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February 25, 2024
THE BULL MARKET REPORT for February 26, 2024

THE BULL MARKET REPORT for February 26, 2024

Market Summary

The Bull Market Report

After the trauma and endless anxieties of the last few years, it's no shock that a lot of investors are still unwilling to accept the evidence that the Wall Street Journal headlines and our own account statements tell us every day: stocks have not only recovered their equilibrium but pushed past all historical peaks into record-breaking territory. That simply doesn't happen unless rational markets weigh the opportunities that corporate innovation can unlock against the threats we all face, and ultimately decide that it's better to bet on progress than hide on the sidelines. Money is flowing into stocks. Cash is getting back to work in pursuit of better outcomes than the yields money market accounts currently pay.

And since earnings provide a tangible sign of how well all that corporate innovation is working, it's clear now that the innovators have faced every challenge of the last few years and come up smiling. Across the corporate landscape as a whole, the situation is under control. The world hasn't ended yet because if it had, we wouldn't be here to write this and you wouldn't care enough to read it. Confidence in capitalism survives. After three bear markets in five years (ranging from the now-almost-forgotten 2018 Trade War meltdown to the 2022 Fed hangover, with the COVID crash in the middle), investors are willing and able to let hope and even a little greed drive their decisions.

(That bit about "greed" is important. With the S&P 500 up nearly 28% in the past 12 months, people who clung to a defensive position in those money markets might have slept well at night, but they're also susceptible to envy. They're falling behind their friends and relatives. As their fear swings toward FOMO - fear of missing out - they're going to join the party that we never left, but have quite a stretch to catch up.)

Earnings are moving higher again, despite the Fed raising rates, despite inflation, despite the perpetual certainty that there's always another recession lurking just over the economic horizon. Macro conditions have been a real drag on corporate results. Should any of those conditions improve, corporate results will register the relief. That's why people are so fixated on the Fed actively cutting interest rates. As far as we're concerned, the most important thing is that the Fed stopped actively making things worse months ago. Rates got as bad as they're going to get. Companies survived. They evolved. And now they're leaner, meaner and more dynamic than ever.

There's always a bull market here at The Bull Market Report. As another quarterly corporate confessions cycle winds up, we'd like to use The Big Picture to talk about where the season leaves us and what we see ahead, while the individual stock updates below provide more specific feedback on how well various recommendations have done and look to do in the future. The Bull Market High Yield Investor has a simpler mandate this time around: If interest rates have peaked, what income-oriented investments make sense? We hope you'll appreciate the conclusions. And as always, reach out if you'd like different coverage or more detail on any topic. You know how to reach us. (Todd@BullMarket.com).

Key Market Indicators

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The Big Picture: A Champion Earnings Season

Sometimes the investor's life boils down to knowing how to grit through the challenges until the moment comes when the world finally turns your way. That's the mindset Wall Street has had to maintain through the Fed's long war on inflation and the pressure that higher interest rates put on an economy that was otherwise on the verge of overheating. We all needed the conviction to see better times ahead. According to all the numbers we've been seeing this season, that pivot from anticipation to gratification is finally here.

The 4th quarter of 2023, has produced a great earnings season in the first two months of this year. The fundamentals are trending up faster than they have since mid-2022, when the Fed really started getting aggressive in its tightening campaign, and operations across the S&P 500 started to feel the sudden deceleration in the air. Back then, earnings growth across the market had slowed to a 2.5% crawl, which felt sluggish at the time. After that, things got worse, with "growth" shifting into reverse as inflation and interest rates squeezed margins from both sides. It took an entire year before the executives running these companies could make enough tough decisions to get the numbers moving back in the right direction.

Three months ago, we got our first hint that growth was back on the menu. Expectations were extremely low, but those executives managed to manufacture a few percentage points of positive progress. This earnings season started from a similar playbook and effectively ended on another high note last week. From a fundamental perspective, the bulls have won. Across the S&P 500, growth is on track to not only stay positive for the second quarter in a row but accelerate from a little over 2% to roughly 4%. With two data points on the books, Wall Street now feels a lot more confident in projecting that the current quarter will also show that companies are still expanding at a reasonable rate and not contracting at all.

Following earlier interest rate increases aimed at curbing inflation, the Fed has paused its tightening cycle for the past few months. While inflation remains above target, recent data indicates some moderation in price pressures. This provides the Fed with more leeway in its policy decisions, unless unforeseen circumstances cause a rapid resurgence in inflation. What we're left with is a sense that the future will be not only better than the present but the past as well. That's why year-over-year growth is so important. It means progress.

And progress is good. Companies that generate more cash than they did in the past deserve to have more valuable stocks. Record earnings support record-breaking markets like the one we're in now. That's the world where the bull is in control. You can see that story play out in the way stocks have responded to this season's quarterly reports. Since the big Banks started the cycle on January 13th (five weeks ago), the S&P 500 and Nasdaq have rallied close to 7%. Remember, in the long term it can take the market a full year to generate results like this. These are the boom times.

Bull Market Report stocks have outperformed the broader benchmarks. This season has handed our portfolios a gain of 7.5% across all recommendations, almost a full point ahead of the high-flying Nasdaq. The winners are easy to see. In the core Stocks For Success portfolio, Amazon (AMZN) and Berkshire Hathaway (BRK-B) have been superstars, rewarding shareholders at a rate more than double the Nasdaq. Meta (META), Netflix (NFLX), Snowflake (SNOW), The Trade Desk (TTD) and of course NVIDIA (NVDA) did even better than that. How about Super Micro Computer (SMCI), which more than earned its name with a 165% gain during this earnings season. Outside the Technology space, it's hard to ignore what The Carlyle Group (CG), Novo Nordisk (NVO), Eli Lilly (LLY) and Recursion Pharmaceuticals (RXRX) are doing. We'd like to single out Eli Lilly here. This was the season that the stock turned into a four-digit (1000%) win on our watch, since the initial Research Report back in 2016. That's more than 100% every year. Beat that, bond bulls!

This is not to even hint that every single one of our stocks spent this season cheering. There are a lot of pain points. But that's how life in the market always plays out. On any given day or in any given season, there are winners and there are losers. As long as your winners do well enough to compensate for the losses, you end up ahead. And leadership rotates. A lot of the champions this quarter may stall or even fumble three months from now. Some of the underdogs will come back fiercer than ever. We haven't given up on any of our current underdogs, although some of the decisions were extremely tough. They'll come back. Meanwhile, our champions will run the field as far as they can. Their quarterly reports gave them a lot of fuel,  and the next season doesn't even start until mid-April, so there's plenty of time for a victory lap or two.

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BMR Companies and Commentary

NVIDIA (NVDA: $788, up 9% last week)
High Technology Portfolio

Another Blowout Quarter As AI Hits The Tipping Point

The most anticipated earnings call this season was an absolute blowout on Wednesday after the close, with chipmaker Nvidia soaring past consensus estimates across the board. The company posted $22 billion in revenue, up 265% YoY, REPEAT: 265% - that’s almost FOUR TIMES, compared to $6 billion a year ago, with a profit of $12.8 billion, or $5.16 per share, up from $2.2 billion, or $0.88 the prior year, as it rides on the coattails of an unprecedented global phenomenon.

Figures for the full year were just as impressive, with a mammoth $60 billion in revenue, up 125% YoY, compared to $27 billion a year ago, with a profit of $32.3 billion, or $12.96 per share, against $8.4 billion, or $3.34 – four times the year before. The stock popped 16% following the results, adding a record $272 billion to its market cap, the largest ever since Meta added $195 billion following its fourth-quarter results over two weeks ago. Some compared the one-day jump in market cap to Nvidia adding more than an Intel Corporation. In. One. Day. This is truly an incredible story. Oh – Here’s more. The founder, Jensen Huang got $10 billion richer on Nvidia’s share price surge that day. The Nvidia CEO saw his overall wealth increase to $69 billion after the stock in the California chip maker he founded in 1993 jumped more than 16% after it outstripped expectations in posting exceptional fourth-quarter results. The market cap increased by $280 billion on Thursday.

During the quarter, Nvidia’s data center division led the way with $18.4 billion in revenue, up 400% YoY, driven by massive new capex spending in the segment, with technologies like generative AI taking resource utilization to a whole new level.

Not one to rest on its laurels, the company has unveiled a string of new products, solutions, and collaborations during the quarter. This includes the Nvidia DGX SuperPod for drug discoveries; the MONAI API for cloud-based medical imaging; collaborations with Google, Cisco, Amgen, and many more, creating insurmountable network effects that no newer entrant or established player can match.

As it inches close to a $2 trillion market cap, ($1.96 trillion now) Nvidia’s more than 5X rally over the past 14 months is already the stuff of legends. There is no questioning the quality of this company, or the role it is set to play in the future. The only debate that continues to rage is relative to its valuation, and whether it can justify the same. This largely stems from the market’s inability to wrap its head around the coming age of AI.

A question asked on ChatGPT consumes much greater server resources than a traditional Google search. As people get accustomed to the new way of searching and finding information online, and while newer use cases and applications start cropping up, AI data and processing requirements will rise dramatically each passing year for the foreseeable future.

OpenAI’s Sam Altman recently had a lot of eyes rolling when he sought $7 trillion to develop silicon-chip manufacturing capacity that can power artificial intelligence. A figure that is two to three times the size of the global electronics industry is a bit hard to digest but doesn’t seem that off the mark considering that generative AI is set to add 7% to global GDP, or $6 trillion over the next 6 to 7 years alone, which we believe is a rather conservative estimate.

Trading at 32 times sales and 40 times earnings, Nvidia is anything but cheap but is certainly nowhere close to its peak given its pole position in the biggest tech story of this century. The company is already rewarding investors generously with $10 billion in dividends and buybacks this year, made possible by a strong balance sheet, with $26 billion in cash, $11 billion in debt, and $28 billion in cash flow. For them to raise another $5-10 billion in equity via a secondary would be easy as pie. Super Micro Computer (SMCI) just completed one last week, raising $1.7 billion in a convertible bond offering.

We added the stock at $460 in December. Our Target is currently $600 with the Sell Price of $400. We are changing the Target to $900 and the Sell Price to $700. We secretly think the stock could go to $1,500 or higher this year. Don’t tell anyone.

Listen, Artificial Intelligence is changing the world we live in. And we are guessing that you probably haven’t felt any of it yet, meaning that the ballgame is in the top of the 1st inning with just one out. There is a long, long road ahead and it is very exciting. All of Silicon Valley is working on AI as we speak. And again, AI is driving the stock market higher. It set an all-time high Friday. Dow, S&P and Nasdaq. But the story is LONG TERM. We believe Nvidia will be higher later this year and next. 2026? This company could be the largest in the world. It’s number 3 now; Microsoft at $3.04 trillion and Apple at $2.82 trillion look out!

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Ally Financial (ALLY: $36, up 1%)
Financial Portfolio

Leading auto finance company Ally Financial released its fourth quarter results recently, reporting $2.1 billion in revenues, down 6% YoY, compared to $2.2 billion a year ago. Profits of $140 million, or $0.45 per share, were down from $330 million, or $1.08, with a beat on consensus figures at the top and bottom lines, coupled with strong guidance.

For the full year, the company posted $8.2 billion in revenue, down 3%, compared to $8.4 billion a year ago, with a profit of $930 million, or $3.05 per share, against $1.9 billion, or $6.06. The drop in its performance during the past year was largely owing to rising provisions for bad debt, alongside fresh FDIC charges, both of which remain in line with the broader industry in recent quarters.

Despite a challenging year, the company continues to post strong operating metrics. While auto origination volumes dipped 14% to $40 billion for the full year, compared to $46 billion previously, the number of applications increased by 4% from 12.5 million to 13.0 million. Retail deposits have hit $142 billion across 3 million customers, up from $138 billion and 2.7 million during the year-ago period.

Ally earned insurance premiums of $1.3 billion during the quarter, its highest ever, made possible by its growing dealership network. Total active credit cardholders hit 1.2 million, up 20% YoY, offering a compelling return profile for the company, while its bread and butter auto loans hit an average yield of 10.8%, up 124 basis points over the past year, with negligible impact on originations.

Following a 43% rally in 2023, the stock still trades at 1.2 times sales and 9.8 times earnings, while offering an annualized yield of 3.3%. Ally is well positioned for an extended rally, with the low interest paid on deposits resulting in marked improvements in net interest margins. It ended the quarter with $7 billion in cash, $21 billion in debt, and $4.7 billion in cash flow. Our Target of $35 was breached late last month at $38 and it has been holding steady all this month. Our Sell Price is $27. We’re bullish on this one and are raising the Target to $43, and the SP to $31. At $11 billion, the company is fairly small in the world of finance and we can see strong growth ahead, through organic growth and future acquisitions.

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Financial Select Sector SPDR Fund (XLF: $40, up 2%)
Financial Portfolio

The Financial Select Sector SPDR Fund is a leading ETF for those looking for exposure to the Financial Services industry. The fund, like the banking and financial services sector that it tracks, had a roller coaster of a year in 2023, starting with the regional banking crisis in March, which saw massive pullbacks across the board, followed by a strong recovery leading it to end the year with a gain of 10%.

Several small banks shut down last year, and while the fund has escaped unscathed, largely owing to its focus on quality, blue chip securities in the industry, there are stressors in the sector that remain a challenge. Unrealized banking losses are now estimated between $1.5 to $2.0 trillion, and the US banking system is now somewhat reliant on the Federal Reserve stimulus to shore up and deal with liquidity issues.

This stimulus may not last forever, forcing banks to reckon with the crisis sometime over the course of this year. Fortunately, the Fed has officially ended its hawkish stance on interest rates and is expected to announce 1-3 rate cuts in 2024, offering banks and financial institutions much-needed respite. Rate cuts may not eliminate these unrealized losses, but can certainly provide a breather.

The Fund has escaped and remains insulated from the worst of this crisis, thanks to its extensive diversification. Its biggest holding has been, and still is Berkshire Hathaway, at nearly 14%, followed by JP Morgan Chase, Visa, Mastercard, Bank of America, and Wells Fargo, among others. Most of these banks have limited exposure to treasuries, or are well-capitalized to warehouse these underwater bonds.

The sector is set for a rebound in 2024, and few other funds are better suited to ride this trend. With an expense ratio of just 0.10%, an extensive track record going back decades, and a pedigreed management team, we expect strong value creation with the fund over the coming months. There certainly are risks, but the Fund, as well as the industry, are much better positioned today than they were a year ago. Our Target is $47 and our SP is $30, hereby raised to $35.

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The Carlyle Group (CG: $45, flat)
Special Opportunities Portfolio

This private equity giant released its fourth quarter results recently, reporting $900 million in revenue, down 15% YoY, compared to $1.1 billion a year ago. Profits were $400 million, or $0.86 per share, compared to $430 million, or $1.01, with a beat on consensus estimates on the top and bottom lines, coupled with strong guidance helped send the stock on an extended rally.

For the full year, the company produced $3.4 billion in revenue, down 30% YoY, compared to $4.4 billion a year ago. It posted a profit of $1.4 billion, or $3.24 per share, against $1.9 billion, or $4.34, owing to dropping asset sales and dealmaking across the board. The past year was undeniably challenging, but Carlyle ended on a high note and is set to carry forward strong momentum for the new year.

During the quarter, the firm realized $5.2 billion in proceeds from asset sales, and $20.6 billion for the full year, down from $8.6 billion, and $33.8 billion a year ago. It made fresh investments worth $7.2 billion, and $20.0 billion for the full year, compared to $6.8 billion, and $34.0 billion. Its total assets under management have hit a fresh high of $430 billion, up 14% YoY, with $76 billion in dry powder.

Carlyle’s private equity portfolio gained 2% during the quarter, followed by credit funds appreciating by 4%, but its real estate portfolio continues to struggle with a 2% decline, and its infrastructure and natural resources funds were largely flat during the quarter. Global real estate is currently in a state of flux, with a lot of changes taking place, not just in high-end commercial real estate, but in residential markets as well.

Despite a challenging year, the stock fared well in 2023, posting 36% in gains, which will and already is extending into the new year. With the Fed’s hawkish stance coming to an end, M&A transactions will start to pick up once again, boding well for fee revenues. Carlyle has authorized $1.4 billion in buybacks, made possible by its $1.8 billion in cash reserves, $9.3 billion in debt, and substantial cash flows.

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Exxon Mobil (XOM: $104, flat)
Energy Portfolio

Energy giant Exxon Mobil released its fourth quarter results early this month, reporting $84 billion in revenue, down 12% YoY, compared to $95 billion a year ago. It made a profit of $10.0 billion, or $2.43 per share, against $9.2 billion, or $2.27, with a beat on earnings, but a slight miss on top-line figures. This, however, didn’t dent the stock’s rally, owing to broader optimism surrounding the oil and gas industry.

For the full year, Exxon produced $345 billion in revenue, down 17% YoY, compared to $415 billion a year ago, with a profit of $40 billion, or $9.52 per share, against $60 billion, or $14.06. The drop in figures during the quarter and the full year are largely in line with expectations, owing to the fall in oil and gas prices YoY, as the elevated prices stemming from the wars in Ukraine and Gaza, normalized during the year.

During the quarter, the company produced 3.8 million barrels of oil equivalent per day, up 136,000 barrels compared to the prior year, owing to developments in the Permian Basin, as well as at its assets in Guyana. The company’s upstream profits took a $2 billion hit during the quarter, owing to regulatory issues at its Santa Ynez Unit assets in California, without which Exxon would have had a stellar beat.

A lot is happening around oil and gas prices at the moment, with a recovery in China, the Red Sea conflict, and a drawdown in US inventories, all creating short-term tailwinds. However, leaving all of this aside, what matters to us is Exxon’s remarkable execution over the years, which has seen its earnings power double from 2019 to 2023, totally irrespective of oil prices, margins, and other factors.

Exxon Mobil’s $60 billion acquisition of Pioneer Natural Resources is set to conclude halfway through this year, giving rise to substantial cost and operational synergies. The company has a lot going for it and yet it still trades at 1.3 times sales and 11 times earnings. The company returned $32 billion to investors and maintained a strong balance sheet with $32 billion in cash, $42 billion in debt, and $55 billion in cash flow. Our Target is $120 and our Sell Price is $85. We’re going to tighten the SP to $95 just in case.

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SPDR Gold Shares ETF (GLD: $189, up 1%)
Special Opportunities Portfolio

The SPDR Gold Shares ETF is the largest gold fund in the world by quite a margin. Its extensive track record, low expense ratio, minimal tracking errors and massive liquidity have made it the most sought-after instrument for most investors seeking a hassle-free option to gain exposure to gold. The fund had a great year in 2023, up 13%, and looks set to continue along the same lines this year, owing to several factors.

To start with, central banks across the globe have started buying gold heavily, with the World Gold Council expecting demand for the precious metal to hit a new record this year. With the Federal Reserve indicating 1-2 rate cuts in 2024, the US dollar will be vulnerable to outflows, prompting various country emerging and developed central banks to diversify their currency reserves with gold.

Historically, each time the Fed ends a hiking cycle, the gold charts a robust performance the following year, and we expect the same this year as well. This bullish cycle often lasts three to five years, but we expect something a lot more robust this year owing to the commodity being significantly undervalued relative to the S&P 500, with the ratio hitting the lowest levels in history.

Gold is still a safe haven during times of uncertainty, and given the increasing geopolitical risks and conflicts across the world, starting with Ukraine, the Middle East, and now a massive military build-up in China, there are plenty of catalysts in the near term. Given a long enough time frame, the commodity’s prospects are many times better, with several tailwinds aligning in its favor. This includes the Dollar being replaced as the world’s reserve currency, with many countries signing unilateral trade agreements that sidestep the currency altogether. (However, we don’t think this will happen anytime soon.) Besides this, the fact that the Fed printed 80% of all US dollars in existence during the course of COVID alone, clearly points to the fact that gold, and not US Treasuries are the ultimate hedge against the excesses of the US government.

Our Target is $215 and our Sell Price is $175. The current price of gold is $2,030, having peaked at $2,135 in December. Where is it headed? Only time will tell. But we’re leaning to “higher.” Remember, the SPDR GLD Trust actually holds gold in its vault, equal to its market cap which currently stands at $56 billion.

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CBRE Group (CBRE: $90, down 3%)
Stocks For Success Portfolio

Our favorite diversified real estate conglomerate released its fourth-quarter results a week ago, reporting $9.0 billion in revenue, up 9% YoY, compared to $8.2 billion a year ago. Profits came in at $430 million, or $1.38 per share, against $420 million, or $1.33, with a beat on consensus estimates at the top and bottom lines, coupled with a strong guidance for the full year leaving investors optimistic.

For the full year, the company hit $32 billion in revenue, up 3.6% YoY, compared to $31 billion a year ago. Profit came in at $1.2 billion, or $3.84 per share, down from $1.9 billion, or $5.69, largely owing to investment volumes dropping during the year, with high interest rates, and a fundamental realignment in the commercial real estate segment taking a toll on the company’s advisory business.

During the quarter, CBRE’s advisory services saw $2.59 billion in revenue, down 1%, compared to $2.61 billion, followed by its Global Workplace Solutions at $6.1 billion, up 15% YoY, compared to $5.3 billion. The Real Estate Investments segment, which includes its development solutions, as well as asset management, was down 10% at $260 million in revenue, compared to $290 million.

These figures are rather phenomenal, considering that commercial real estate investment volumes in the US dropped 44% YoY during the quarter. If anything, the company’s performance during this past year shows its resilience in the face of a remarkably tough macro environment and is a testament to its extensive diversification across services, asset classes, geographic locations, and more.

Following a 21% rally in 2023, CBRE still trades at a valuation of less than 1 times sales and 21 times earnings. Now that the Fed’s hawkish stance is slowly coming to an end, the stock is set for a rally this year, riding a long overdue recovery in the real estate market. The company has $1.5 billion in pending buyback authorizations, ending the year with $1.3 billion in cash, $4.9 billion in debt, and $500 million in cash flow. Our Target is $105 and our SP is $73, hereby raised to $85. Let’s play the SP tight, as there is some negativity surrounding commercial real estate at the moment, although CBRE makes money in good times and bad. In fact, companies need their services way more in tough times.

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Meta Platforms (META: $484, up 2%)
Long-Term Growth Portfolio

Social networking giant Meta Platforms ended the year on a high note, with a spectacular fourth-quarter performance early this month. The company posted $40 billion in revenue, up 25% YoY, compared to $32 billion a year ago, with a profit of $14 billion, or $5.33 per share, exactly triple YoY, from $4.7 billion, or $1.76 per share, with a beat on consensus sending the stock soaring following the results, jumping from $394 to $475.

The company’s figures for the full year were just as extraordinary, with $135 billion in revenue, up 16% YoY, compared to $117 billion a year ago. It posted a profit of $40 billion, or $14.87 per share, up from $23 billion, or $8.59. This can mostly be attributed to the rebound in digital ad spends, following a slump last year, and the year before, coupled with accelerating user growth across its family of apps.

Meta’s extensive family of apps, which includes the Facebook platform, WhatsApp, Instagram, Facebook Messenger, and now Threads, had 3.2 billion daily active users on average during the quarter, up 8% YoY. Monthly active users across the family were mere inches away from 4 billion, an increase of 6% YoY, driven by growing interest penetration, and the company’s efforts in retaining and engaging users.

Ad impressions during the quarter grew 21% YoY, with the average price per day increasing 2% YoY, which is rather impressive. This means that despite the supply of inventory increasing significantly, ad prices kept up, and this highlights a major rebound in global digital ad spending. Meta is now focused on unlocking other sources of revenue across its massive landed base, beyond its traditional advertising.

Despite the stock’s phenomenal 440% rally since mid-2022, it is still rather undervalued, and with its first dividend announcement and a potential stock split later this year, it is far from done. The company’s year of efficiency has been a phenomenal success, with significant improvements in its cost profile following layoffs, before ending the year with $65 billion in cash, $38 billion in debt, and $71 billion in cash flow.

Our Target was smashed at the beginning of the month, having blown by the $350 target late last year. We are raising it today to $550. Our Sell Price doesn’t exist. We would not sell META/Facebook. The market cap is now over $1 trillion, at $1.25 trillion. #6 in the country/world. Can you name them? Hint: MANAGM

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Recursion Pharmaceuticals (RXRX: $13.37, up 32% in the past two weeks)
Early Stage Portfolio

Recursion Pharmaceuticals is a pioneering biotech company that develops AI and machine learning-enabled platforms to aid in the process of drug development.

The company is a research company at this point, with revenues minimal. They have almost $400 million in cash in the bank, and debit of just $50 million. Many bigwigs of the tech and investment world are paying close attention to its massive potential in the world of new pharmaceuticals. When we first started coverage for this stock, we discussed how it had Cathie Woods’s stamp of approval, with ARK’s funds owning 4 million shares in the company, which we thought was pretty good. This figure has now gone up to its current level of 23 million shares in all of ARK’s funds. ARK INVEST now owns a sizable 8.5% stake in the company, valued at $300 million, which is enough to get analysts to pay attention to the stock. Now, just two months since our first report on the stock, semiconductor giant, Nvidia has announced that it has invested $76 million into this company, and this is in addition to the $50 million that it had already invested last year.

Recursion aims to industrialize drug discovery, and it plans to achieve this by building a massive library of chemical compounds and their reactions with gene types, before letting the forces of AI and ML work their magic. It has already partnered with Nvidia to power its supercomputer, BioHive-1*, and this partnership is set to grow deeper, with the two innovators playing off each other's strengths.

* BioHive-1 is Recursion’s supercomputer, one of the top 500 supercomputers in the world and the fastest supercomputer wholly owned and operated by any biopharma company

Key Points of the recent News Release from the company last week:

  • Recursion announces a multi-year collaboration and $50 million investment from NVIDIA.
  • This collaboration aims to accelerate the development of Recursion's AI foundation models for drug discovery.
  • NVIDIA will provide computational power, expertise, and access to their BioNeMo platform for model training and distribution.
  • Both companies share a vision to revolutionize drug discovery through AI.

Benefits of the collaboration:

  • Faster development of advanced AI models.
  • Wider reach and impact of Recursion's models through Nvidia’s BioNeMo, a generative AI platform that provides services to develop, customize and deploy foundation models for drug discovery.
  • Improved data-driven strategy and model release for Recursion.

Significance:

  • Marks a major step towards Recursion's goal of becoming a leading "techbio" company.
  • The collaboration has the potential to significantly impact the development of new medicines.

Today, pretty much anything that Nvidia touches turns into gold, so as soon as its fresh investment was announced Recursion’s stock popped 20%. But note that Recursion is partnering with other companies like Roche/Genentech and Bayer on drug discovery efforts. Our Target is $18, hereby increased to $28. Our SP is $8. THIS STOCK IS VERY SPECULATIVE.

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The Bull Market High Yield Investor

Despite a few hot inflation prints earlier this month, the investors who really care about interest rates aren’t worried enough to vote with their wallets. There’s zero real money in the futures market riding on any more tightening moves from the Fed. Zero. Which cuts through a lot of the doomsday chatter. If anything, the odds of a significant number of rate CUTS this year remain high. Rate futures traders think we’ll see 2-4 loosening moves, enough to take overnight rates down 0.5% to a full percentage point. That’s real relief. It’s enough to take rates down to where they were a year ago or even lower.

The world did not end a year ago. Everyone now knows that the current level of monetary austerity is survivable. Sustainable. It might sting to pay that much interest, but we’ve seen that the economy has been able to bear it. And if the absolute level of interest isn’t toxic in itself, then the only thing to fear is time. Rates are likely to start going down before the end of the summer, but have they stayed too high for too long for borrowers to handle? We think the answer is no. For one thing, even borrowers who got into debt at the highest rates (last summer) will rush to refinance the minute the Fed relaxes. The more ground the Fed gives up, the more leeway they’ll have to refinance.

The relief spreads. Things feel better. All we need for that to happen is for inflation to show us real signs of improvement. The PCE will set the tone on Thursday morning. If it’s good, the futures market has the right idea and there’s no need to be afraid. It only gets complicated if the numbers come in as hot as the CPI and PPI did. In that scenario, rate relief will be elusive. But in the past, the economy has grown fast enough to power through higher borrowing costs. It evidently doesn’t take much. GDP is on track to expand about 2.5% in the current quarter. That’s a good sign.

Growth is the engine that keeps the economy moving forward. It’s the gas pedal. Rates are the brake. As long as the gas is pushing the car forward faster than the brake is slowing it down, the economy is in a good place for investors. It’s that simple. Whether the Fed gets its foot off the brake or not, the gas is flowing. But in a strong economy, stocks have what they need to outperform.

Bonds, meanwhile, are only attractive if you can lock in yields that you can be satisfied with over the long haul. That satisfaction is in the eye of the investor, but as far as we're concerned, locking in around 4% a year (or barely 2% above inflation, even if the Fed achieves its target) is not exactly a thrilling outcome. We'd rather chase higher income from corporate dividends, where growing companies end up with more cash to share with shareholders. Then there are chances to simply capture a higher current yield than anything the Treasury market can give you . . . and these opportunities often have other advantages as well. We profile one of each type of investmetn here for you.

Prologis (PLD: $133, flat. Yield=2.6% right now, but it could rise over time)
REIT Portfolio

Warehousing giant Prologis released its fourth quarter results recently, reporting $1.8 billion in revenue, up 10% YoY, compared to $1.6 billion a year ago. It created a profit, or FFO of $1.20 billion, or $1.26 per share, against $1.18 billion, or $1.24, which was broadly in line with estimates, and despite light guidance for the new year, the stock has been on an ascendant streak ever since the results.

The company’s full-year figures were impressive, with revenues at $6.8 billion, up 40% YoY, compared to $4.9 billion a year ago. Profits were $5.3 billion, or $5.61 per share, against $4.2 billion, or $5.16, driven by robust occupancy rates, at 97%, record new lease commences at 44 million square feet, and a retention rate of 73%, among many of other internal and macroeconomic factors.

It had an eventful quarter and year when it comes to fresh deployments, with $500 million worth of acquisitions during the fourth quarter alone, and $730 million for the full year. This was followed by $3.2 billion worth of development stabilizations, $3.4 billion in new development starts, and finally $1.6 billion in dispositions, all perfectly aligning with Prologis’ capital recycling initiatives.

Prologis currently remains right in the sweet spot amidst massive global tailwinds, with the e-commerce boom not showing any signs of slowing, and the supply constraints in recent years forcing merchants to maintain larger inventories. As a result, in the third quarter of 2023, it raised rents by a phenomenal 74% on all expiring leases, because it could, and there was plenty of demand from companies to pay for it.

Following a 19% rally last year, the stock is not cheap by any measure, trading at 16 times sales, and 40 times earnings. However, given its massive addressable market, it wouldn’t be wise to value it like any other REIT. This is a growth stock that pays a nice dividend and with a strong balance sheet ($530 million in cash, $30 billion in debt, and $5.4 billion in cash flow) has the potential to raise that distribution a lot more over time.

Guess what? We looked back a decade and saw that Prologis "only" paid $0.28 per share quarterly back then. Shareholders who locked in at that point have seen their payout soar to $0.87 in the intervening years. They paid about $40 for that income stream in 2014, which means that what was once a 2.8% current yield is now handing them 8.7% of their initial investment every year. If the trend continues, investors today who are willing to settle for less than 3% can ultimately enjoy a similar outcome.

Either way, our Target is $160 and our SP is $110, raised today to $120. This is no small company, with a $123 billion market cap. Solid as a rock.

Nuveen Municipal Credit Income Fund (NVG: $11.85, up 1%. Yield=4.6% tax free, or the equivalent of 7.7% taxable)
High Yield Portfolio

Since hitting its lowest levels in over a decade, the Nuveen Municipal Credit Income Fund has created a stellar rebound over the past four to five months. Following significant value erosion for over two years owing to the Fed’s hawkish stance, the possibility of multiple rate cuts in 2024 has reignited optimism in the Fund, presenting a once-in-a-decade opportunity for value investors and speculators alike.

Municipal bonds are now in a plum position, with the muted possibility of further rate hikes eliminating downside risks, and a higher for longer interest rate environment allowing for significant value creation and equity-like yields. Yields are at the highest point to start the year since 2011, and for the first time in over a decade, investors will enjoy attractive total returns from cash, a dynamic that has long been absent.

After the second consecutive year of net outflows in munis in 2023, at $19 billion, we expect demand to start rising soon, as tax loss harvesting starts to subside, and there is more clarity on the Fed’s interest rate strategy going forward. Higher yields and lessening volatility will compel mutual funds and other institutional investors to lock in yields by reallocating funds from other assets in favor of muni bonds.

Despite a net outflow in 2023, it is worth noting that much of it was driven by redemptions at short-term funds, whereas longer-term funds recorded a net inflow of $10 billion during the year. Portfolio managers should now start to pursue moderately longer duration profiles, aimed at creating enduring value as it becomes increasingly certain that rate hikes are coming to an end, with cuts on the horizon.

In addition to broad-based tailwinds in its favor, the Fund at a Book Value of $13.55 trades at a 14% discount, offering tax-free yields of nearly 4.6%. In this light, there are few better funds to ride this trend than the Nuveen Municipal Credit Income Fund. Our Target is $16 and our SP is $11.

Good Investing,

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

December 23, 2019
THE FREE BULL MARKET REPORT for December 23, 2019

THE FREE BULL MARKET REPORT for December 23, 2019

The Weekly Summary

 

December was chaotic last year, keeping investors glued to their screens as we watched a miserable season turn into one of the biggest rebounds in recent memory. This time around, conditions are unusually quiet as a late Thanksgiving turns into a compressed holiday season. Wall Street is already looking toward the Christmas and New Year breaks. So are we.

 

After all, Santa came early and often this year. The market as a whole has rebounded 28% YTD, handily recovering all ground lost in the 4Q18 rout and then continuing to push into record territory. The S&P 500 has now rallied a healthy 12% past last year's peak, with more than half of that surge coming in the last four months. Whether the motive is relief that we've skirted another year without a recession or more straightforward optimism, the mood is as good as it gets.

 

If anything, we're inclined to urge a little caution here. When a full 44% of investors are actively bullish and the so-called "greed index" flashing at extreme levels, this is as good a time as ever to take a little profit and rotate the returns back into stocks that haven't flown as far as the rest of your holdings or offer a comparable return for lower risk. The perfect time to buy was a year ago when everyone but us was terrified that the trade war and the Fed had triggered the end of the world. While today this is not an awful entry point, a selective approach can be your friend here . . . we would definitely not pour money into index funds right now.

 

After all, while the active BMR universe is up 42% so far this year, our stocks have tangible growth on their side. Earnings for the S&P 500, on the other hand, have spent the entire year in a stall, so there's no compelling mathematical reason for the index to keep moving up without straining historical multiples to the bubble point. Right now the market as a whole carries an 18X earnings multiple, well above the 15-16X that investors have normally been willing to pay.

 

In exchange for those inflated fundamentals, investors are getting negative growth. Those companies are actually tracking lower earnings than they did a year ago, and are likely to keep deteriorating at least into the 4Q19 reporting season. After that, we'll simply have to see if the combination of lower interest rates and a truce in the global trade war shakes a little growth free. If not, stocks will look increasingly vulnerable to any external shock to sentiment . . . the higher the multiples get, the more precipitous the fall from grace becomes.

 

However, there's a lot to be said for a sympathetic Federal Reserve and any relief from the trade war. The White House estimates that even Phase One in a deal with China coupled with a new NAFTA accord will boost GDP growth 0.5% in the coming year, which is enough to drive a so-so economic expansion into something approaching spectacular. It's definitely far from the recession zone that everyone was worried about a few months ago.

 

You need growth to decline in order to realistically talk about recession ahead. No decline means no recession. And no recession means people who retreated to the market sidelines are now having a hard time resisting the urge to get back in before they miss out completely.

 

Remember, while earnings haven't moved up in the past year, they haven't dropped a lot either. The trade war has delayed a lot of new corporate investment initiatives without driving executives to pull the plug on any established cost centers. We haven't seen mass layoffs. No sprawling Financial conglomerates or prominent hedge funds have imploded the last time the Treasury yield curve briefly inverted.

 

And that curve is healthier than a few months ago. Barring a lot of dread around the coming election, the rate environment once again reflects lower risk in the short term and higher uncertainty farther out into the future, exactly as it should. The Fed has done its work well. Investors have a reason to cheer.

 

So what can go wrong? While we are always quick to accentuate the positive, we also acknowledge that other investors make errors when the mood swings too far in either direction. Expectations can get stretched to unsustainable levels, setting up the next inevitable round of disappointment, second guessing and nervous selling. That's ultimately a good thing for those of us who have been watching and waiting for a chance to buy great stocks on the dip. Throughout our career (collectively well past a half century actively in the market) the long-term trend always points up and the dip is always worth buying.

 

There’s always a bull market here at The Bull Market Report! Gary Jefferson has the week off and with the holiday approaching, we decided to use his absence to try something new with an in-depth review of Todd's Stocks For Success. We hope that you come away from this issue with deeper understanding of why our founder likes Berkshire Hathaway so much. He would buy any of these stocks on weakness.

 

Finally, a scheduling note ahead of the Christmas holiday. The market will close early on Tuesday and stay shut until Thursday morning, so news will be light and our News Flashes will probably taper off a bit. We'll use the time to reflect on the year that's gone and cement our thinking on the year ahead. Ideally we'll also be able to update the site a little and perform other housekeeping as we get the portfolios in position for 2020.  We'll be in touch either way, but as always, we wish you a happy holiday and the best possible experience as an investor.

 

Key Market Indicators

 

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BMR Companies and Commentary

 

The Big Picture: Big Rally, Narrow Bench

 

 

While the last few months have been great for the S&P 500 and our stocks as well, the gains remain restricted to a narrow field of relatively safe bets. Investors simply aren't thinking outside the box right now. They're content to park their money in a few big stocks that don't require a lot of patience or even conviction. While we'd love a little of that capital to flow immediately to a few of our smaller and more neglected recommendations, we don't mind in the slightest.

 

For one thing, we already recommend many of the leaders. Just seven BMR stocks account for 40% of the S&P 500's gains for the past quarter, and Apple (AAPL: $279, up 2%) alone contributed almost half of that upside. If you weren't bullish on Apple in the last few months, you missed the boat. We were right to keep the giant in our sights, and it gave us everything we hoped to see. Apple has surged a full 77% this year, recovering $700 billion in market capitalization along the way.

 

Microsoft, Alphabet and to some extent Facebook, Berkshire Hathaway, Johnson & Johnson and Visa also contributed a significant amount to the market's gains in the last few months . . . not to mention the year as a whole. Big stocks got big because the enterprises driving them were some of the most dynamic companies around. This year, they got even bigger. All are hitting all-time highs. How far can they go before taking a break? We'll simply have to see, but as long as earnings keep outperforming everyone else around, the stocks have all the room they need.

 

Then there's Amazon (AMZN: $1,787, up 1%), which is as dynamic as ever but the stock hasn't gone anywhere in the last quarter. It's also down 12% from its peak, so there's no sense of straining any kind of historical limit. When investors come back, this can once again be a $2,000 stock and a trillion-dollar company. And in that scenario, the S&P 500 gets enough of a boost to break another record. No other stock has to do any work. Amazon can do it on its own.

 

We see that story play out again and again. A full 3 in 5 S&P 500 constituents are actively lagging the market and the lower you go on the market food chain, the rarer true leadership gets. A staggering 85% of the stocks on Wall Street have underperformed the S&P 500 this quarter. Most are doing okay. True losses are limited. They're simply getting left out.

 

But the market will never tolerate an imbalance for long. Sooner or later, one or more giants will hit a wall and the money that's flowing to them now will rotate into smaller stocks. When that happens, we'll have a reason to cheer. On average, our recommendations are still down 12% from their 52-week highs, let alone lifetime peak levels. We've come a long way back in the last few months without even clearing what are still formally correction conditions from late in the summer, when Technology took a huge step back. There's money to be made here.

 

Look at Roku (ROKU: $137, up 3%). It's up close to 350% YTD but is 22% off its peak. That's an opportunity. Even though a handful of giant companies are doing most of Wall Street's work, plenty of smaller names keep breaking records as well. Splunk (SPLK: $151, up 5% this week), for example, is once again within sight of an all-time high, set in early December, capping a year that's literally run rings around the market as a whole. This stock has gained 44% YTD but the ride has been wild. We've seen it plunge from above $140 to below $110 twice this year, so the moral here is to hold on tight through the retreats.

 

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Berkshire Hathaway (BRK-B: $226, flat last week but setting an all-time high)

 

This stock is a must-own. If you believe in America, then Berkshire is the place to put your money where your mouth is. The stock is worth $553 billion, making it one of the top 10 largest companies in the world.  Do you want to know what they do?  Well, here it is, straight from Yahoo Finance. Breathe it all in:

 

Berkshire Hathaway Inc., through its subsidiaries engages in insurance, freight rail transportation, and utility businesses. It provides property and casualty insurance and reinsurance, as well as life, accident, and health reinsurance; and operates railroad systems in North America. The company also generates, transmits, stores, and distributes electricity from natural gas, coal, wind, solar, hydro, nuclear, and geothermal sources; operates natural gas distribution and storage facilities, interstate pipelines, and compressor and meter stations; and holds interest in coal mining assets. In addition, it offers real estate brokerage services; and leases transportation equipment and furniture. Further, the company manufactures boxed chocolates and other confectionery products; specialty chemicals, metal cutting tools, and components for aerospace and power generation applications; flooring, insulation, roofing and engineered, building and engineered components, paints and coatings, and bricks and masonry products, as well as offers homebuilding and manufactured housing finance; recreational vehicles, apparel products, jewelry, and custom picture framing products; and alkaline batteries. Additionally, it manufactures castings, forgings, fasteners/fastener systems, and aerostructures; titanium, steel, and nickel; and seamless pipes and fittings. The company distributes newspapers, televisions, and information; franchises and services quick service restaurants; distributes electronic components; and offers logistics services, grocery and foodservice distribution services, professional aviation training programs, and fractional aircraft ownership programs. In addition, it retails automobiles; furniture, bedding, and accessories; household appliances, electronics, and computers; jewelry, watches, crystal, china, stemware, flatware, gifts, and collectibles; kitchenware; and motorcycle accessories. 

Here are the company’s top five holdings:

 

Apple 

Comprising 24% of the Berkshire Hathaway portfolio, Apple represents Buffett's largest holding, with a whopping 250 million shares in the tech giant, as of November 2019. Currently worth approximately $65 billion, in 2018, Apple surpassed Wells Fargo to capture the #1 spot after Berkshire Hathaway purchased additional shares of the Steve Jobs-founded company in February of that year.

 

Bank of America

Warren Buffett's second-largest holding is in Bank of America, valued at $27 billion and comprising 13% of his portfolio. Buffett's interest in this company began in 2011 when he helped solidify the firm's finances, following the 2008 economic collapse. Investing in Bank of America, which is the nation's second-largest bank by assets, falls in line with Buffett's attraction to financial stocks, including Wells Fargo & Company and American Express (see below).

 

The Coca-Cola Company

Buffett once claimed to consume at least five cans of Coca-Cola per day, which may explain why the Coca-Cola stock is his third-largest holding. But one thing is for certain: Buffett appreciates the durability of the company’s core product, which has remained virtually unchanged over time, with the exception of the ill-fated "New Coke" formula rebranding, in the mid-1980s. This makes sense, given that Buffett started buying Coca-Cola shares in the late 1980s, following the stock market crash of 1987. Presently with 400,000,000 shares, valued at $22,000,,000,000, Coca-Cola accounts for 10% of the portfolio.

 

Wells Fargo

At 9% of his portfolio, Buffett currently holds shares valued at over $19 billion. Although this is Buffett's fourth-largest position, Wells Fargo previously occupied the top slot for many years. A series of scandals that began in 2016, including the creation of millions of dummy bank accounts, unauthorized modifications to mortgage plans, and the fraudulent sale of unnecessary car insurance, has hurt the bank's reputation.

 

American Express

This company is the third financial services company to make Buffett's top five list, occupying 8% of the portfolio. Valued at nearly $18 billion, Buffett acquired his initial stake in the credit card company in 1963, when it sorely needed capital to expand its operations. Buffett has since been a savior to the company, many times over, including during the 2008 financial crisis. With 12.5% average annual return over the past quarter-century, American Express has proven to be a valuable asset. 

 

We’d like to say THEY COVER IT ALL.  Again, if you believe in America and free enterprise, you might just want to buy one share of the A series – it’s only $340,000 per share!  (A good friend of ours used to call us up at the office back in our Morgan Stanley days in the 1990s and would leave a message: “I just called to place an order for 100 shares.” That’s when the stock sold for $35,000 a share, so 100 shares was worth $3.5 million. He thought this was hilarious!  Well, how about now? 100 shares is worth $34 million! HAHA.

 

What’s the point about all of this hilarity?  Get a piece of this company. 10 shares. 100 shares. 1000 shares. Whatever you can afford. You’ll never regret it. Our Target of $230 is about to be breached. We hereby raise it to $255. Our Sell Price remains the same:  We would not sell Berkshire Hathaway.

 

 

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

June 29, 2016

CBRE and BREXIT

June 29, 2016: CBRE (CBG: $26, up 3% today) The global leader in real estate services has seen its stock hammered by the Brexit decision. Just this month, the price has fallen from $31, just before the Brexit vote, by 20% to its low on Monday to just under $25. Is this justified? The answer is no and here is why.

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April 24, 2016

EARNINGS PREVIEWS FOR THE WEEK OF APRIL 25-29

Aetna, Gilead Sciences, Apple, GoPro, Barrick Gold, LinkedIn, CBRE, PayPal Holdings, Facebook, United Parcel Service, First Solar

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March 29, 2016

CBRE

If it has anything to do with real estate - commercial, industrial, hospitality or retail - chances are CBRE is involved. That is a safe statement considering CBRE is the world’s largest commercial real estate services and investment firm employing over 70,000 skilled professionals. In any service business, keeping the team happy and productive is critical...

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