shaver | Oct 15, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
Tulip Mania was a period in the Dutch Golden Age when the price of bulbs reach ridiculously high levels in a craze only to eventually have the price crash badly in 1637. While we are not seeing broad-based craze in today’s markets, we must be mindful that there are pockets of risk out there, and that while market prices today haven’t reached “ridiculously high levels” they have still come a long way, raising the bar for how much risk lingers around out there. For example, this week the mainstream news media extensively covered Wall Street’s junk market bond binge. Junk rated companies are raising debt at the fastest pace since 2012. Not just is the issuance up a lot, but the terms of the deals (i.e. the debt covenants) are getting looser and looser, and thus easier to borrow money. We only raise these points to say, please be mindful of the risks, but there remains plenty of opportunity for future profits!
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks/funds where we think you can still make good money, including: Athenahealth, Nutanix, Cloudera , Opko, Apple, Annaly and BlackRock.
BMR Companies & Commentary
Another week, another all-time record high. Does this scare you? Not us. Why should it scare you? The economy is strong. We have 325 million people who are trying to better themselves by starting companies, by investing in real estate, by buying equities and bonds. No one thing or no one event can bring down the entrepreneurial nature of this country. The market is climbing a wall of worry. Trump, North Korea, breaking the Iran deal, the Taliban, our war in Afghanistan (that Trump is escalating now – ouch), Trump – oh wait, we just said that above. Yes, climbing a wall of worry. But the stock market has been doing this for over 100 years. Seriously. Look what it has been through and look where it is now. Look where our economy is now. Amazing. So Dow 23,000 look out and who knows, maybe in a year or two we will be saying “Dow 30,000 look out.”
If you really are worried and/or if things do get worse, sell your growth stocks and buy some income producing stocks from our REIT portfolio or our High Yield portfolio. Annaly Capital Mortgage (NLY: $12.22, up 1%) has been paying over 10% for over 20 years. I am going to repeat this for you here: Annaly Capital Mortgage has been paying over 10% for over 20 years. Since 1997 they have operated through bull and bear markets in stocks and bonds and they have survived and thrived. You’re worried about the stock market? Buy some Annaly – it is non-correlated with the market.*
*It has a beta of 0.30. A beta of 1 means it follows the overall stock market equally – if the market is up 1%, Annaly is up 1%. But no, Annaly has a beta of 0.30% meaning little to no correlation. The beta of an investment indicates whether the investment is more or less volatile than the market as a whole. In general, a beta less than 1 indicates that the investment is less volatile than the market, while a beta more than 1 indicates that the investment is more volatile than the market Beta can be zero. Some zero-beta assets are risk-free, such as treasury bonds and cash.
You want diversification? There are many other stocks in those two portfolios that pay from 4% to 9% dividends. Buy a basket of them and sit back and sleep like a baby at night!
Athenahealth (ATHN: $115, down 7%)
While Athenahealth didn’t perform well this week, as far as we can tell the issues are just some pre-earnings jitters, not anything serious. The company is scheduled to report earnings on Friday. The consensus is looking for EPS of $0.50 on $310 million of revenue.
We expect all the key fundamentals to remain solid. Recall, the company recently committed to several key initiatives, including: (i) targeting approximately $100 million in cost-savings to increase profitability and drive growth; (ii) committing to significant operating margin expansion; (iii) launching a search to recruit a seasoned independent chairman of the board and additional independent director; and (iv) augmenting the senior management structure to establish the role of president, in addition to an ongoing CFO search.
We do note that the interim CFO sold 4,000 shares this week. Sometimes this news spooks people, but in this case we see no reasons to be concerned about it.
BMR Take: With Elliott Management in there shaking things up, there is a lot of excitement ahead. We love this company but believe now is the time to take profits. For those of you who bought on our recommendation, we made a fair amount of money since we added the stock at $103 in November. While we already officially removed the stock from our portfolio on 8/7/17, we once more reiterate taking profits. Why again? We know some of you out there may have stayed the course selling calls, as that’s what we recommended to do at the time if you weren’t ready to get out. Well, we want to be sure to now say without any hedging - time to exit completely! Let’s buy this one back below $100.
Nutanix (NTNX: $27, up 15%)
Goldman Sachs called Nutanix the investment opportunity of a decade. Why?
The demand pendulum appears to be swinging toward emerging, best-of-breed vendors with more modern approaches, and away from traditional, one-stop shop vendors that are often viewed to be out-of-step with the latest trends.
The proof is in the success or failure of new clients. Just this past quarter Nutanix had a strong quarter for large deals, including multiple deals in the high seven-figure range (several of these in the public sector). Nutanix is now working with a big chunk of the Fortune 500.
The big exciting part about Nutanix is that the company has doubled the number of clients in the past year. The typical client starts with a small contract, but then increases the amount of business they do, often 3x, 5x, or even 10x within a few years. So if Nutanix does nothing else but take care of the clients it already has, we should see strong growth in the years ahead.
BMR Take: We think Nutanix is a must-buy at current levels. Don't be worried about the current valuation. Let's look at why. This year the consensus is for EPS of $0.07, which is nothing much. However, the company is plowing money into sales and marketing to grow the business. Did you know they could save a few hundred million dollars tomorrow generating $1.50+ of EPS if they wanted to stop investing for growth? You see this analysis reveals the serious earnings power embedded in the business model, which is why we like the company so much.
Cloudera (CLDR: $15.72, down 6%)
Remember the company we really like just mentioned above, Nutanix? Well they are doing great things with Cloudera, which means there is more than one way to make money here.
Nutanix, a leader in enterprise cloud computing, announced that its Enterprise Cloud Platform software has been certified to run Cloudera Enterprise workloads. Through this certification, joint customers can reduce management complexity and derive more value by deploying and managing their Cloudera analytics workloads on the market’s leading hyperconverged software platform.
For big data deployments, choosing the right hardware and software is critical to success but often challenging for IT teams balancing ambitious corporate goals with smaller budgets and fewer resources. Joint customers can now run Cloudera workloads on an on-premises, elastic, software-driven infrastructure that can scale on-demand, one node at a time. And because Cloudera workloads can run on the same shared infrastructure as other workloads, IT teams can reduce costs and focus their attention on strategic projects, rather than managing multiple silos of underutilized infrastructure. Great news!
BMR Take: With $360 million of sales projected this year, a growth of 40%, Cloudera is an emerging growth stock worth keeping an eye on. With acquisitions building out the product suite and accelerating revenue growth, momentum is undeniably picking up. A $2 billion market cap, this company is a pipsqueak in the world of commerce. But given its high growth rate, in 2-3 years, the firm can be a major factor (if the company doesn’t get taken out by the big boys.)
Wall Street Consensus Ratings for Cloudera
Ratings Breakdown: 5 Hold Ratings, 4 Buy Ratings
Consensus Price Target: $22.40
10/11/2017 Mizuho $18
9/8/2017 J P Morgan Chase $24
9/8/2017 Morgan Stanley $19
9/8/2017 Stifel Nicolaus $24
5/24/2017 Bank of America $23
5/23/2017 Raymond James Financial $23
5/23/2017 Citigroup $23
5/23/2017 Deutsche Bank $25
Opko Health (OPK: $6.95, flat)
Opko is a diversified healthcare company that seeks to establish industry leading positions in large, rapidly growing markets. The diagnostics business includes BioReference Laboratories, the nation's third largest clinical laboratory with a core genetic testing business and a 400 person sales and marketing team to drive growth and leverage new products, including the 4Kscore® prostate cancer test and the Claros® 1 in-office immunoassay platform. The pharmaceutical business features Rayaldee, an FDA approved treatment for Secondary hyperparathyroidism in stage 3-4 chronic kidney disease (CKD) patients with vitamin D insufficiency.
Opko recently announced that it has entered into an exclusive agreement with Japan Tobacco (JT) for the development and commercialization in Japan of Rayaldee for the treatment of SHPT in dialysis patients with chronic kidney disease. This is great news for growth!
Under the terms of the agreement, JT will make an upfront payment to Opko of $6 million with another $6 million payment to be made upon initiation of Opko’s planned phase 2 study of Rayaldee in US dialysis patients. In addition, Opko will be eligible to receive up to an additional $31 million in development and regulatory milestones and $75 million in sales-based milestones. JT will also pay Opko tiered, double digit royalties on net product sales. Wow!
BMR Take: Consensus calls for about $1.2 billion of revenue for the company this year heading to $2 billion in a few years. We could be in for some major upside to estimates. Now wouldn’t that be nice, after being so patient with this little $3.9 billion company.
Apple (AAPL: $157, up 1%)
Apple could be disrupting more industries soon.
Barclays, the British bank, will need to defend its advantages in the payments business from encroachment by technology companies including Amazon and Apple, according to Barclay’s CEO Jes Staley.
There are some tectonic shifts going on, driven by tech and the geopolitical environment. The banks are very focused on the payments space and that may be where the battleground of finance is fought over the next 15 years. Could you imagine if Apple started taking share of the banking business from the world’s largest banks (like Barclays, JP Morgan, and Wells Fargo) as well as the world’s largest payments companies (like Visa and MasterCard). This would be another huge long-term growth driver.
BMR Take: Note that Apple has $260 billion in cash now, and with a market cap of $810 billion cash is 32% of the stock price. So more than $50 of the stock price is in cash. This is UNPRECEDENTED in the history of Wall Street. Apple remains an exciting investment opportunity. The services business is projected to double in revenue to $50 billion over the next several years. The Services business is much more profitable than hardware so the impact to earnings is even better. Don’t sell a share. We believe Apple has a lot more room to go on the upside.
BlackRock (BLK: $475, up 3%)
BlackRock, the world's largest money manager with $5.7 trillion in assets under management, reported better-than-expected earnings on Wednesday, which sent its stock to a record high.
And shares could go even higher, according to Credit Suisse (and us!) Following 3Q17 results, BlackRock remains the best-positioned traditional asset manager in the world with EPS growth expected to run 15-20% through 2019.
Most of the company's growth has come from its wildly successful exchange-traded fund business, known as iShares, which now accounts for half of all US investments in the products. There continues to be strong demand for iShares's ETFs driven by the evolution of the US retail channel (from commission-based to fee-based) and increased adoption by institutional clients and pricing reductions in its core series. Year to date, iShares accounted for about 50% of total ETF flows in the US.
Passive investments, like ETFs and other products that track a weighted index rather than a single equity, have steadily eaten away at active managers' portfolios in recent years.
BMR Take: BlackRock is among the best-positioned companies in investment management owning the top ETF franchise that is growing rapidly due to passive investing, as well as an increasing product portfolio of technology. Recall, there are several top hedge funds on the list of shareholders in BlackRock. With EPS set to approach $30 over the next 3 years, this stock pick is among our favorites.
Upcoming Economic News
Industrial Production
Tuesday, October 17, 2017 09:15 AM
Period: September
Consensus: 0.30%
Prior: -0.90%
Housing Starts
Wednesday, October 18th, 8:30 AM
Period: September
Consensus: 1,180,000
Prior: 1,180,000
Continuing Jobless Claims
Thursday, October 19th, 8:30 AM
Period: October
Consensus: 1,895,000
Prior: 1,889,000
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
The 4th quarter is off and running strongly, which is not uncommon. Even though it includes October (Octoberphobia), Q4 has historically been the strongest quarter of the year for the S&P 500. Since 1950, the S&P 500 has gained 4% on average in the fourth quarter, advancing 79% of the time. Oil dipped back under $50 per barrel and gold has fallen over 7% in just the last month because the US Dollar has strengthened due to the belief that the Fed will hike rates again in December. Maybe or maybe not. We still think tax reform is a bigger wild card than another Fed hike. The expectation of tax reform has resulted in just about everything with the exception of energy being up for the year, but even energy has some building tailwinds.
According to Boone Pickens Advisors, worldwide demand is soaring and set to hit 100 million barrels per day next year – a feat that was only expected around 2025 by most long-term forecasts including those from OPEC and Exxon. Growing energy demand is normally associated with growing economies, so this continues to be good news for future market gains based on earnings growth. The point being made is that if the market suffers a setback due to the failure of tax reform, it should not develop into a real bear market because of the support to be found in continued earnings growth. If Boone Pickens Advisors is right about soaring demand for energy, there is plenty of upside left in this bull.
General Electric (GE: $23, down 10% this week, and down from $32 in December - wow)
The drop in the stock in the last 10 months is almost 30%. With a market cap of $200 billion GE is not going away. But they are the Dog of the Dow. You know what the Dogs of the Dow are, right? They are the five worst performing stocks of the 30 Dow stocks. GE is gunning for THE DOG of the Dow this year. Many value money managers love this stuff. They buy the Dogs and historically, they have been big winners the following year and years.
We are thinking of adding GE to our Stocks For Success portfolio, not just because of the thinking in the above paragraph but for a host of other reasons. It has just had a shakeup in management, which will continue for the next few months. Old CEO out (Immelt), new CEO in (John Flannery). Lots of executives leaving or getting pushed out. Dividend is 4% which is pretty darn good for a Dow stock. 100+ year history of success as a global business leader. Lots going on with this huge company.
A note about the dividend. Some analysts think the dividend could get cut in order to conserve cash. This would be bad and good news. The stock would probably get nailed by another 10% down to $21 or even lower, but that would most likely mark the bottom. So if you are thinking of taking a position, keep this in mind. In other words, keep some cash around (keep your powder dry) in order to buy more at a lower price. If this dividend cut doesn’t happen, then buy some more as the stock moves up over the coming 24 months as it gets back into the $30s. The all-time high is about $58 back in 2000, right after the bubble started bursting in the dotcoms. It dropped to $24 in 2002 and then rallied to $41 in 2007. It got whacked to $12 in 2009 in the financial crisis and has moved straight up for eight years to $32 in 2016. We think there is a good possibility of seeing $30 and $40 in this great franchise as we move into the latter stages of the twenty teens.
Again, we are thinking of writing a research piece on GE soon. We believe it is a long term winner for the super conservative investor.
Update on Shopify
As you know, we love Shopify (SHOP: $94, down 4%) but along came Andrew Left and his firm Citron announcing that he was short the stock, that it was going way down, and that the company was fraudulent, among other silly claims. Many analysts jumped in this past week on the story. Here’s what one of them said:
"Citron’s Argument is Weak
"Let’s call a spade a spade - Shopify is selling a dream.
"So, is the Shopify stock news on-point? Is Shopify using illegal marketing tactics in selling that dream? That’s a gray area to be sure, but is the marketing message remarkably more misleading than the TV commercials inviting consumers to participate in class action lawsuits that mostly enrich attorneys, but rarely pan out as well as expected for the actual plaintiffs?
"Is a vision of a healthy cancer patient within a television commercial for a cancer drug some sort of unspoken guarantee of long-term survival? Does a young man that uses the Axe brand of personal-hygiene products actually expect to be besieged by young women, as depicted in Axe’s television commercials?
"The answer to all these questions is, of course, no. The FTC tolerates the imagery simply because it knows it has to give consumers at least a modicum of credit in distinguishing the difference between a contract and a commercial.
"And as for Shopify’s lack of profits, Shopify is in good company. Most young companies don’t turn a profit until after they’ve matured, but savvy investors know the time to get into some of them is before, not after, that fact. Look at Amazon, the most prominent of the rags-to-riches stories. It’s been one of the best long-term investments anyone could have made over the course of the past couple of decades. Investors don’t care where a company is, they care about where it’s going.
"Looking Ahead for SHOP Stock
"Don’t misread the message. The FTC might crack down on Shopify’s advertising. The company might never turn a profit. The market might not care if Shopify does eventually turn a profit. Nobody really knows the future. That’s the speculative nature of stock-picking.
"Andrew Left, however, seems to be grasping at straws with this one. Though he certainly rattled shareholders by generating some rather alarming Shopify stock news headlines, this time his claims are more bark than bite.
"If your gut is telling you this may be a time to scoop up shares at bargain prices, you may want to trust your gut."
BMR Take: Again, this was an opinion of a consensus of Wall Street analysts. But we certainly concur. We think this guy Left is out in left field. Here’s a chart of the last six months. You can see that the stock is where it was in August, just two short months ago. In April it was $71. We think there is tremendous value here with this company and believe Andrew Left will be left high and dry.
Update on Cloudera (CLDR: $15.72, down 6%)
Nothing new this week, just a lower stock price, giving the stock even more value for the investor.
Here’s what we said three weeks ago on September 24th.
Cloudera (CLDR: $16.90, down 8%)
Cloudera is issuing new stock, diluting existing stockholders, hence why the stock is down. Specifically, Cloudera announced that it has filed a registration statement with the U.S. Securities and Exchange Commission relating to a proposed follow-on public offering of its common stock. A portion of the shares to be sold in the offering will be sold by existing stockholders of Cloudera, and a portion of the shares will be sold by the company. Cloudera will not retain any proceeds from the shares sold by existing stockholders. The number of shares to be sold and the allocation of the shares between existing stockholders and the company have not yet been determined.
Morgan Stanley, J.P. Morgan, and Allen & Company are acting as lead bookrunners for the offering. Merrill Lynch, Citigroup, and Deutsche Bank Securities are acting as book-running managers and Stifel, JMP Securities, and Raymond James are acting as co-managers.
BMR Take: Two weeks ago they reported this:
Recent Business and Financial Highlights:
Subscription revenue was up 46% year-over-year to $74 million
Subscription revenue represented 82% of total revenue, up from 79% in year-ago period
Subscription gross margin for the quarter was 85%, 200 basis points higher than second quarter fiscal 2017
Dollar-based net expansion rate was 140% for the quarter
45 net new Global 8000 customers added
And they have $500 million in the bank. Yes, they aren’t profitable yet, but remember, revenues tell all.
Taking a step back, companies do what Cloudera just did all the time — raise equity and use the proceeds for corporate purposes. It is not a reason for us to sell the stock or for the stock to be down as much as it is. The fundamental business has not changed one iota on this development. So it makes sense for us to stay invested. We will certainly keep a close eye on this management team though. For the time being, we are sticking with the company.
The High Yield Corner
By Michael Foster
Remember the slight volatility we recently saw in REITs? That’s gone. Instead, 4 of the 6 REITs in the High Yield portfolio were up this week, while two were flat. While not rising the most, Omega Healthcare Investors, Inc (OHI: $32, up 1%) is the most important and interesting story of the week. Extremely cautious, risk-averse investors dislike this stock because of its high yield (8%) and relative youth. Having been around since the late 1990s, it lacks the history of many dividend growth stocks. It also had a pretty disastrous collapse in its dividend back in 2000. However, that’s all long history by now. More recently, Omega Healthcare has devoted itself to a penny-per-quarter dividend hike that makes it a uniquely high yielding dividend growth stock. Some will warn that these dividend increases are unsustainable, and that may be true. But if the hikes last 10 years instead of 2 quarters and you avoid it because it won’t last forever, you’re giving up some extreme gains over a decade. This is how risk averse behavior cuts into returns.
The more aggressive investors who own Omega realize this, which is why they look at both the firm’s FFO and its dividend growth rate like a hawk. Last week, Omega yet again gave investors a penny-per-share raise. At the new payout, FFO covers the dividend pretty well - at a 125% rate. Bear in mind that that’s below the 130% threshold that we frequently write about here, which makes us cautious about the longevity of the rate hikes. We need to see FFO per share slow significantly before that dividend coverage ratio gets hurt and a cut becomes a mathematical necessity.
But how long could that take? Our best guess is that we have at least three years until a cut becomes necessary, but there are two factors that could grossly change that estimate. For one, shares outstanding growth. The more shares Omega releases, the more dividends it has to pay, which makes its FFO less powerful in covering payouts. Total shares outstanding have risen to 197 million from 196 million in the last year - a pretty small jump. But shares were just 68 million a decade ago, meaning an 11% annualized growth rate in total shares outstanding. That brings us to our second factor: FFO - funds from operations. During that same decade, FFO has risen 22% annualized over the same period. So you can see how Omega has been able to grow far beyond its obligations to shareholders and keep that growth rate going!
Can Omega continue? The real answer is no one knows, but there is reason to be concerned. The growth rate has slowed significantly in recent years, especially since Omega was smart to expand during the post-2009 years when all real estate was on sale. Deals are harder to find now, making growth a lot harder.
There’s another lever Omega can pull, though: Getting strong rent hikes. Keep in mind that Omega’s wheelhouse is a customer base that struggles with inflation, which makes rent hikes particularly challenging. For that reason, we think the long term trend of strong growth at Omega is definitely a thing of the past, and the penny-per-quarter hike cannot continue forever. But selling now and missing out on years of high yield dividend growth would be folly. Instead, we need to keep our positions and look closely at the numbers before jumping out. Now is not the time.
Our strongest REIT of the week is in many ways the exact opposite of Omega. Digital Realty Trust (DLR: $122, up 3%) saw a really strong week without too much relevant news. Last week the firm announced it would expand its Silicon Valley Connected Campus, with a new six-megawatt facility planned for 1Q18 delivery. This is a really small part of Digital Realty’s portfolio, comprising just a $75 million investment, so it isn’t enough to move the needle. Also, as counterintuitive as it sounds, Digital Realty’s strength isn’t in the Valley but in its distributed presence around the country. The company has many retail-facing clients, as well as the U.S. government, where the need is to have many hubs where human beings who use the Valley’s services are located.
Digital Realty is on track to grow that business, but the real story of last week’s price movement is more technical than fundamental. The stock has retreated from its 52-week high hit last month ($127), and after this week’s gains is approaching it yet again. The dividend yield is also nearing the sub-3% level, which it hit in September briefly before rising. We fear we may have a repeat of that in the short term - but that’s hardly a cause for concern. It simply means that Digital Realty is for the most part range bound right now, and we need to content ourselves with that while we wait for the company to aggressively ramp up its dividend. The last rate hike was in March, and another one by the end of the year would be nice. In reality, this company’s management has settled itself into a predictable pattern of one-per-year dividend hikes despite a rapid acceleration in FFO growth. FFO per share is now over double payouts - an absurd ratio to say the least! We would like to see Digital Realty aggressively ramp up its dividend hike schedule.
We doubt we’ll see it anytime soon, but we do think it’s an inevitability with this company. Simply put, it cannot stop making money, and its business is growing too rapidly for it to be at risk anytime soon. Eventually, Digital Realty will need to start increasing its dividend more frequently or doing much more aggressive dividend hikes. Either way, its 3% yield at current prices is destined to turn into more of a 5% yield in the next 3-5 years. For that reason, investors long the stock should stay tight even if you’ve been in it for the past year and are sitting on some attractive capital gains.
Good Investing,
Todd Shaver, CEO, Founder and Editor
The Bull Market Report
Since 1998
September 24, 2017
by Todd Shaver | Sep 24, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
Repetitive. That’s what the talking heads are on CNBC. That’s what you see in the local newspaper and even in the Wall Street Journal. All anybody talks about is Trump this and Trump that. Rising interest rates and the Fed. So on and so on. It’s all in hindsight too. Rarely ever do you hear forward thinking. Well, not here at the Bull Market Report. We aren’t anchored to the mainstream. We aren’t beholden to anything or anybody other than giving fresh perspective to you, our subscribers.
This week the one thing that caught our eye was hardly discussed at all in the media. China’s travel and tourism growth rate over the next 10 years is expected to outpace the USA and all other major nations. We are sure you know that China has 1.4 billion people versus our 325 million. We are at a major disadvantage in terms of population size. We better be smart in all we do. We better remember what got us here -- the wisdom of the founding fathers and bold actions (like starting a fight over tax reform by sinking a ship). What wise and bold actions are we taking today? Politically? Financially? Socially? Our Fed can’t even raise rates one-quarter of a point eight years after a crisis. While we are stalled, places like China with 4x the people-power we have are taking over. Let’s go!
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks/funds where we think you can still make good money, including: Nutanix, Opko, Apple, Cloudera, Carlyle Group, PayPal, and we discuss Bitcoin.
BMR Companies & Commentary
Nutanix (NTNX: $24.50, up 14% for the week)
Nutanix is on a role. You know why? We’ll tell you the secret. Here is what the smart money sees: It all comes down to new customer growth and average revenue per customer. Sometimes it is just this simple. You look at the business model. You see what is happening with the leading indicators. These are the drivers of where the business is going. And it’s clear what is going to happen.
As of the end of July, Nutanix had 7,050 customers up from 3,770 customers in the year ago period. Out of this pool, there were just 400 customers doing over $1 million of business versus 210 customers in the year ago period.
What does this mean?
The total number of customers just doubled. Hardly any are doing over $1 million of business yet. An analysis of lifetime value from seasoned customers reveals this initial buy is 1x; after 18 months customers spend 4x the initial buy, and the top 25 customers end up around 19x.
So you see it’s just math. We could analyze the product all day (which is fabulous) and the market is buying it. Customers are flocking in.
BMR Take: Nutanix is a once-in-a-generation opportunity according to Goldman Sachs. But note that Nutanix is the classic busted IPO. Busted IPOs are where the initial hype around the first day of official trading on a public exchange gets a bit too high. There is a lot of excitement after all. And there is a lot on the line for investment bankers and management to get top dollar on the IPO price. Then the stock deflates. This is where it is a good time to buy. Nutanix is a great business - not much has changed since the IPO, aside from the fact that now is a much better time to start buying.
Opko Health (OPK: $6.71, up 12%)
The CEO bought 15,000 shares at around $6 per share. They say people sell stocks for any number of reasons. But there is only one reason you buy a stock – you think it’s worth a lot more. Now, when that person happens to be the CEO, that is interesting. The CEO should know the business really, really well. Many academic studies have shown that following insider buying by top executives is a money making strategy in the markets. So again why is the CEO buying shares right now? Whatever he sees leads him to believe he is going to make some money.
BMR Take: Consensus calls for about $1.2 billion of revenue for the company this year heading to $2 billion in a few years. We could be in for some major upside to estimates. Now wouldn’t that be nice, after being so patient with this little $3.75 billion company.
Apple (AAPL: $152, down 5%)
Apple had its worst week in 17 months for a number of reasons but what some say is muted demand. They say the old Apple of Steve Jobs never would have even come out with this phone. Today they just do an upgrade, throw a party, and expect people to flock to it. In fact, they are charging $1,000 now. The old Apple wouldn’t do something unless it was innovative. Nowadays it’s just boring old corporate culture. While demand for the new iPhone was weaker than expected, the reality is it is not a needle-moving matter or a reason to sell the stock. Apple is among the best franchises in the world and they are still selling a millions of iPhones. This is a great buying opportunity.
What else? If you updated to iOS 11 after it launched on Tuesday, chances are that you’ve noticed your battery is draining at an alarming rate. On Thursday, mobile security firm Wandera dove into the update and discovered that iPhone and iPad users who upgraded to iOS 11 are seeing their battery life decay more than twice as fast as it was on iOS 10. So clearly there are some kinks to work through.
BMR Take: We are not particularly concerned with these recent developments. Many times the bad news comes out first after a product launch and then the good news trickles out over the coming weeks and months. Apple is approaching their big selling season here shortly and in October will start taking orders for the Apple X. We will suggest to you here that the orders will be big and the hype bigger, and expect the stock to recover nicely in the coming months.
Cloudera (CLDR: $16.90, down 8%)
Cloudera is issuing new stock, diluting existing stockholders, hence why the stock is down. Specifically, Cloudera announced that it has filed a registration statement with the U.S. Securities and Exchange Commission relating to a proposed follow-on public offering of its common stock. A portion of the shares to be sold in the offering will be sold by existing stockholders of Cloudera, and a portion of the shares will be sold by the company. Cloudera will not retain any proceeds from the shares sold by existing stockholders. The number of shares to be sold and the allocation of the shares between existing stockholders and the company have not yet been determined.
Morgan Stanley, J.P. Morgan, and Allen & Company are acting as lead bookrunners for the offering. BofA Merrill Lynch, Citigroup, and Deutsche Bank Securities are acting as book-running managers and Stifel, JMP Securities, and Raymond James are acting as co-managers.
BMR Take: Two weeks ago they reported this:
Recent Business and Financial Highlights:
Subscription revenue was up 46% year-over-year to $74 million
Subscription revenue represented 82% of total revenue, up from 79% in year-ago period
Subscription gross margin for the quarter was 85%, 200 basis points higher than second quarter fiscal 2017
Dollar-based net expansion rate was 140% for the quarter
45 net new Global 8000 customers added
And they have $500 million in the bank. Yes, they aren’t profitable yet, but remember, revenues tell all.
Taking a step back, companies do what Cloudera just did all the time -- raise equity and use the proceeds for corporate purposes. It is not a reason for us to sell the stock or for the stock to be down as much as it is. The fundamental business has not changed one iota on this development. So it makes sense for us to stay invested. We will certainly keep a close eye on this management team though. For the time being, we are sticking with the company.
The Carlyle Group (CG: $24, up 4% this past week and 17% in the past two weeks)
We have written often about liking Carlyle since it was trading much lower than here. We think $30 is in the cards. Many investors still don’t understand or appreciate the business.
But what is really interesting is that the company just issued a new preferred. But in today’s low interest rate environment, many investors aren’t interested in bonds but still need to find a yield. A lot of money is being made in preferred stocks with their higher yields. Well, Carlyle just issued a preferred stock you can now buy. The Carlyle Group announced the pricing of a $400 million offering of its 5.875% Series A Preferred Units.
BMR Take: We would be buyers of the stock up to $30 a share. But now take a look at this new preferred and make close to a 6% yield. We know that Carlyle knows what to do with $400 million in cash! We just interviewed David Rubenstein, founder and Co-CEO. He is a powerhouse and we are quite happy investing in him and his management team. Have you seen his TV show on Bloomberg TV? Peer To Peer Conversations. Watch this show and buy some stock. You will be happy you did.
PayPal (PYPL: $65, up 6%)
CEO Dan Schulman says the company is looking for acquisitions. Schulman told the media that nothing is imminent but that they are on the hunt.
What could they do?
Historically, they bought money transfer services XOOM and Venmo. These services were natural extensions to PayPal’s brand. They spent a lot of money on tiny revenue producing business, but the technology of these companies is top notch and can scale big time under PayPal brand, so it was a strategic way to not pay a lot for something completely already built.
What would we like to see?
We would like to see the company do something exciting! Little small M&A deals are boring because they take forever to work. We would like to see PayPal take a swing at doing something big.
BMR Take: PayPal is a growth story for decades to come. EPS is growing greater than 10% and has been for a very long time. We see PayPal eventually taking on Visa and Mastercard for the top spot in payments. Setting a new all-time high on Friday, the company is now worth $78 billion. Do you have a PayPal account yet? You will.
Upcoming Economic News
Consumer Confidence
Tuesday, September 26th at 10:00 AM
Period: SEP
Consensus: 120.0
Prior: 122.9
Durable Orders
Wednesday, September 27th at 8:30 AM
Period: AUG
Consensus: 1.0%
Prior: -6.8%
GDP
Thursday, September 28th at 8:30 AM
Period: Q2
Consensus: 2.2%
Prior: 2.2%
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
We have looked at the effect the hurricanes might have on the US economy. This is important to the stock market because any disruption to the expectations of continued earnings growth and GDP expansion could trigger a serious correction. The good news is that, although there will be a negative impact, it is not expected to be large enough to "derail" the upward trajectory of earnings growth and higher GDP numbers.
Meantime, one of our favorite resources recently said, "This is now the 2nd longest bull market in history. And I'm betting that it ultimately becomes the longest running bull market in history, eclipsing the current record of 12.3 years. We're less than four years away from surpassing that. And I think we most certainly will, and more……."
We can't argue with this because, fundamentally, the market's gains are rooted in real earnings numbers and economic stats - not speculation. Just one example is the recent solid reading from the Empire State Manufacturing Survey which came in at 24.4 vs. the consensus for just 19.0, and in which analysts noted that the New Orders component grew at the fastest monthly rate in eight years.
And, last but certainly not least, stock valuations, although being higher than historical averages, are nowhere close to "bubble" territory.
Today, if we had to worry, our main fear would be if tax reform ever gets labeled as "dead". If that happens, expect a selloff, but not the beginning of a new long-term bear market. On the whole, the upside momentum for the markets should remain on track.
The Bitcoin Corner
Wow. Where do we start? Discussion of Bitcoin and Ethereum and a host of other cryptocurrencies is skyrocketing. Anything that goes from $2 to $4000 in five years is going to get talked about. Repeat: $2.00 to $4,000.00 – this is not a misprint. The Bitcoin world is now worth about $42 billion which is a tiny part of the world’s money supply, but then again, $42 billion is a big number. We wouldn’t mind having 0.01% of this!
What is Bitcoin?
That’s a good question. For one thing, there can be no more than 21 million of them. There about 16.7 million in circulation and it is getting harder and harder to “mine” them. So one of the reasons for its great rise recently is the scarcity value.
Here is one definition:
Bitcoin is a worldwide cryptocurrency and digital payment system, called the first decentralized digital currency, since the system works without a central repository or single administrator. It was invented by an unknown group of programmers, under the name Satoshi Nakamoto and released as open-source software in 2009. The system is peer-to-peer, and transactions take place between users directly, without an intermediary. These transactions are verified by the network and recorded in a public distributed ledger called a blockchain.
What is a blockchain?
The blockchain is a public ledger that records bitcoin transactions. A novel solution accomplishes this without any trusted central authority: The maintenance of the blockchain is performed by a network of communicating nodes running bitcoin software. Network nodes can validate transactions, add them to their copy of the ledger, and then broadcast these ledger additions to other nodes. The blockchain is a distributed database – to achieve independent verification of the chain of ownership of any and every bitcoin amount, each network node stores its own copy of the blockchain, Approximately six times per hour, a new group of accepted transactions, a block, is created, added to the blockchain, and quickly published to all nodes. This allows bitcoin software to determine when a particular bitcoin amount has been spent, which is necessary in order to prevent double-spending in an environment without central oversight.
We at The Bull Market Report have started buying some ether, another cryptocurrency. We will explain what this cryptocurrency is all about next week. It peaked at about $390 on the 1st of this month and with all the news about China shutting down the exchanges*, the price fell to $206 on the 15th and is around $285 at the moment. But a year ago it was around $12. Don’t ever say that cryptocurrencies aren’t volatile!
Bitcoin peaked at about $4,900 at the start of the month and dropped to $3,000 by the 15th. It is now at $3,670 as we write this. But note that these two cryptocurrencies trade 24-7. That’s right, they trade 24 hours a day, 7 days a week. So by the time you read this, the price will have changed. A year ago it was around $500.
Some symbols for these two are BTCUSD or BTCUSD=X for bitcoin and ETHUSD or ETHUSD+X for ethererum.
* Chinese cryptocurrency exchange ViaBTC has announced its plans to launch a trading platform based outside of China. The decision to establish an overseas-based platform follows announcements that the exchange will shut down operations in mainland China on September 30th.
The debate on bitcoin is raging. The CEO of JP Morgan, Jamie Dimon, called it a speculative bubble and a fraud. The same day Jack Dorsey of Twitter and Square said blockchain is the future and a major unlock opportunity for technology.
So which is it?
The High Yield Corner
By Michael Foster
We have now enjoyed a second week of calm in the high yield world, with a lot of Bull Market Report recommendations seeing slight upticks for the week and a few dipping slightly. The biggest declines, which weren’t really all that big to begin with, were in the REIT space, where nerves about the upcoming interest rate hikes from the Federal Reserve are making investors cautious about future borrowing costs for these firms.
But not all of the declines are in Janet Yellen’s shadow. Digital Realty Trust (DLR: $115, down -2%) continues to see a mixture of profit taking and selling pressure as a result of more predictions about future server needs. Additionally, the debate is hitting many major financial and technology publications, with a growing number of experts weighing in to express caution or contempt for the bearish viewpoint.
Since this debate is heating up, we should dig in a little deeper into its history and the bull and bear cases. We will take this whole issue of The High Yield Corner to discuss this fabulous company (market cap $24 billion, 3% dividend.)
It all began with Social Capital's Chamath Palihapitiya, a CEO who left Facebook to head his own tech investment firm. Palihapitiya has serious tech chops (an is worth $1 billion.) He also worked at AOL and Winamp back when those were big names in tech, and he’s become a titan of the industry by moving to the Next Big Thing before the rest of us realized where the Tech world was going. So when he talks, we should all listen.
Palihapitiya’s idea is simple: Technological improvements are going to cause a rapid and accelerating reduction in the physical size of individual servers. The numbers he threw out boil down to this: 50% of all computing needs will one day run on 10% of the silicon that is currently required. This drastic reduction in the server size will also result in servers being small enough to fit in an RV that you could park beside a data center. "Plug it into some air conditioning and power and it will take those data centers out of business,” he said.
The rebuttal is that it’s going to take a very long time for those developments to come into play. Digital Realty CEO Andy Power made a pretty simple rebuttal: Amazon, Google, and other big tech giants developing and expanding their content delivery network systems around the world are still signing 10 to 15 year leases with Digital Realty. Since Palihapitiya’s bearish view depends on Google developing their own tech to displace Digital Realty, it seems like what Google is really doing contradicts his theory of what they may do at some unspecified point in the future.
That would definitely be a point in Power’s favor. However, we should remember that Digital Realty and Google are counterparties, and tech companies are notorious for trying their best to become less reliant on partners. Google, for instance, famously went against Apple and tried to compete head-on with Android. Then they went against Samsung and acquired their own cell phone company - something that Google recently did yet again. Google is obviously interested in taking as much “in house” as possible, and they have the cash to buy their own real estate and create their own server farms - especially if the size required will be so much smaller in the future.
With that in mind, there’s definitely a pretty strong chance that Palihapitiya will be proven right. Eventually. And that’s the key. In finance, there is a famous adage that “being too early is the same as being wrong.” If Palihapitiya is proven right in, say, 2025, and it causes Digital Realty’s revenues to drop 20% then, but the markets have knocked off 10% of Digital Realty’s valuation in 2017, can we really say that the price hit was fair? Probably not.
And this is the key - a kind of miscommunication between tech and finance that happens all the time. The time horizons are so different, and techies and investors will almost always disagree on the implications of when and how to move investments as a result of changes to the landscape. That, we believe, is what is happening here. Investors are acting too quickly to price in an event because no one really knows how long it’s going to take to actually happen.
What does this mean for Digital Realty’s stock? In most cases of a massive misunderstanding of an emergent technology, you get an S-curve. This happened with Baidu, Facebook, and plenty of other tech stocks. Initial enthusiasm causes a surge in valuations - then the uncertainties around the new technology causes a panic, driving valuations down sharply. Then there’s a recovery as the market realizes they had over-exaggerated the risks, and underestimated the power of the new technology.
With Digital Realty, we think there’s a good chance that we will get this kind of movement. Initial enthusiasm about the technology will cause the REIT to fall further, maybe dragging the price down 10% from its top. Maybe it will go down even more. Then the market will realize they have dramatically overestimated the time frame of these new “microservers” and the stock will recover. Hence an S-curve. The time horizon for this price movement is obviously unpredictable, but tech does tend to move fast. Investors should be prepared for a bit more volatility with Digital Realty over the next few weeks.
Investors should sit tight. If Digital Realty’s dividend yield falls below 4%, it will obviously be a strong buy. Funds from operations and organic growth are strong enough to support the dividend for many years. We may also see Digital Realty increase their dividend (they have the coverage ratio to do it any day now) if the stock falls too heavily. That would be Power’s way of telling investors clearly: “We are confident in our ability to make money.” And that will help the stock recover even faster.
Good Investing,
Todd Shaver
Editor, Founder and CEO
The Bull Market Report
Since 1998
September 17, 2017
by Todd Shaver | Sep 17, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
Equity markets ended the week up, again! New all-time highs were set Friday (again) with all three indices. The threat of conflict with North Korea can’t stop the bull market. Gridlock in DC isn’t shaking confidence. The unemployment rate is low. GDP growth is fair though under pressure from severe weather. It’s really a “Goldilocks” economy and a market backdrop of not too hot and not too cold. The biggest threat might simply be the Fed’s Janet Yellen who must unwind a $4.5 trillion balance sheet. The September Fed meeting is upon us and nobody is expecting a rate hike because of the pressures on GDP growth from weather. Though pay attention to plans for the Fed balance sheet as these moves could be worth as much as three rate hikes depending on the pace of unwinding. We are as eager as you to see what happens.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks where we think you can still make good money, including: First Solar, Apple, Twilio, Bristol-Myers, Amazon, Google, and Square.
BMR Companies & Commentary
First Solar (FSLR: $51, up 8%)
First Solar caught a lot of press this week as Deutsche Bank upgraded the stock to a Buy and said the stock is heading to the mid-60s.
What is there not to like? First, US demand is so strong it is driving pricing higher. Beyond the typical demand there is something else happening. Customers are flocking to make purchases ahead of the ruling on the section 201 tariff.
What is this? There is a high likelihood of the International Trade Commission finding injury in the section 201 case. This case basically makes a determination on the safety of the product. A favorable decision is expected to result in 2018 margins between 20 and 30%, against a 2017 rate of 17.5%. This regulatory relief for First Solar is welcomed!
Lastly, monetization of the phase 1 California Flats Solar Project coupled with the anticipated sale of the company’s stake in 8Point3 Energy Partners (CAFD: $14.49) could result in upward revisions to EPS estimate.
BMR Take: Putting it all together, First Solar is in the right spot at the right time. We recognized it early. Now we see a big Wall Street investment bank get behind the name. Yea! With EPS running around $2.50, the stock is not expensive here considering the quality and future of the franchise.
Apple (AAPL: $160, up 1%)
Apple unveiled its latest slate of new products on Tuesday including a new $1,000 iPhone that is sure to bring out aficionados of the company's devices when they arrive in local stores later this month and again in early November.
In a live-streaming event, Apple introduced a new version of its Apple Watch and Apple TV set-top box, plus two new phones, the iPhone 8 ($700) and a larger iPhone 8 Plus ($800) version. But the highlight was the iPhone X (pronounced “10”), a thin, sleek phone that has 3D face-recognition technology, a state-of-the-art camera, and a $1000 price tag -- double the price of the first iPhone that Apple introduced 10 years ago.
The other products will be available for pre-order starting Friday and should hit stores a week later.
The $1,000 price tag is causing all sorts of buzz. Will consumers pay that much? Well, most think so because you just make monthly payments through a plan and not a lump sum. Is there new technology that is exciting? Yes, from face recognition for security to the largest screen yet. All in all, the timing of the launch could push sales from 4Q to 1Q, but we expect Apple to sell a lot of phones.
BMR Take: Apple is going to do over $250 billion of sales this year. This is a staggering amount of money pouring into the company’s bank accounts from consumers who love Apple. Remember, as long as Apple continues to be a fan-favorite for customers, we think there is a huge opportunity for the company to do more and more services on top of selling hardware. The future is bright!
Remember, 65% of Apple is now the iPhone. And every new user is going right to the App Store to buy apps, increasing the Services business incrementally. Recurring income, baby. That’s what it’s all about.
We have a few notes we made from a research report from UBS Securities.
Apple Price Target - $180 (We are at $170) with a $195 potential upside.
iPhone growth in F18/19 – UBS expects double-digit unit growth in F18 and single-digit growth in F19 driven by a growing installed base and high retention rate. They expect a bulge of F15 iPhone 6 owners to upgrade in F18, creating a strong year if not a "supercycle." Supply and pricing could affect the degree of growth.
“Apple innovation to drive long-term revenue growth?
“Augmented reality (AR) is an area where Apple could leapfrog competition in offering a superior user experience. Features will take time to be released as the technology must reach a level of maturity suitable for Apple's brand. Other products like the Watch and AirPods are slowly
becoming material to the business and represent another way to monetize a loyal base of customers.
“The installed base continues to grow double digits and retention rates remain high. The retention rate for Apple above 80%, at a seven point premium to the Android retention rate. There is pent-up demand for the iPhone 8, with over a third of the base consisting of handsets older than two years old, the highest ever.
“Around the world Apple is gaining share everywhere except China. China remains a wildcard. Encouragingly, shipments to Mainland China stabilized in June. Our survey indicates interest in the next iPhone is similar to last year.
“At a P/E of 15x, Apple is trading at near an all-time high valuation. This suggests the market is pricing in a strong product cycle in F18 with double-digit EPS growth. It's also possible investors are gradually re-rating the multiple to recognize the strength and stability of the brand.”
Twilio (TWLO: $31, up 4%)
Twilio is one of the most exciting growth stories out there. And the CEO’s recent Bloomberg TV interview re-ignited our conviction in the story.
As you have been following the growth of Twilio lately, you’ll know it’s an exciting addition to the communications space. Twilio is a developer platform that powers communications for more than 40,000 global companies, including Netflix, Airbnb, and Lyft.
Twilio has emerged as a simple way for companies and software teams to begin adding communications capabilities to their applications in the form of text, video, and voice, providing companies with the flexibility that they need to implement more engaging customer experiences into their daily operations.
Twilio was built around the growing desire to provide a better customer experience for end-users and companies alike. Across numerous industries, enterprises have begun to recognize that the only way to truly differentiate their businesses from other competitors in the marketplace, is to give their customers an experience that is seamless, integrated, and engaging. Unfortunately, it’s difficult to achieve that level of service when your communication technology is not all run from one central place.
BMR Take: Sometimes the daily news is just noise. You have to step back and do a simple fundamental analysis. What does this company do? Why is the value proposition a winner? What is the big picture story? Twilio has this nailed in spades and the CEO provided a great reminder of that to the equity markets this week talking on Bloomberg.
Look at revenues for the past three years. $89 million in 2014. $167 million in 2015. $277 million in 2016. (Note: they’ve already done $180 million in the first six months of 2017.) With revenue growing greater than 30% and nearing $500 million, the momentum is there and we are still early. Repeat, we are still VERY EARLY on this company. Where is this company’s growth going to stop? (Hint: it isn’t.) Take a hard look at owning this company.
Bristol-Myers Squibb (BMY: $62, flat)
At Bristol-Myers, patients are at the center of the universe. The company’s vision for the future of cancer care is focused on researching and developing transformational Immuno-Oncology (I-O) medicines for hard-to-treat cancers that could improve outcomes for these patients. The I-O opportunity is a breakthrough for cancer, and Bristol is a key player.
Bristol is in fact leading the scientific understanding of I-O through its extensive portfolio of investigational compounds and approved agents. The company’s differentiated clinical development program is studying broad patient populations across more than 50 types of cancers with 14 clinical-stage molecules designed to target different immune system pathways. Bristol continues to pioneer research that will help facilitate a deeper understanding of the role of immune biomarkers and how patients’ tumor biology can be used as a guide for treatment decisions throughout their journey.
This week Bristol announced some good data on I-O drugs. This reaffirmed the market’s confidence is Bristol’s ability to execute on the important I-O market opportunity.
BMR Take: Bristol is a top franchise is the Drug industry. The stock has been badly beaten down for about a year but now is coming back, as top franchises always do. With nearly $4 of EPS potential, this drugmaker is a screaming deal in our view.
Amazon (AMZN: $987, up 2%)
The future is here and guess what? Amazon created it! Alexa, Amazon's voice-activated digital assistant for the home, has learned a new skill -- dispensing medical information about first aid from one of the best-known names in medicine, Minnesota's Mayo Clinic.
The information is accessible by speaking to the Amazon device, which users appreciate if they're busy doing something with their hands, like putting aloe on a burn or examining someone who has stopped breathing.
The device advises in its robotic-female voice to begin cardiopulmonary resuscitation for one minute and then call 911 if the person is unresponsive from suffocation. If the user asks for it, the device will go on to discuss specific techniques for doing CPR on an adult, child, or baby.
BMR Take: Amazon is the innovation machine and to see Echo break through into the medical field is a just another key data point about the possibilities of the future. With over $20 of future EPS power or more, Amazon is unlike any stock ever in the history of the world. We are strong believers in the future of Amazon.
Google (GOOG: $920, down 1%)
There is talk that Google is considering making a $1 billion investment in Lyft to take on Uber. This could be exciting!
Google and Lyft can really help each other. With the possibility of autonomous driving being central to its future, Lyft badly needs a solution. Google is considering putting up to $1 billion into Lyft in a move that would see it become one of Lyft’s biggest shareholders at a crucial time.
Lyft is far smaller than Uber and when it comes to market places that can be fatal. For money to be made, generally, one player needs to have 60% share or be twice the size of its nearest competitor. In the US, Uber has already achieved this hallowed status and in theory should be able to crush Lyft simply by applying sustained competitive pressure until Lyft runs out of money.
Google could be the solution for Lyft to emerge as a fierce Uber competitor.
BMR Take: Google is a tech giant, a robust franchise, and reasonably priced versus EPS of $40. The all-time high is $988, set in early June, so it is off 7% from that high. With driverless cars a key part of the future economy, and Google paving the way, we are excited about what a Lyft investment could mean and think the general market will be too if the deal is announced. UBS Securities has a $1,080 Price Target with a $1,410 upside. We have $1000 as our Target, but will raise it when it hits.
Square (SQ: $28.50, up 7%)
Square is at all-time highs. Last week we talked about Square getting into banking. That was all the buzz. This week Jack Dorsey, CEO, is talking a hard look at blockchain technology and what it could mean for Square. This company is on the leading edge of innovation all the time.
You’ve been hearing or reading a lot about blockchain but you probably still aren’t entirely certain how to define it. You’re not alone. It’s something that Jack Dorsey, the CEO of Square (and CEO of Twitter), describes as the “next big unlock”.
Blockchain is often defined as a ledger that enables secure, encrypted transactions. Some financial and technical experts have described it as analogous to the early days of the internet: it’s a framework or backbone for transactions.
But Dorsey also went beyond that interpretation of it, adding that the ability to “distribute and decentralize the ledger enables proof of work, and proof of one entity, in an untrusted network.” “Even if there’s a hostile entity or a mistrust in the network,” Dorsey continued, “we can still account for value creation and the transfer of values as well.”
BMR Take: If Square can get blockchain right, the company could take on the likes of Visa and/or MasterCard to change the world of payments how we know it. How exciting. This is sending the stock to new all-time highs and we are only at the beginning stages of Square’s life as a publicly traded company. Note that JP Morgan and Bank of America as well as Goldman Sachs are experimenting with blockchain. With a market cap of just $11 billion we see very big times ahead for this innovative company. And they could be bought out for $15-18 billion in a whisker by one of the big boys.
Upcoming Economic News
Housing Starts
Tuesday, September 19th, 8:30 AM ET
Period: August
Consensus: 1,175,000
Prior: 1,155,000
Fed Funds Target Upper Bound
Wednesday, September 20th, 2:00 PM
Consensus: 1.3%
Prior: 1.3%
Leading Indicators
Thursday, September 21st, 10:00 AM
Period: August
Consensus: 0.20%
Prior: 0.30%
BlackRock Consensus Ratings on the Street
(BLK: $429, up 3%)
4 Hold Ratings, 8 Buy Ratings
Consensus Price Target: $448
9/08/2017 Barclays $475
8/18/2017 Jefferies Group $440
7/18/2017 Morgan Stanley $476.
7/18/2017 Deutsche Bank $455
7/14/2017 Keefe, Bruyette & Woods $440
6/19/2017 Bank of America Corporation $450
BMR Take: Market cap is $69 billion. Huge. They manage over $5.7 trillion of assets. HUGE. All-time high is $443 set in July. We think this is easily breakable. The Street likes this stock. We like this stock.
Cloudera Consensus Ratings on the Street
(CLDR: $18.38, down 12%)
4 Hold Ratings, 4 Buy Ratings
Consensus Price Target: $23
9/8/2017 J P Morgan Chase $24
9/8/2017 Morgan Stanley $19
9/8/2017 Stifel Nicolaus $24
5/24/2017 Bank of America $23
5/23/2017 Raymond James $23
5/23/2017 Deutsche Bank $25
BMR Take: Bad week for Cloudera. The stock got hammered. They announced a follow-on offering of shares from the IPO they did in April. This is normal stuff – some shares will be sold by insiders and some by the company. No details yet. We are not concerned, although it would be nice to see the stock at $25 where it ought to be. Remember, this is a tiny company. Market cap is $2.4 billion – a puppy. Very speculative. But we are believers.
Andeavor (ANDV: $102, up 1%)
We have a note we made from a research report from UBS Securities.
“The recent Western Refining merger is expected to generate $350-
$425 million in synergies.”
Their Price Target is $116, with an upside to $125. Ours is $110, but if it hits that we would consider raising it.
Cryptocurrencies Update
Bitcoin had a wild week, closing at around $3500 on Friday. Bitcoin doesn’t really “close” as it trades 24-7. Bitcoin began a colossal price reversal on Tuesday that finally culminated with the latest $2,972 weekly low, which ended up becoming the new monthly low as well. The massive 32% reduction, was followed by a flurry of negative news coverage with China shutting down the biggest bitcoin exchange in the country and Jamie Dimon of JP Morgan saying that this is the biggest bubble since tulip bulbs in 1637. He said that the cryptocurrency "won't end well." Dimon was speak at a conference presented by CNBC and Institutional Investor.
Bitcoin hit $4,980 all-time high on September 1st. It plunged about 13% Thursday after one of the biggest exchanges in China said it will shut down its operation. Bitcoin surged more than 10% on Friday, but was still on track for a big weekly loss during a tumultuous period of trading.
JPMorgan's global head of quantitative and derivatives strategy, said in a note on Wednesday that in addition to being volatile and difficult to value, "another worrying aspect of cryptocurrencies are some parallels to fraudulent pyramid schemes."
But to be sure, many see bitcoin as a huge opportunity.
Former JPMorgan strategist Tom Lee said the cryptocurrency could surge another 600% in five years. "It's not worth it to look at bitcoin two months, two weeks ahead," Lee argued, saying he still believes each bitcoin will be worth $25,000 in five years.
We at The Bull Market Report find this whole story fascinating and have been following bitcoin and Ethereum closely. If you would like to know more about it, please write us here: Info@BullMarket.com.
Opko Health Update
Opko (OPK: $5.97) had a wild week. It rallied the first three days of the week, closing at $6.47 on Wednesday. Then it got hammered on Thursday and was flat on Friday. We have seen no news to account for this, but please note that this one is quite speculative. Opko has had to deal with disappointment on multiple fronts, including less-than-encouraging results in clinical studies and slow starts for approved drugs. Yet even though several institutional investors have thrown in the towel and given up on the company, Opko has strong potential for sales of its chronic kidney disease treatment Rayaldee to pick up. Moreover, Opko's diagnostic testing business has good prospects as well. Although the company hasn't executed well yet, some are optimistic. We have high hopes for the company but it is testing our patience.
The High Yield Investor
By Michael Foster
After a lot of good weeks, we’ve had a week that was - well, slow.
Almost everything in the Bull Market Report high yield portfolio ended the week flat, as investors focused on the big headlines (North Korea, Irma, etc.), which actually had minimal impact on any high yield investment.
This might be surprising, so let’s talk a little bit about why the big macro events aren’t moving the needle. You’d be right to wonder why municipal bonds, especially bonds in Texas, Florida, and nearby weren’t negatively affected by the hurricanes that have caused still undetermined billions of dollars of damage and human misery. In light of that tremendous destruction, municipal bonds barely budged. Even bonds issued in the hardest hit areas were unaffected. To take one example, Miami’s transit authority issues bonds are backed by the revenue received from toll roads, parking lots, and so on. Surely less travel to the city and less use of parking lots by tourists due to the storm will hit revenue and thus put these bonds at risk - yet their prices barely budged.
The reality is that municipal bond issues use a combination of insurance and risk management to plan for major catastrophes, especially in catastrophe-prone areas like southern Florida. The storms were severe, but Florida financiers and civil servants plan for these things as part of their regular work. So while the timing of the storms was a bit of a surprise, the reality of hurricanes hitting Florida every once in a while is priced into the municipal bond market.
Thus muni funds continue to have a strong year after last week’s relatively small price movements. Nuveen AMT-Free Municipal Credit Fund (NVG: $15.70, down -1%) took a very slight hit, but that was counterbalanced by the small rise in Invesco Municipal Trust (VKQ: $12.96, up 1%). The most important lesson to learn, by far, is that big catastrophic events don’t really hurt muni bonds - at least, not in the way that the mainstream financial press would like you to believe (since, after all, they’re desperate for controversy and know fear-mongering headlines get clicks and pageviews).
Moving on to taxable income funds, we saw more quietness among AllianzGI Equity & Convertible Fund (NIE: $20, up 1%) and PIMCO Dynamic Income Fund (PDI: $30, up 0%). There are a couple of things to note about both of these funds with regards to their pricing. The income stream for both remains somewhat reliable, although the Pimco fund’s net investment income has dropped significantly in 2017 (this, however, is being counterbalanced by an increase in NAV growth). What investors should focus more of their time on is the pricing. The Pimco fund is now priced at a 4.8% premium to NAV, which is significantly lower than the 10% premium that it reached earlier this year. A big drop-off in the premium this summer has caused that pricing to go closer to its historical norm, and a small premium to NAV is a lot more tolerable than 10%. For that reason, investors who like the Pimco fund and have been waiting to buy more are finally in a position where they can seriously consider adding to their positions. However, if you can wait for a discount to show up, you might be wise to wait for a bigger market sell-off to provide that opportunity.
As for the AllianzGI fund - its discount to NAV has been steadily disappearing throughout 2017, and we’re now at slightly less than a 9% discount, which is a relatively high price for the fund relative to its historical average. That means investors should be a tad more cautious about adding to their position right now, but the fund is far from a sell. We’ll need to see discounts of 5% before offloading this fund makes any sense at all. In reality, the fund’s continued NAV appreciation (NAV is up 6% even after paying its 7.5% dividend consistently over the last year, giving a total NAV return of over 13%) demonstrates that the fund’s management knows what they’re doing and are able to provide a stable, reliable income by picking the right stocks and convertible bonds and handing profits to shareholders. At the end of the day, we can’t really ask more from a fund.
So with all of the humdrum, low level action of the last week, let’s discuss the two stocks that actually had pretty big moves. The first is Digital Realty Trust, Inc. (DLR: $118, down -3%), which closed its DuPont merger and proceeded to fall significantly thereafter. We’re pretty much off the 52-week high hit on Monday, so it’s hard to say whether the decline is a result of profit taking or a lack of faith in the value of the merger. We see no reason to be skeptical of the merger, so we are not changing our view on the stock.
There is, however, one other issue with cloud-based REITs like Digital Realty - earlier this week, a Silicon Valley venture capitalist gave a presentation arguing that server size was about to decline significantly due to semiconductor and other technological innovations. Obviously, this will be bad for datacenter stocks - or is it? Considering the explosive growth in data storage and users’ tendency to fill up datacenters faster than the space needed to store data shrinks, demonstrates that this is a pretty specious reason to be bearish on datacenter stocks.
Finally, AstraZeneca (AZN: $32.50, 1%) took a bit of a hit earlier this week on little news. Again, this seems to be a bit of profit taking, considering the significant rise in the stock from a month ago. There’s little news about the company’s product pipeline or balance sheet to indicate caution, so we’ll wait and see how the stock performs next week before concluding this price movement is anything more than noise.
Good Investing,
Todd Shaver, CEO, Editor and Founder
The Bull Market Report
Since 1998
September 4, 2017
by Todd Shaver | Sep 4, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
We sadly observed Hurricane Harvey devastate Texas this past week. 52,000 people are in shelters as thousands of homes are flooded. The state of Texas ranks as the 2nd largest contributor to GDP in the US trailing only California and ahead of New York. So the economic impact has yet to be fully seen. Real estate portfolios caught without flood and business disruption insurance may be seriously in trouble. Auto sales are already seeing a sizeable dip. Chemical plants are shut down. We could go on and on. What an unfortunately troublesome situation to watch and one with the potential for lingering negative impacts for months to come.
In other news, lawmakers decide to give bipartisanship a shot on healthcare. The Senate Health Committee will turn its attention to bipartisan legislation aimed at shoring up Obamacare markets for 2018. The drift toward compromise follows high profile repeal failures, but still faces an uphill battle as many Republicans have spent years railing against the health law. Staff has been working on it over the summer break and there is general agreement that insurer payments will continue, though specifics are sparse.
Separately, we have yet to see formal action following Trump’s opioid emergency declaration. No formal paperwork has been filed and no new policies have been announced. This appears to be new territory for the government as the national emergency designation is typically used for relief of temporary issues like natural disasters rather than chronic problems like opioid abuse. In addition, administration officials seem to have been caught off guard by Trump's statement. The White House has indicated that it is considering all options for action. Why should we care? This is a big deal for labor force participation, which is at historical lows. If we can get everybody back to work contributing to our economy and off drugs, that is the path to 3.0% GDP growth versus where we are now at 1-2%.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks where we think you can still make good money, including: Apple, Gilead, Bristol-Myers, Amazon, and PayPal.
BMR Companies and Commentary
Apple (AAPL: $164, up 1.5%, all prices are for the week)
Apple has officially scheduled its first-ever event in the company's Steve Jobs Theater, a September 12th invitation-only press conference expected to reveal the latest iPhones and possibly a revamped Watch and Apple TV. The company emailed invitations Thursday that read "Let's meet at our place," with an picture of an Apple logo in red, white and blue. The event, hosted at the company's new spaceship-style Apple Park headquarters is scheduled to start at 1 PM ET. For several years, Apple has revealed its latest iPhones in September, in time to promote them for the holiday season. This year, 10 years after the first iPhone hit the market, Apple is widely expected to reveal the iPhone 8, and the rumor mill has already churned out reports that the device will have a larger OLED* screen and a virtual home button. There are also reports Apple will reveal a Watch that has its own cellular connection and an Apple TV that adds 4K UHD. This is likely it—the big event for Apple’s new iPhone launch! We will all be watching closely.
* Organic light-emitting diode. An OLED display works without a backlight; thus, it can display deep black levels and can be thinner and lighter than a liquid crystal display (LCD). In low ambient light conditions (such as a dark room), an OLED screen can achieve a higher contrast ratio than an LCD.
The main risk to keep an eye on is prices. The argument is that costs are getting so high on new smartphones that customers will not be willing to keep paying up to get them. If this is so, we will see margin compression and perhaps fewer sales by Apple.
Apple Consensus on the Street
Apple was upgraded by analysts at Cleveland Research from a “neutral” rating to a “buy” rating in a report released on Tuesday, and they raised their price target to $197.
On the Street there are 10 Hold Ratings, 39 Buy Ratings, 1 Strong Buy Rating
9/1/2017 Royal Bank Of Canada Target: $180
8/29/2017 Cleveland Research Target: $197
8/24/2017 Bank of America Target: $180
8/24/2017 Drexel Hamilton Target: $208
8/22/2017 Canaccord Genuity Target: $180
8/14/2017 Sanford C. Bernstein Target: $175
BMR Take: Remember the big story for Apple is their services business. They have all these iPhones out there in use by a huge customer base. Can they now get more money from these customers through services? The iPhone 8 is a key part of the strategy. We note that Apple has $260 billion in cash now, which is the equivalent of $50 a share, and greater than 30% of the stock price. This is UNPRECEDENTED in the history of Wall Street. Apple remains an exciting investment opportunity. The services business is projected to double in revenue to $50 billion over the next several years. The Services business is much more profitable than hardware so the impact to earnings is even better. Don’t sell a share. We believe Apple has a lot more room to go on the upside.
Gilead Sciences (GILD: $84)
We removed Gilead from our Healthcare portfolio in February after holding them for a year with poor results. Things have changed dramatically since that time as management has tackled various issues head-on, so we give you an update as things have changed even more this past week.
Gilead announced a big acquisition. Gilead will acquire Kite Pharma for about $12 billion in cash; it was unanimously approved by both the Gilead and Kite Boards of Directors and is anticipated to close in the fourth quarter of 2017. The transaction will provide opportunities for diversification of revenues, and is expected to be neutral to earnings by year three and accretive thereafter.
The acquisition of Kite establishes Gilead as a leader in cellular therapy and provides a foundation from which to drive continued innovation for people with advanced cancers. We are greatly impressed with the Kite team and what they have accomplished, and believe they are on the cutting edge of cell therapy that will be the cornerstone of treating cancer. The field of cell therapy has advanced very quickly, to the point where the science and technology have opened a clear path toward a potential cure for patients. The two company’s similar cultures and histories of driving rapid innovation in order to bring more effective and safer products to as many patients as possible make this an excellent strategic fit.
BMR Take: Gilead is losing two major drugs this year with big revenues due to the expiration of their patents and was the reason we removed the stock earlier this year . Over the past several years they were among the largest sellers in the history of Healthcare so replacing them will be a tough uphill climb. Could Kite provide a way to do it? We will see.
Bristol-Myers Squibb (BMY: $60, up 3%)
This week Bristol-Myers will announce more than 60 presentations, including seven late-breaking abstracts, from its Oncology portfolio featured at the European Society for Medical Oncology 2017 Congress in Spain. Presentations of data from company-sponsored studies, clinical collaborations and research will explore the potential role of Opdivo (nivolumab) as monotherapy and in combination with Yervoy (ipilimumab) and with relatlimab, a fully human monoclonal antibody that targets lymphocyte activation gene-3 (LAG-3); or with chemotherapy in 13 types of cancer.
All this news matters a lot because healthcare investors love new data! We are seeing the stock pick up some momentum getting ready for what is likely to be a wave of good news.
BMR Take: We are still optimistic Bristol-Myers could be a take-out candidate. Activist investor Carl Icahn is in the stock and pushing for change. We believe we could see a 25-50% premium from today’s price if a sale gets done. Further supporting our view, we note Jana Partners is now also building a position in the stock. Jana had a big stake in Whole Foods, and was taken out by Amazon this past week as you know.
Amazon (AMZN: $978, up 4%)
Amazon announced 3,000 more jobs coming to Ohio. This follows news a few weeks ago about doing a major facility in New Jersey. We continue to highlight the Amazon machine because this single company alone is now a major driving force behind the economy.
The internet retailer received approval on Wednesday for state tax incentives for two distribution operations in Ohio. The project approved by the Ohio Tax Credit Authority will create 2,000 jobs. The company said it will invest $100 million at the site, which eventually will result in a 855,000 square-foot facility. The second distribution-center project, will result in an estimated 1,000 jobs if the company goes ahead with the project. Amazon had no presence in the state until recently.
BMR Take: The Amazon powerhouse is steamrolling the real economy and the stock market. With over $20 of EPS potential by 2020 according to analyst consensus estimates, we see a lot of potential ahead.
We noticed that the stock is on a little roll lately. The stock hit a closing high of $1052 a month ago in late July and then proceeded to drop over $140 to the low 900s. But this week the stock was up a little bit every day until Friday when it took a breather. We have watched these high-priced stocks for years and many times it is human nature to not be able to bring yourself to buy a stock that is almost $1000 a share. But we always mentally build in a stock split. Say 10-1 in Amazon’s case. If the stock were a $98 stock, would you buy 100 shares? Sure you would. So we just look to buy 10 shares for $980. Same difference. If you think the stock is going to $2000 a share in the future like we do, 10 shares here, 20 shares there, and 30 shares beyond, adds up to real money.
PayPal (PYPL: $61, up 2.5%)
PayPal customers in the U.S. can now earn cash back on every purchase online and in stores with the recent launch of the new PayPal Cashback Mastercard issued by Synchrony Bank. The PayPal Cashback Mastercard, designed exclusively for PayPal members, offers cardholders 2% cash back every day, on every purchase – everywhere Mastercard is accepted.
Unlike other rewards credit cards, there is no annual cash back limit, no minimum redemption amount, no restriction on how to spend cash rewards and no expiration. The PayPal Cashback Mastercard offers all the security and convenience expected from PayPal, plus all the traditional benefits of a Mastercard. All accounts are automatically added to the member’s PayPal wallet to simplify checkout and provide peace of mind.
The introduction of the PayPal Cashback Mastercard with Synchrony Bank continues PayPal’s commitment to provide customers with rewarding product experiences and a range of innovative credit options. By providing a simple way for people to earn cash rewards for the shopping they’re already doing, the PayPal Cashback Mastercard will give consumers yet another reason to shop with PayPal.
BMR Take: PayPal has 200 million customers on the way to over 1 billion longer-term (after all, Facebook has over 2 billion, showing the possibilities for a global internet-based business model). With EPS closing in on $3 by 2020, and EPS growth moving along in the mid-teens, we see growth at a reasonable price here in the stock and like it a lot!
Nutanix (NTNX: $22, flat)
We reported via News Flash on Friday on the stellar earnings report the company issued on Thursday. The stock shot higher on Friday, hitting $24, but settled at $22, flat for the week. We’re not traders as you know, but long term investors, and we have seen this many times in our career. We are going out on a limb here and will say that the stock will move higher from here over the coming weeks and months.
We mentioned the high level of sales that were booked but not reported as revenues – the backlog. Management indicated that billings growth was 40% year over year and that the company continued to build up a significant backlog of deals that booked but did not ship in the quarter. The sales transition toward large enterprise is progressing nicely. Management's next quarter guidance implies billings growth of 25% YoY compared to consensus of 17%, due to the significant backlog build.
To recap:
Fiscal 4Q 2017 Financials
Revenue: $226 million, up 62% year-over-year from $140 million in 4Q16
Net Loss: $50 million, compared to a net loss of $47 million in 4Q16
Operating Cash Flow: $6 million, compared to $2.5 million in 4Q16
Cash and Short-term Investments: $350 million, up 90% from 4Q16
Deferred Revenue: $525 million, up 77% from 4Q16*
Free Cash Flow: $(6.5) million, compared to $(6.5) million in the fourth quarter of fiscal 2016
Billings: $289 million, growing 40% year-over-year from $207 million in 4Q16
BMR Take: We added the stock in May at $17.45 and have a Target of $30. Our Sell Price at $14 is way too low, so we hereby raise it to $19. This was a great quarter and if Wall Street doesn’t wake up to the potential of this company, we would be very surprised.
Upcoming Economic News
Domestic Auto Sales
Monday, September 4th, 8:00 AM ET
Period: August
Consensus: 4.6 Million
Prior: 4.5 Million
Trade Balance
Wednesday, September 6th, 8:30 AM
Period: July
Consensus: -$44.5 billion
Prior: -$43.6 billion
Initial Claims
Thursday, September 7th, 8:30 AM
Period: 09/02
Consensus: 240,000
Prior: 236,000
Consumer Credit
Friday, September 8th, 3:00 PM
Period: July
Consensus: $15.0 billion
Prior: $12.4 billion
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
Over the previous weekend, these were the economic headlines:
--- Robust Retail Sales
--- Disappointing Durable Goods
--- Strong Business Inventories
--- Uneven Industrial Activity
--- Mixed Housing Data
Economic data suggests that things are good, but not great.
Fed Chair Janet Yellen's signaling of continued restraint on monetary policy at Jackson Hole triggered another rally in US stocks last week. This extends the current bull market to 102 months, surpassed in length only by the 113-month run leading up to the dotcom crash. Skepticism over valuations is even higher now with a record 46% of investors believing equities are overvalued.
While the bull market may be entering the later stages of the cycle, UBS strategists believe it can run further based on these observations:
--- The earnings yield on the S&P 500 is 4.8% compared with a yield of 2.17% for 10-year Treasuries.
--- At 18x, current market PE ratio is near long-term averages. Historically when valuations have been in an 18x to 23x range, the MSCI AC World Index has returned 6% over the subsequent six months (versus an overall average of 5%). And relative valuations of equities also suggest long-term outperformance versus bonds.
--- Corporate earnings growth remains robust, at 12% in the US and around 10% in the Eurozone in the last quarter. Synchronized global growth should continue to support this, with all 45 OECD economies on track to expand this year.
There are, however, some caution flags appearing here and there. We prefer to look at price-to-sales ratios rather than PE's, and they haven't been this high since the peak of the dotcom bubble in 1999. This means that new investors are paying more for every dollar of sales than at almost any time since the dotcom bust. However, if sales continue to grow as expected this ratio will normalize to some degree. Put another way, stocks are priced almost to perfection and if the earnings growth story were to falter, it could cause some real volatility.
VMware (VMW: $107, up 5%) Has 500,000 Customers
BMR Take: Think about this. Half a million customers. Can you imagine? We think this is just fabulous. We’re up 30% since we added them in January at $83. What a great company. Our Target is $108 which it hit Friday, an all-time high (not counting the euphoria 10 years ago when they went public). With a market cap of $44 billion, and Dell Technologies being the principal owner (80%+) we think very highly of this company. So we hereby raise our Target to $120 and raise the Sell Price from $90 to $100.
The Blackstone Group (BX: $33, up 4%) had its Target Price set at Credit Suisse Group at $45
A Few Wall Street research firm targets
8/30/2017 Credit Suisse Group $45
7/25/2017 Morgan Stanley $40
7/21/2017 Deutsche Bank $33
7/14/2017 Keefe, Bruyette & Woods $37
7/14/2017 Oppenheimer Holdings $38
5/28/2017 Citigroup $41
Blackstone Considers IPO of Gates Corp.
Blackstone Group is considering an initial public offering of Gates Corp. that could value the auto-parts maker at as much as $9 billion. Its products include belts, hoses, industrial power transmission, fluid power, and automotive. The company was founded by Charles Gates in 1911 and is headquartered in Denver. In 2014, the company was acquired by Blackstone in a deal worth $5.4 billion.
The private-equity giant is in the early stages of laying the groundwork for the possible offering, according to people familiar with the matter. The business could be worth $8 billion to $9 billion, one of the people said. It isn't clear whether that includes debt.
BMR Take: We can’t tell you how good this company is. Well, maybe we can: This company is great! Look at the wealth being created by this firm. In 3-4 years in this one deal alone, they have created $3-4 billion of equity. Absolutely amazing. Our Target is $35 but we are dying for the stock to hit this price so we can raise it to $42. This is a value stock like no other.
The High Yield Corner
By Michael Foster
Significant news came this week from AstraZeneca (AZN: $30, up 3%), helping the shares rise solidly by the end of the week. The biggest news is the company’s presentations at a conference in Spain that will demonstrate the company’s phase-3 study of imfinzi for non-small cell lung cancer and tagrisso for. EGFR cancers.* The science is complex and far for non-specialists to understand without a lot of deep reading, but the market is a great place because it prices in that knowledge instantaneously, which is why AstraZeneca shares rose 2% on the news.
* EGFR is short for estimated glomerular filtration rate. The EGFR is a number based on your blood test for creatinine, a waste product in your blood. It tells how well your kidneys are working.
Another intriguing tidbit from AstraZeneca: the company announced on Tuesday that it was recruiting Takeda Pharmaceutical to work on an antibody for Parkinson’s disease treatment. Again, more exciting developments that prove the mega-pharma company’s pipeline is very healthy. Remember a year ago when this was a primary concern on the company and thus the stock? Those concerns are gone now; instead, investors have finally realized that there is tremendous value in this company and it is still innovating; thus it’s no surprise shares are up 10% in 2017 so far. Paying a solid 3.1% dividend, we can see some dividend increases in the months and years ahead. We’ve got a $42 Price Target on the stock and would hope to see this level sometime next year.
Elsewhere in The Bull Market Report High Yield portfolio we see green across the board. There’s only one exception: Invesco Municipal Trust (VKQ: $12.93), which ended the week flat. No surprise; municipal bonds are a low volatility asset class, and there’s not really any news in the municipal bond market to warrant a massive jump. That includes the latest tragedy in Texas. While large storms and ecological disaster might intuitively seem like they will hurt municipal bond markets (lower economic activity should mean lower government revenue and thus higher default risks), it’s important to remember that this “common sense” is actually false. (Often, the common sense view doesn’t quite work in finance.) In reality, credit agencies do not downgrade bond issuers faced with economic disasters; furthermore, the lower revenue may make the state’s budget tighter in the short term, but the risk of that hurting municipal bonds is negligible. Additionally, natural disasters rarely result in massive new bond issuances to fund repairs, so it’s not like existing bonds will get priced out by new issues.
We saw Nuveen AMT-Free Municipal Credit Fund (NVG: $15. 64, up 1%) have a solid showing. Also a nice surprise from Nuveen this week: the company announced dividends for all of its closed-end funds, but did not lower dividends on NVG - although many other funds did see their distributions decline slightly. Again, good news for municipal bond investors long this fund.
The Bull Market Report’s other closed-end fund picks also ended the week in the green and announced distributions that were in-line with previous dividends. AllianzGI Equity & Convertible Fund (NIE: $20, up 1%) announced that its 38 cent quarterly dividend would continue at the same level, and PIMCO Dynamic Income Fund (PDI: $30, up 1%) also announced its monthly dividend would stay at the same level. These funds are paying 8% in income, year-in and year-out, while also seeing their share prices rise. Closed-end funds are typically income vehicles that aren’t often traded for short-term capital gains, but both funds have given investors that opportunity this year. AllianzGI is up 10% year-to-date and Pimco Dynamic is up 14% year-to-date - extremely impressive returns for such diversified funds. And the income does not look to be threatened anytime soon, so investors can continue to hold them with confidence.
Now, let’s turn to REITs. Digital Realty Trust (DLR: $118, flat) announced that its COO was leaving the company in September. Markets shrugged; while he obviously has done well for the company in the past, there’s no reason to assume he’s irreplaceable. We’re sure that his replacement will be skillful.
Despite little news elsewhere affecting REITs, we saw price gains for Omega Healthcare Investors (OHI: $32, up 3%), Government Properties Income Trust (GOV: $18.50, up 1%), Apollo Commercial Real Estate (ARI: $18.18, up 2%), Ventas (VTR: $69, up 1%), and Welltower (HCN: $74, up 2%).
Also, there wasn’t any real news on Kimco Realty (KIM: $20, flat), but it’s interesting to note that this retail-focused REIT has had a bit of a resurgence lately thanks to the surprising strength in retail. (Note that we removed Kimco from our portfolio in May, but we wanted to give you an update.) If you remember, several weeks ago in this column we wrote at length at how the “death of retail” cliché was really more about shock financial journalism trying to get clicks from disaster-starved readers and had little to do with the reality of our economy. Well, we were right. In addition to beats from Macy’s, Dollar General, Target, Wal-Mart, and several other retailers, even the near-death dogs like Sears Holdings and Abercrombie & Fitch impressed the market with their quarterly results, beating expectations. Retail is not the healthiest sector on Earth, but it isn’t dead or dying. But Kimco was priced for a dying retail sector. So what does that mean? Kimco shares are up 11% in the last three months.
We want to go on record with another prediction that drives bullishness on retail REITs like Kimco. Amazon’s recent acquisition of Whole Foods and their price drop at the supermarket is going to drive retail sales for two reasons. Firstly, Amazon Prime members will be incentivized to leave their computers and shop in person more. Secondly, more people can now afford Whole Foods and will shop there. That also means people are going to spend more time shopping at auxiliary stores adjacent to Whole Foods. This is a rising tide that is going to lift many boats, which is why buying retail REITs right now makes a lot of sense. Check back in after about six months and see if we’re right.
Good investing,
Todd Shaver, CEO, Founder and Editor
The Bull Market Report
Since 1998
August 21, 2017
by Todd Shaver | Aug 21, 2017 | Monthly Newsletter Daily 12pm if new
The Weekly Summary
It was rough week with lots of domestic and international issues popping up, producing anguish. In particular, nine CEOs turned their back on Trump. It all started when first Merck’s Kenneth Frazier, then Under Armour’s Kevin Plank and Intel’s Brian Krzanich stepped down from a White House business group set up to advise Donald Trump. While none mentioned the president, Frazier, one of the country’s most-prominent black chief executive officers, quit the council as Trump was being assailed for failing to quickly condemn white supremacists for deadly violence at a rally Saturday in Charlottesville. Frazier said he was acting on a “matter of personal conscience.” Trump shot back on Twitter Tuesday morning, saying, “For every CEO that drops out of the Manufacturing Council, I have many to take their place.
Then on Wednesday President Trump rushed to announce that he was shutting down the two advisory councils of business leaders, after the members had decided on their own to disband in the wake of the president’s comments on the events in Charlottesville. Of course, these kinds of advisory councils seldom accomplish much of anything.
Look, all this drama will pass. The market will move on. But there is definitely an unsettled feeling out there. It is good that the market showed signs of turning around at week’s end, but we did see a few glimpses of nasty selloffs in a few trading sessions this week. It was a rough week. If you are super worried, then we suggest you take some profits off the table. There are many choices for you to move your money to in the High Yield and the REIT portfolios. These are much more secure, stable stocks with very nice dividends that you can enjoy and sleep better with.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks/funds where we think you can still make good money, including: high yield equities like Annaly and larger caps like Apple, Google, Microsoft, Home Depot, and Visa,
BMR Companies & Commentary
Annaly Capital Management (NLY: $12.34, up 1%)
Annaly recently reported respectable earnings at the beginning of the month. Here are our thoughts on the outlook for the rest of the year and what to watch. Many people are cautious given Annaly’s fixed-rate agency exposure and the current valuation. We know that the company has a set yield on government guaranteed paper. So while there is no credit risk other than the full faith and credit of the United States, there is interest rate risk – we know this and accept this. The newer investments are coming on at lower rates with higher yielding holdings rolling off. And we know that if short term rates rise the current portfolio valuation will be sensitive to the movements. We are likely to see some pressure on Annaly’s business model.
But what can the company do? They can rotate into higher yielding MBS* investments. They can increase leverage. They can do a number of things to cover the dividend. Look, if you think a business model is flawless without risk then you don’t know it well enough. Annaly has rsk to higher rates, but higher rates are ultimately good for the company. And investors are missing all the offsetting possible moves management can take. Remember, this is a company that is 18x the size of the median mortgage REIT by market cap, has outperformed the S&P 500 by 3x since its IPO for total return, and has successfully raised $1.5 billion in new capital this year. They know the world they live in and have survived and thrived for 20 years.
* Mortgage-backed Securities
BMR Take: A Director at the company just bought 13,500 shares. Another one just bought 17,700 shares. We love love love to see that! We are looking at a $0.30 dividend paid quarterly for the time being which is good. The stock looks compelling based on this income stream, producing a dividend over 10%.
Apple (AAPL: $158, flat) is Getting into Programming
Apple has set a 12-month budget of $1 billion to develop original programming. Apple could buy and produce as many as 10 TV shows. Apple's first two efforts -- Planet of the Apps and Carpool Karaoke -- have not been warmly received by critics. Apple executives are talking with Hollywood agents about shows that Apple can buy.
BMR Take: Note that Apple has $260 billion in cash now, and with a market cap of $813 billion cash is 32% of the stock price. So $50 of the stock price is in cash. This is UNPRECEDENTED in the history of Wall Street. Apple remains an exciting investment opportunity. The services business is projected to double in revenue to $50 billion over the next several years. The Services business is much more profitable than hardware so the impact to earnings is even better. Don’t sell a share. We believe Apple has a lot more room to go on the upside.
And how about Apple's performance last week in a very tough week for equities.
Google (GOOG: $911, flat)
The Cloud is a huge opportunity in technology and all the industry giants are fighting to grab their fair share. Let's stipulate up front that Amazon Web Services (AWS) remains the top choice for most companies that are thinking about moving their data and software into cloud data centers. Having said that, however, Amazon's cloud is no longer the only option that companies consider. For example, those companies wanting extensive analytics are taking a good hard look at the Google Cloud Platform. And many firms are hedging their bets by using multiple cloud providers to avoid being stuck with one down the road.
While AWS is still the largest cloud provider by far, Microsoft and Google are coming on strong. AWS's revenue growth appears to be slowing, in part because it's hard for such a huge business - AWS is expected to produce $16 billion in revenue this year - to grow as fast as its younger, smaller incarnations. Startups are considering alternatives now for several reasons: standard cloud computing and storage services from the three top players are all seen as competitive, and no one thinks any of the three major cloud contenders is going away. Basically, AWS, Microsoft, and Google are seen as safe bets.
BMR Take: Google took a hit on the recent earnings report. Buy the dip. This company will generate over $40 of EPS in 2018. The stock is far from a stretched valuation.
Microsoft (MSFT: $72, up 1%)
As Internet-of-Things (IoT), artificial intelligence (AI), smart factories and intelligent applications continue to advance, businesses are increasingly turning to these technologies to create new business solutions with greater agility in order to drive competitive advantages. Microsoft launched its IoT Innovation Center in Taiwan last October to spur development between IoT partners and international enterprises and organizations. In September, Microsoft will hold its second IoT Expo in conjunction with the World Congress on Information Technology. Jason Zander, Corporate Vice President, Microsoft Azure, will deliver a keynote on "Leading Digital Transformation and Landing IOT Value with a Strong IoT Partner." Zander oversees the development and global deployment of cloud infrastructure and technology, including Microsoft Azure IoT. In addition to sharing the success of Microsoft's IoT Innovation Center and its partners, Mr. Zander will also provide Microsoft's vision of the development of IoT and in-depth analysis on the integrated application solutions of the world's leading IoT partners.
BMR Take: The Internet of Things is a megatrend. We are going from 10 billion devices connected to the internet to 30 billion. Your hair dryer will be connected to the internet someday. All of this is going to be a huge opportunity for Microsoft. The company is on track to generate $4 of EPS in 2018. The valuation remains compelling.
And note how strong Microsoft was last week in the very rough week on Wall Street. This company is solid.
Upcoming Economic News
Richmond Fed Index
August 22th, 10:00 AM
Period: August
Consensus: 12.0
Prior: 14.0
New Home Sales
August 23th, 10:00 AM
Period: July
Consensus: 614,000
Prior: 610,000
Building Permits
August 24th, 8:00 AM
Period: July
Consensus: 1,223,000
Prior: 1,223,000
Blackstone Entity Merging with Starwood Homes
Invitation Homes (INVH, $23), a portfolio company of The Blackstone Group (BX: $32, down 1%) , is merging with Starwood Waypoint Homes. The combined company, to be called Invitation Homes, will have 82,000 homes. Once the deal closes Invitation Homes stockholders will own about 59% of the combined company. The total enterprise value of the deal is $20 billion.
Invitation Homes, a U.S. home rental company, went public in February. Blackstone will own about 40% of Invitation.
--- The portfolio of homes will be focused on high-growth markets, with nearly 70% of revenue coming from the Western US and Florida.
--- The merger is expected to drive $50 million in annual synergies.
--- Continued strong performance with the combined company experiencing 7% same-store NOI growth in Q217 with over 95% occupancy.
--- The two companies have invested nearly $2 billion, an average of approximately $22,000 per home, in renovations and maintenance, improving resident experience and driving economic growth and job creation in local communities.
BMR Take: Just one more example of the innovation that Blackstone is involved with day in and day out. With a dividend of 7% and a leader (Schwarzman) dedicated 24-7 to moving the stock higher, what is there not to like. $38 billion market cap. Reaching the all-time high of $44 set in 2012 is surely on the horizon.
Tesla Near to Completion of Gigafactory
Tesla ($348, down 3%) has released some interesting pictures and a video of their gigafactory in Nevada, 95 times bigger (sic) than a football field. New drone footage shows how massive Tesla's Gigafactory is.
http://www.businessinsider.com/tesla-gigafactory-pictures-facts-2017-8
In other news, Tesla raised $1.8 billion in a bond sale on Friday, boosting the amount by $300 million to meet demand. The 8-year bonds were priced at a record-low yield of 5.3%. The 5.3% coupon is a record low for a bond of its rating and maturity, according to data compiled by Bloomberg. The sale was managed by Goldman Sachs Group and Morgan Stanley.
BMR Take: The bond market loves this company. We do too. But we know the risk involved here is on the high end of the scale. Tesla is either headed to $400 a share or $300. And one could make an argument for either. If it hits $400 and they continue to ramp up production as promised, then $500 is a great possibility. But if it goes to $300, $200 would be in range. You want a risky stock? Then Tesla is your baby.
Amazon Sells Bonds for Whole Foods Acquisition
Speaking of bond sales, Amazon (AMZN: $958, down 1%) went to the markets for money last week and sold $16 billion of unsecured bonds to fund its $14 billion acquisition of Whole Foods Market. And in a sign of market interest, the longest portion of the offering, a 40-year security, was sold at a yield of 1.45 percentage points above Treasuries.
BMR Take: Now that is just unreal low. The company has $21 billion in cash so they didn’t need to go to the bond market but did because rates are so low. Smart thinking, Jeff. The deal is the 4th largest this year, behind ATT and Microsoft.
Apple Goes to the Debt Market in Canada
Apple raised $2.5 billion at a rate of 2.51% in a 7-year note sale in Canada on Tuesday. At $2.5 billion the financing is the largest corporate non-financial borrowing in Canadian history.
Stocks Cheap Compared to Bonds
We’re Just Sayin’
The High Yield Report
By Michael Foster
We’re continuing to see market chaos and a lot of selling of high quality assets although the macro risks from political uncertainty are dwindling. But the current selloff is very different from the previous week’s in one very telling, interesting way: Not all assets are falling at the same rate, and some are actually doing very well.
To wit, take a look at The Bull Market Report’s Healthcare REIT pick Omega Healthcare Investors (OHI: $31) which had a strong showing this week after some initial weakness, helping Omega Healthcare end the week up 2%.
We’re seeing a lot of reshuffling in the markets, with investors rotating in and out of funds, stocks, and assets as they rise or fall due to market demand. This is the real “random walk” of Wall Street, and it’s a dynamic that makes short term trends for any individual asset to be unpredictable. In reality, we’re seeing a lot of individual investors making choices to buy on the dip - and they’re pulling money from other assets to do so.
What can an investor do in such an environment? Simple: sit tight. If you have extra cash on the sidelines, now is the time to deploy into the high yield picks that The Bull Market Report has been recommending for a long time. Last week we suggested buying more of Omega Healthcare shares; it’s up 2% since then. Now is the time to do the same with other REITs seeing irrational weakness like Sabra.
You can also consider adding Kimco Realty Corporation (KIM: $19.34) and Apollo Commercial Real Estate (ARI: $17.92) to your shopping list after Kimco fell over 3% in the last week and Apollo remained flat. There is no change in these companies FFO to justify the decline, and Kimco’s year-long weakness on the often-touted (and always inaccurate) “death of retail” has made it just that much more compelling. We have discussed at length here why Retail isn’t dead, and how Amazon’s recent purchase of Whole Foods indicates that the shift from pre-dotcom retail to mobile “bricks and clicks” commerce is far more complicated than the simple narrative of dying malls. In any case, Kimco doesn’t buy enclosed malls! It’s a high-quality strip mall-focused REIT, and Whole Foods (and thus soon Amazon) is one of its biggest tenants.
There are more buying opportunities beyond REITs, and investors are keen to lighten up their cash allocation to consider the other funds and stocks in the High Yield portfolio. However, there is one word of caution to consider when it comes to one of our best performing picks, the PIMCO Dynamic Income Fund (PDI: $29). This fund was flat last week.
What’s going on here is a pretty basic misunderstanding of the fund’s future income potential. You see, Pimco releases a monthly scorecard of net investment income (NII) on its website, while also calculating its dividend coverage ratio. And, simply put, the news isn’t good for the Dynamic Income Fund.
In the past, Pimco easily out-earned its dividend and had a tremendous amount of undistributed net investment income (UNII). That’s why the fund paid a special dividend of $1.45 at the end of 2016. By this time last year, the fund had around $1 in UNII, so it was pretty obvious that a big special dividend was coming (we discussed this at the time and estimated a strong special dividend at the end of last year – and nailed it). This year, however, the Dynamic Income fund has only 4 cents in UNII - a pretty tremendous drop from a year ago!
There are a few reasons why the fund isn’t earning as much income as it used to, most of which revolves around the crowding out of great investment opportunities in mortgage backed securities. The MBS is a pretty daunting asset made sinister by The Big Short and growing awareness of their role in the subprime housing crisis. However, that crisis is a decade behind us, and the quality of MBS investments has skyrocketed. While Pimco was one of the few asset managers aggressively buying up these assets in the past, there are now a lot of people wanting to buy them. That means lower yields for the assets, thus weaker income for the Dynamic Income Fund.
However, at the same time, it also means growing market prices for these assets. This fund’s NAV has risen by 10% so far in 2017, largely a result of that constant demand for MBS’s in the market. Last year, the Dynamic Income Fund’s NAV had risen by far less than 1% over the same time period, because the demand for these assets simply wasn’t there. That means that the fund is sitting on a lot of capital gains with dwindling income.
What does this mean for shareholders? In all honesty, it’s hard to tell. The fund hasn’t really faced a crowding out of supply due to strong demand since 2012. It has enjoyed both NAV and income gains in earlier years, and the end-of-year special dividends reflected that. We simply don’t know if the fund’s managers will decide to return some of those capital gains to shareholders or hold on to it and give a massively reduced special dividend at the end of the year.
It seems that the market has begun to price in the likelihood of a lower special dividend. The fund’s premium to NAV has plummeted from over 10% earlier this year to just 3%. It may fall even further as we get closer to December. If Pimco surprises and gives a big special payout at the end of the year, that could reverse quickly. If it doesn’t, we’ll probably see middling price growth throughout 2017.
The risk with the fund is that its Net Investment Income continues to fall and it fails to cover its dividend on a long-term basis. While we’ve seen hints of that now, it’s far too early to conclude that this risk is really here and it’s time to sell. But investors need to prepare for that eventuality. We will keep a close eye on this trend and advise you if it’s time to move out of this great fund. Hopefully we won’t have to recommend selling anytime soon.
How should you react? Holding the fund for its income stream makes sense now, and buying more when the fund’s premium disappears and it starts trading at a discount also makes sense. That means there’s no reason for investors to get scared and sell off the fund, but it also means investors shouldn’t expect a massive jump in the fund’s price throughout 2017. That’s not a bad thing - it really reflects what the fund should be seen as: A source of steady and reliable income.
Good Investing,
Todd Shaver, Founder, CEO and Editor
The Bull Market Report
Since 1998
