June 25, 2017
by Todd Shaver | Jun 25, 2017 | Weekly Newsletter 7pm Sunday
The Week Ahead
Two themes are dominating the headlines heading into next week. First, several GOP Senators have come out to say they won’t vote for the Health Bill in its current form. But this is a yawn. Healthcare stocks rallied to end the week pushing past the uncertainty. Congress knows they need to do a good job because Americans are tired of their lack of accomplishments.
Second, everybody is talking about how Amazon will rule the world. Literally, the common question on conference calls now is: “Does your company have any Amazon risk?”. From Capitol Hill to Silicon Valley the bull market is rockin’ and rollin’. What a great time to be an investor. It won’t always be this good that’s for sure.
There is always a bull market here at The Bull Market Report! This week we highlight the following stocks: First Solar, Athenahealth, Tesla, Twilio, Bristol-Myers, and Eli Lilly.
Highlights From The Past Week
Fed Stress test results are in. And everyone passes. On Thursday the Fed released the first phase of its annual stress test which, once again, found that all 34 of the US largest banks "passed", exceeding minimum projected capital and leverage ratios under severely adverse scenarios, based on their projected ability to withstand economic shocks, which shows that "firms are getting the hang of the once-dreaded reviews." The result marks the third straight year all firms cleared the minimum requirements in the exams’ first phase, begging the question just how "stressful" this test truly is. Results covered the "Dodd-Frank Act Stress Test" that measures banks’ capital under stress over the nine quarters. The banking system is very healthy. This is good news for the bull market!
OPEC deal to impact the oil market. OPEC’s production cut deal is unlikely to survive beyond its current deadline in March 2018 many believe. This would result in a huge amount of extra oil to hit the market. OPEC’s most recent deal has not had the cartel’s desired effect on the markets, neither in terms of oil prices nor in drawing down the global glut. Why? OPEC finally decided to cut back production. This should have reduced supply and in turn led to oil prices recovering. But what happened instead? Those darn US swing producers just jumped right back into ramping up production at the opportunity of the void left by the OPEC cuts. Now we are seeing oil prices fall again.
OPEC can’t be pleased with the US nullifying their efforts. The ongoing oil drama is likely to continue. Fortunately, the bull market doesn’t seem to care. We will keep a close eye on the situation just in case as historically, energy boom and busts have had far reaching effects.
BMR Companies & Commentary
First Solar (FSLR: $40, up 11% for the week)
President Donald Trump proposed a solar wall across the Mexican border. And guess who is the likely winner of the contract, First Solar!
At a rally this week in Iowa, Trump announced plans to build a solar wall across the Mexico border.
It appears that the department of Homeland Security has issued 2 RFPs for border wall design prototypes - one for a solid concrete wall and a second for other alternative designs. One of the applicants has submitted plans to construct a border wall with solar panels that would be used for lighting, sensors and patrol stations at the border site as well as to sell excess electricity to the U.S. and Mexican customers. Selection of winning bids is expected sometime this month.
Media reports suggest that the border wall could be about 50 feet tall and would require anywhere between 1.5 to 5GW of solar panels resulting in $10-15 billion of expenditures. While more details have yet to be announced around transmission, permitting constraints, and so on, we expect this announcement to be an incremental positive as it shows that despite pulling out of the Paris accord, the current administration is actually thinking of plans to increase the use of solar and renewables. Moreover, a number of state governments have recently announced plans to promote solar
In terms of actual beneficiaries of the Trump wall, we note that the bidding process would likely involve a number of solar companies but considering the company's established market position, First Solar remain best-positioned to win much of this business opportunity.
BMR Take: Not including the above contract, First Solar EPS is expected to ramp from $0.51 this y ear to $1.34 in 2019, according to consensus estimates. This earnings level is expected off of a revenue base of $2.8 billion this year. You add the potential for a multi-billion dollar government contract and you can see why we like the stock.
Yes, we are underwater on this stock as the firm disappointed investors right after we added it to our Special Opportunities portfolio early last year. It happened fast and we elected to stay with the company through the turmoil. We have noted many times that a turnaround is in full force but it is going to take time, at least into 2018 for the turnaround to be fully successful. It appears to be on track and the stock is on a long slow trajectory to get back to the $60 level and beyond. Last week was a strong statement.
Athenahealth (ATHN: $146, flat)
Would Apple acquire Athenahealth? It might make sense. If Apple were looking to plunge deeper into the digital health market, it would make sense for Apple to buy Athenahealth in order to quickly get some scale. After all, the company’s market cap is less than $6 billion.
CNBC previously reported that Apple is working on ways to turn the iPhone into a way for patients to centrally manage their health data, with connection to a cloud-hosting platform. The idea rings familiar, as it’s the same strategy the company deployed with music.
While the industry continues to make progress, a major issue in Healthcare is adequate interoperability to ensure the seamless exchange of medical data. Apple has more than 1 billion iPhone users, but currently has limited access to clinical systems that capture data in hospitals and physician offices. Meanwhile, Athenahealth has instant access to approximately 10% of the market, 83 million patient records, and roughly half of all U.S. doctors through its health app. Athena’s platform could be a ‘disruptor’ for Apple.
Putting some credibility to the talk, we point out this interested fact - Athena’s CEO & co-founder Jonathan Bush is passionate about making a difference in Healthcare including bringing its technology into the 21st century and according to sources, apparently Apple would be one of few homes for the firm he’d consider.
BMR Take: Athena’s EPS is on track to grow from $0.65 this year to $1.45 in 2019. This growth was good enough for a major activist investor, Elliott Management, to get involved in recent months, which has sent the stock price soaring. But the upside is not done yet. A takeout could push shares much higher.
Tesla (TSLA: $383, up 3%)
Tesla set a new all-time high on Friday at $387, before settling a bit to close at $383. The market cap is $63 billion, as compared with GM at $52 billion and Ford at $44 billion. It’s got a ways to go to catch Toyota at $165 billion, but after you read our BMR Take, below, catching Toyota is not out of the question.
Tesla is reportedly considering launching its own streaming music service. The company has already spoken to the major labels about acquiring the rights to stream songs and albums from the biggest names in the world.
The company may still be a niche player in the auto world, but it is quickly becoming a more serious competitor, and there is no cooler or more in-demand product than Tesla right now.
It is already fairly easy to link a streaming platform and listen to music in a Tesla, but Musk and his employees are clearly interested in upping their offerings, which could make their cars that much more enticing to potential buyers.
Tesla apparently wants to offer several different tiers of this new musical product, all available at different price points. That’s a solid plan that few streaming outlets have been able to master, and few have even tried. If the company can deliver several different options for music lovers looking for different features at different prices, it could give the new service a competitive edge. And by helping it sell more cars, it could generate serious marketing revenue for Tesla.
BMR Take: Tesla is just one of the most innovative companies in the world. Who would of thought of a doing a music service? But they have the resources to pull it off. While Tesla is losing money this year (consensus calls for -$5.80 of EPS), the long term vision and potential here is unrivaled in the Auto sector. If you can’t drive a Tesla, at least ride the stock.
Note that we can foresee another secondary coming in the not too distant future. Tesla goes to the market to raise capital since they are still losing money in a huge way. The have 3.0 billion shares outstanding so selling just 1% of this in new shares, 30 million, would raise over $11 billion in fresh new capital. As we write this we are astounded at the math. No wonder the shorts are getting absolutely destroyed.
Twilio (TWLO: $29.70, up 10.5%)
We see several positive indicators ahead of Twilio. First, Twilio is seeing 20,000 inbound leads per month, up from 5-10,000 at the beginning of the year. Twilio hosted its Signal 2017 Developer Conference in May, which may have helped increase the lead flow. Twilio recently disclosed that it now has 1.6 million developer accounts on its platform, up from 1.0 million a year ago
Second, the sales organization at Twilio remains quite bullish and optimistic about the company’s prospects. According to reports, the long-time sales people at Twilio “have never been more bullish about this company.” Customer reviews show that 85% of reviewers have a positive business outlook about the company, 92% approve of CEO Jeff Lawson, and the overall rating for the company is 4.2 out of 5.0.
Lastly, there is a wisp of hope surrounding the Uber relationship. On the 1Q17 earnings call, management announced that its largest customer, Uber, was “changing the way they utilize and consume communications services.” Twilio said it expects Uber to remain an “important customer…going forward,” but lowered its 2017 base revenue guidance by $11-12 million as a result of the diminishing relationship.
All this aside, some people in the industry are now saying that Uber business might be back. Apparently, after an adjustment period in which Uber implements and executes on its multisourcing strategy, Twilio might be able to see its Uber business return to a growth phase. We sure hope this is the case.
BMR Take: We believe the stock represents an excellent opportunity for long-term capital appreciation. With sales ramping from $275 million a year ago to $360 million this year and heading to $600+ million by 2019, the lucrative 25% top line growth is an impressive feat.
Bristol-Myers (BMY: $57, up 4%)
Bristol-Myers’ stock has doubled the Healthcare sector index since April. While it has taken longer than expected for Bristol, the business outlook is finally starting to improve.
Hospital sales of Opdivo rose 13% in May compared with the 4-month moving average, according to data compiled by Symphony Health Solutions. Opdivo provided 23% of the latest quarterly revenue at the company. This blockbuster drug is having a major effect on lung cancer. It’s great to see these strong growth figures.
BMR Take: Many people continue to speculate that Bristol could be acquired. Recall that famous hedge fund investor Carl Icahn took a major stake in Bristol on this investment thesis and remains one of the company’s top shareholders. But at $93 billion, this would be a BIG acquisition. We don’t think a buyout will happen, but we are a secret admirer of Icahn. After all, he is worth $16 billion. We think he knows a thing or two.
Bristol is a healthcare bellwether. The EPS outlook is $2.90 this year and $3.15 next year, placing the P/E multiple attractively under 20x. With a 2.7% dividend yield, we like the fact that you get paid while you hold the shares. We see substantial upside potential with or without a takeout.
Eli Lilly (LLY: $84, up 2.4%)
As CEO of a 141-year-old Big Pharma company, Eli Lilly’s David Ricks has a fairly good platform for surveying the Healthcare ecosystem. He gave an interview this week and we highlight below some of the key takeaways.
Innovation and productivity are always a challenge for Big Pharma, so the unveiling of Lilly’s new expanded R&D facility warranted some celebration. Right now, the most exciting place is oncology. Something like half of the venture-backed investment is going into oncology companies. That’s because there’s a massive opportunity.
As everyone knows, the battle doesn’t end with an FDA approval. Drug pricing is a heated debate right now and soured sentiment on all of healthcare lingers. Obviously, there’s a lot of frustration with the drug pricing topic. Though one of the core problems is the changing model for insurance design, which is impacting the affordability of medications for people with chronic illnesses. A lot of the cost burden in the healthcare market right now has been shifted to premiums paid by consumers. The high level of premiums being paid today by consumers is not necessary. If political leadership can set new policies that take healthcare back to operating more efficiently, the cost burden currently being placed on consumer can ease up meaningfully.
BMR Take: Lilly is a top franchise in its market. With EPS of $4.10 this year expected to rise 5-10% a year for the foreseeable future, we like the prospects just on this alone. You add upside from innovation in oncology, and the possibility for drug price reform to increase sentiment, and a 2.5% dividend yield while you wait, it adds up to a recipe for investment success.
Upcoming Economic News
Dallas Fed Index
Monday, June 26, 10:30 AM
Period: JUN
Actual: N/A
Consensus: 18.2
Prior: 17.2
Notes: This is an indication of business activity.
Consumer Confidence
Tuesday, June 27, 10:00 AM
Period: JUN
Actual: N/A
Consensus: 116.7
Prior: 117.9
Note: The Conference Board's Consumer Confidence Survey is a monthly measure of the public's confidence in the health of the U.S. economy.
Pending Home Sales Index
Wednesday, June 28, 10:00 AM
Period: MAY
Actual: N/A
Consensus: 110.5
Prior: 109.8
Note: The National Association of Realtor's Pending Home Sales Index is designed to be a leading indicator of housing activity. This index measures housing contract activity.
Personal Income
Friday, June 30, 8:30 AM
Period: MAY
Actual: N/A
Consensus: 0.30%
Prior: 0.40%
Note: Monthly Personal Income and Outlays data are published by the U.S. Bureau of Economic Analysis. Personal income measures total pretax income earned by individuals, non-profit organizations, and private trust funds.
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
The week which follows June option expirations (two weeks ago) has historically been one of the worst. But not this year. What we also like is the fact that oil has broken down below $45 per barrel and it hasn't dragged the market with it. Plus, the Fed raised rates AND laid out a plan to unwind its $4.5 trillion balance sheet (which represents its bond portfolio.) We said last week that such a move would likely be a headwind for the market, so one would think that the economy would have to be rather strong for them to approve both moves. It isn't, however, so we are at somewhat of a loss to understand the "exuberance" of the market in light of the statistics that clearly show a "softening" economy as opposed to a strong one:
Wholesale and Retail Inventories Down: Revised wholesale inventories shrunk 0.5% in April, the largest contraction in more than 12 months. The Commerce Department reported that retail sales fell 0.3% in May, marking the largest one-month drop since January of last year. That is just not a signal of a strong and growing economy, particularly in view of the fact that consumers are 70% of our economy.
Housing Data Weaker: U.S. homebuilding fell for a third straight month in May to the lowest level in eight months. Housing starts dropped 5.5% to a seasonally adjusted annual rate of 1.09 million units, which is well below forecasts of a 4.1% increase. Remember, 10,000 people turn 65 every day in the US (and will for the next 10+ years). These folks will eventually move, so homebuilding will have its own demographic headwinds to contend with in addition to the usual economic ones.
Economic Slowdown: The Fed has always targeted 2% inflation, but inflation slowed in April to an annual rate increase of 1.7% year-over-year, down from 1.9% recorded in March and 2.1% in February. Falling oil prices, excessive auto inventories and increasing apartment rental inventories will pretty much put the kibosh on reaching the Fed's target rate of 2% unless there is a dramatic turnaround in the last half of the year. We know that economic growth slowed in the first quarter, with GDP increasing at only a 1.2% annual rate - down from 2.1% in Q416. It's supposed to come in above 2% for the 2nd Qtr, but we'll have to wait for the numbers to come out.
Lower Expectations: Last but not least, the Bloomberg U.S. Economic Surprise Index, which measures whether economic data beat expectations, fell below zero for the first time this year. This signals potential headwinds moving forward.
Many experts believe the market has already priced in some of the new Administration's "growth agenda". However, the "Trump" trifecta (lower taxes, infrastructure spending and healthcare reform) is a nofecta at this point. Unless something gets done before the August recess, the markets will have to face the probability that zero gets done this year. If that happens, we will really need to get excellent earnings to avoid hearing the dreaded sound of air coming out of the market's balloon. And, it will be interesting to see if the Fed moves forward with another rate hike in 2017 in light of the weaker "Big Picture."
Cloudera Update
Cloudera (CLDR: $16.35, down 6%) had another rough week. The stock has gone straight down since we added it three weeks ago. In the earnings report for the June quarter, revenue was $80 million, an increase of 41% from the year ago quarter – a strong showing in our book. They operated at a loss which had been expected, but the market didn’t like this and took it out on the stock. The company went public two months ago at $15 and the firm was able to pocket $250 million in cash, so the company can stand a few quarters of losses, as long as revenues continue growing at this exalted rate.
BMR Take: Nothing has changed in the last three weeks except for the price of the stock. The company is still moving forward dramatically with increased revenues and we don’t expect this to change. Big revenue increases like this always win in the end. But this is not a stock for the weak. It is below our Sell Price, so if it is too painful for you, you should reduce or eliminate your position and watch from the sidelines. We believe in the company but obviously are too early on this one.
Nutanix Update
Nutanix (NTNX: $19.31) had a great week, up 9%. The firm is knocking down new business in bigger chunks lately, with two of its new orders valued at more than $5 million, while 35 deals were more than $1 million each. The firm added 800 new customers last quarter, hitting the 6000 customer mark, and the market is just starting to recognize this and is anticipating another strong quarter ending this week.
BMR Take: Revenues last quarter were big, hitting $192 million, up from $115 million a year ago. That’s 67% growth. We’ll take that to the bank any day of the week. This is still a relatively small firm, with a market cap of just $2.3 billion, so it’s not like investing in a Google at $675 billion, almost 300 times as big. So when you invest in firms that we recommend, do some serious thinking about the relative risk involved. Of course, Nutanix at $19 can go to $38 a lot easier than Google going from $966 to $1932. And for that matter, Nutanix and go to $9.50 a lot easier than Google can go to $483. It’s all relative. Risk vs. reward.
The High Yield Corner
By Michael Foster
Special to The Bull Market Report
The AGIC Equity and Convertible Income Fund (NIE: $19.69) had a relatively flat week despite a fall in price on Wednesday with volumes slightly higher than the fund’s average. That’s helped the fund achieve a 7% year-to-date return on top of the current 7.7% yield, which is in excess of the 6% annualized return since the fund’s inception in 2007. We’ve seen the fund maintain its dividends with no evidence so far that the dividend will be cut. The fund’s NAV has also seen a 9% return year to date, meaning the fund’s discount to its NAV has improved slightly from the start of the year. We like this one.
The PIMCO Dynamic Income Fund (PDI: $30, flat) had a similarly solid week, although the price action here has been more steady. The stock is up 2% in the last 30 days. The fund is currently trading at a 7% premium to its NAV as a result of a strong price appreciation over the last two years. Currently, Pimco Dynamic is up 8% year-to-date and is up 11% from a year ago, which excludes the fund’s 9% dividend yield. Huge.
And keep in mind that this excludes the fund’s special dividends, which have been 3% or more of the fund’s market price in recent years. While it’s too early to make any estimates of what that special dividend will be at the end of 2017, it is evident that we will see another special dividend come to shareholders. Remember last year in the fall and early winter? We talked about it incessantly and guess what? They came through in flying colors, issuing a $1.45 dividend on December 22nd. What an awesome Christmas present.
And now, let’s take a look at REITs. The Bull Market Report High Yield portfolio is heavily focused on a variety of REITs of various types. This week was favorable to all of them.
Digital Realty Trust (DLR: $120, up 4%) has been on a non-stop tear as investors continue to bet positively on the firm’s recent merger with DuPont Fabros Technology (DFT: $65), with synergies from the merger, making this an increasingly valuable reason to buy the stock. Shareholders can rejoice in the 23% gain in 2017.
While the data center space is seeing continued mergers and investor enthusiasm, the Healthcare sector is enjoying a much more low-key run. Omega Healthcare Investors (OHI: $34, up 4%) saw steady price gains for the week. Omega has been an interesting stock for a few reasons. After hitting the current level in April, we saw a pretty heavy dip to bring the REIT to be flat for the year, a rarity in 2017, which has treated REITs kindly. Previously at The Bull Market Report, we have discussed this as a somewhat random outflow of capital with no clear catalyst. The firm’s funds from operations, which is the primary metric when analyzing income and dividend sustainability, is stronger than ever, and the stock’s 7.5% yield is not at risk. So what’s driven the decline? There really is no clear answer, but it doesn’t matter much anyhow; no bad news has come from the firm and it’s since recovered to be up 8% for 2017. Omega Healthcare remains a firm hold for income investors.
Our other Healthcare REIT recommendation has also done extremely well. Care Capital Properties (CCP: $28) is up a whopping 5% for the week, being one of the best REIT performers of the week. That brings Care Capital’s price growth to 10% for the year. This is an eventuality that we have been waiting for for a long time. Care Capital was significantly oversold late in 2016 as a result of market fears that the Healthcare REIT sector would be decimated by President-elect Trump’s plans to overhaul Medicare/Medicaid. But nowadays the news from D.C. has much more to do with politics than policy, and healthcare reforms seem to be sidelined as D.C. focuses on other things. This has helped investors return to Care Capital. As they well should. It’s a solid REIT with over 100% dividend coverage and growing FFO, making us long term holders.
Note that Capital Care is being acquired by Sabra Health Care REIT (SBRA: $25) and it too, had a good week, up 5%.
Government Properties Trust (GOV: $23) was flat on the week with very little volume. In fact, volume has plummeted from a year ago. This may in part be a result of the strong showing the stock has had in 2017 - we’re up 19% already. When The Bull Market Report first recommended this stock, it was yielding 11% thanks to market fear around the company’s pivot towards more private office acquisitions. We did not see a problem with this, identifying it more as a diversification strategy that would lower the firm’s risk profile. The market seems to have taken to this view, as the stock now yields less than 8% thanks to its recent price run-up. Despite the significant capital gains this stock has provided The Bull Market Report REIT portfolio, we encourage investors to hold on to their shares and see what happens at the firm’s late-July earnings call. Any dramatic change in FFO or occupancy rates could make us change our view, but that seems to be an extremely unlikely eventuality.
Finally, a note on AstraZeneca (AZN: $35, up 1.5%). This was one of our big contrarian recommendations last year and we saw the stock fall significantly after our recommendation. Stubbornly, we stuck it out and encouraged readers to hold the company while the market gets its act together and recognizes that dividend coverage is solid thanks to well-managed cash flows, and a pipeline with many promising drugs ensures earnings growth is around the corner. Finally the market has realized its mistakes, and shares are up 29% in 2017. We are now up 17% from our initial recommendation, but more price growth is expected down the road. Again, investors should keep their AstraZeneca shares and enjoy the unrealized gains they’ve had, along with the gains in other High Yield Portfolio holdings. We see more gains coming ahead.
Good Investing,
Todd Shaver, CEO, Founder and Editor
The Bull Market Report
Since 1998
May 10, 2017
by Todd Shaver | May 10, 2017 | 7am News Flash
Sabra Health Care REIT (SBRA: $24), a Maryland Corporation, is a self-administered, self-managed real estate investment trust that owns and invests in real estate serving the Healthcare industry. Sabra leases properties to tenants and operators throughout the United States. Sabra's portfolio consists of skilled nursing facilities, senior housing facilities, a hospital, and one mezzanine loan nationwide. Its property portfolio consists of over 180 real estate properties held for investment, consisting of 100 skilled nursing/transitional care facilities, 85 senior housing facilities, and one acute care hospital. Capital Care Properties (CCP: $27) has over 340 primarily skilled nursing and senior housing facilities. The combined company will have over 500 properties.
Care Capital shareholders will receive a fixed exchange ratio of 1.12 shares of Sabra for each Care Capital share. At closing, estimated for 3Q17, Sabra shareholders will own approximately 40% of the combined entity and Care Capital shareholders 60%. The new company would create a more diversified real-estate investment trust with better access to debt markets. The combined company is expected to have a market capitalization of about $7.4 billion. Sabra management will lead the combined entity with three Care Capital directors taking board seats. We hope that management will aggressively use asset sales to create a portfolio with a higher percentage of sustainable rents. If they do, we see compelling upside to the stock.
Also, the combined entity's reduced cost of capital and back office savings will also provide management better flexibility to deal with tough issues within the Care Capital portfolio, specifically an increasingly difficult skilled nursing operating environment. Progress here could unlock real excitement for investors to own the stock.
Lastly, the combined company expects to have modest leverage, excellent liquidity and strong fixed charge coverage, with investment grade credit metrics. Sabra and Care Capital believe the greater scale will promote investor interest and increased shareholder liquidity, positioning the combined company to benefit from a more attractive cost of capital, allowing it to successfully compete for future investment opportunities. More acquisitions provide a path towards improved earnings power, a trait we love to see in our Bull Market Report portfolio companies.
BMR Take: We cheer the benefits and rationale for this transaction. We eagerly await the 3Q17 closing timeline as we see upside to the stock as the acquisition closes and the synergies begin to be realized. We hereby remove Capital Care from our REIT portfolio at $27, flat with the price when the stock was added, but collecting the big 8.5% dividend since September is a nice return. We add Sabra to the REIT portfolio at $24 and expect it to get back to $29 where it was in late April. We’ll set a Target of $30 on the stock and a Sell Price of $21.
May 8, 2017
by Todd Shaver | May 8, 2017 | Earnings Preview 12 PM
Tesoro Corporation (TSO: $81)
Bull Market Report Target Price: $110
Bull Market Report Sell Price: $78
Earnings Date: Monday, after the close
Consensus: 1Q17
Revenues: $7.0 B
EPS: $0.31
Year Ago Quarter Results
Revenues: $5.0 B
EPS: $1.19
Key Things to Watch for in the Quarter
Analysts across Wall Street are looking for Tesoro to increase its top line by 42% to $7 billion, but EPS will decline almost 75% to $0.31. The stock climbed 5% in the weeks following when Tesoro beat estimates this time last year. Year-to-date, the stock is up about 6% and currently trades at a 13 PE ratio, extremely cheap compared to the industry average 39. Tesoro is expected to close a merger with Western Refining in the first half of this year. Tesoro will greatly benefit from the new firm’s combination of resources and business operations.
Mazor Robotics (MZOR: $37)
Bull Market Report Target Price: $44
Bull Market Report Sell Price: $32
Earnings Date: Wednesday, 8:30 AM ET
Consensus: 1Q17
Revenues: $11.5 M
EPS: -$0.17
Year Ago Quarter Results
Revenues: $6.5 M
EPS: -$0.24
Key Things to Watch for in the Quarter
Mazor Robotics is expected to report healthy revenue and EPS growth for 1Q17. Analysts estimate that Mazor will report a 79% increase in revenue to $11.5 million and a 30% increase in EPS to -$0.17. The firm reported earnings that missed estimates in all four quarters of 2016, and the stock has provided investors with a 200% return. The CEO made an appearance on Mad Money last week, contributing to the 55% upwards move since March 22nd, just 10 days ago. Mazor had a market cap of approximately $550 million at the beginning of this year, relatively small by Wall Street’s standards, allowing it to fly slightly unnoticed by larger investors. But not by readers of The Bull Market Report, as the cap is now at $880 million. We are now up over 120% since we added the stock in June. It is not too late to own this one.
Care Capital Properties, Inc. (CCP: $29)
Bull Market Report Target Price: $33
Bull Market Report Sell Price: $20
Earnings Date: Tuesday, 10:00 AM ET
Consensus: 2Q17
Revenues: $79 M
EPS: $0.38
Year Ago Quarter Results
Revenues: $81 M
EPS: $0.36
Key Things to Watch for in the Quarter
Analysts across Wall Street expect that Care Capital Properties will report a healthy 6% growth in EPS to $0.38 and a 3% decrease in revenue to $79 million. Although shares fell nearly 10% following the 1Q16 earnings release, the stock managed to rally over 20% from its 52-week low. Care Capital has managed to trade relatively cheap at a PE ratio of 18 compared to similar REITs which trade around 35x earnings. The stock has yielded investors a strong 8% dividend over the past year. And over the past few month’s insiders have increased their equity positions by 5%, indicating confidence in the future of the company’s business. We look forward to watching Care Capital’s continued growth in the Medical Real Estate business.
May 7, 2017
by Todd Shaver | May 7, 2017 | Weekly Newsletter 7pm Sunday
The Week Ahead
Well, it’s graduation week. Class of 2017 graduates are hitting the stage to accept their diplomas, listen to a keynote speech, make one last party, and then head out into the great big world. What will they find? GDP growth moving to 4% or stalling out around 2%. Will geopolitical tensions escalate as early as this year or find a sustainable comfort zone? Can equity prices hold? How bad will rising rates hurt the bond market? Everybody from the newest participant in the labor force to the most experienced must wrestle with these questions in the year ahead. We at The Bull Market Report hope to help you with some good insights about what to make of it all—week in and week out.
There is always a bull market here at The Bull Market Report! This week we highlight the following securities: Eli Lilly, Home Depot, Netflix, Splunk, PayPal, and VMWare. And a few others!
Highlights From The Past Week
Federal government expanding investigation of Fox News. The aggression against the media continues. Current and former Fox News employees have been interviewed, as authorities try to determine how settlement payments for sexual-harassment allegations were structured and which executives played roles in the payments. One source tells the WSJ that the investigators seem to be interested in intimidation tactics that former CEO Roger Ailes signed off on. The investigators are in the securities unit of the US attorney’s office, and no prosecution will necessarily follow. What does this all mean? You need to find trusted sources of information in this world. We strive to make The Bull Market Report a reliable and honest source of information for you to rely on.
It's the strangest thing: A hedge-fund manager apologizing for bad calls. Wellington Management Sr. VP Nick Adams isn't just apologizing for his mistakes on Silicon Valley venture deals -- which differ from the bank stocks he has a proven record with -- he's refunding fees. Adams, who has lost money two out of the past three years, put hundreds of millions of dollars into Mozido and Powa Technologies, which are both financially distressed. Adams has promised he won't ever invest in similar private deals in his flagship fund again. People familiar with the firm's finances say that after investors including Blackstone (BX) withdrew their cash, Adams's portfolio at the start of 2017 was $6 billion, down 40% from 2014. Adams has now returned to investing in traditional lenders like Bank of America and Citi, and his main fund rose 12% in Q1. We think there are lots of lessons to learn from this situation. For instance, if you ever wonder why many of The Bull Market Report’s stock picks are in household names that are often large cap stocks, well, now you know why. Traditional investing is a proven money maker and we try to take you where you can make money.
Don't assume the Healthcare industry will be fine. We think the market is right to assume that the Republican replacement for Obamacare won't be passed in its current version, but anything that hurts earnings for the sector could bring prices down, and the failure to pass any sort of healthcare reform may make a tax reform harder to achieve, which will be a negative for stocks more broadly. We all must keep an eye on this important event unfolding in Washington in the weeks ahead.
BMR Companies and Commentary
Eli Lilly (LLY: $83, +0.5% - All changes are for the week) Eli Lilly has more growth drivers than all its peers, but its continued pledge of "at least 5% annual sales growth" for 2015-20 is being called into question because a big portion of growth comes from two drugs - Jardiance and Trulicity - that have recently faced setbacks. We think Eli Lilly is a topnotch franchise in Healthcare and will overcome these hurdles.
Jardiance is a drug for type 2 diabetes. Johnson & Johnson has a competing drug called, Invokana, which is set to release new trial data in June. Everybody is saying that if Johnson & Johnson’s drug has good data, then there will be more pricing competition in 2018 for Eli Lilly’s drug. We think this risk is widely known, already factored into the numbers, and not a reason to not own Eli Lilly’s common stock.
Trulicity is also used for type 2 diabetes. It faces risks from the FDA's decision last August on Novo Victoza, specifically that this drug had problematic heart effects. Will the FDA say the same thing about Trulicity? We will find out in 2018. For now, it is overly pessimistic to assume Trulicity faces serious FDA challenges.
Note that Lilly's drug unit accounted for 83% of 2016 sales, with the balance coming from animal health, so the story is not just all about drugs. Also, Eli Lilly's operating margin trails most of its peers, except Bayer, and by leveraging new-drug launches, it aims to reduce R&D and SG&A expenses to 50% or less of sales in 2018 versus 56% in 2015. This target is achievable by Pharma standards as Jardiance's new heart label drives growth and Trulicity, an established product, continues to add to margins.
Lilly investors may be relieved by the good set of results in 1Q following recent drug setbacks. Older drugs, such as Cymbalta and Strattera, beat consensus, lifting margins and feeding through to the 2% EPS beat. Diabetes was strong with both Trulicity and Humalog beating consensus, while Jardiance missed by a little. Jardiance is a key driver of growth and while the miss raised eyebrows we say stay the course.
BMR Take: Eli Lilly is a top franchise in Healthcare boasting a market cap of $91 billion. On track to clear $5 of EPS, the stock is a good value.
Home Depot (HD: $156, flat)
A lingering debit/credit card breach has kept a lid on shares of Home Depot. The bad news is that it is so sad to see some large-scale breaches at US companies like Target and now Home Depot. The good news is Home Depot has taken strong steps to remedy the situation. In any case the stock is $1 from an all-time high, fast approaching $200 billion in market cap.
Companies hit by data breaches often face class action complaints filed by consumers. They also face lawsuits from shareholders looking to thwart future breaches and restore financial stability to companies in which they have invested. Home Depot's willingness to take meaningful but financially limited remedial mitigating action achieves a mutually beneficial resolution that companies facing any kind of data breach lawsuits, such as Yahoo, may rely on to improve their corporate data governance.
Under the proposed settlement, Home Depot will change many of its cybersecurity corporate governance policies. Home Depot agreed to document the duties and responsibilities of the chief information security officer; conduct table top exercises; monitor computer networks; maintain a “Data Security and Privacy Governance Committee;” hire a “dark web mining service;” receive reports on the company's information technology budget; join an information sharing program; and authorize the board to retain its own IT and data security professionals. Home Depot also agreed to pay $1.1 million in attorney’s fees and and $1.5 million to the shareholder representatives. They agreed to the settlement because it saw the attorneys’ fees as a minimal money issue and it believed the actions “would restore trust” in the company.
BMR Take: Home Depot is on track to deliver $10 of EPS and $100+ billion of sales. Don’t sweat the small stuff. Sorry to see the cyber breach, but the core business is doing great.
Netflix (NFLX: $157, +3%)
What could be more exciting than a Netflix merger with Apple? The world continues to talk about the prospects. Let’s break down the potential reality.
There may be as good as 40% odds that Apple acquires Netflix. The research arm of the investment bank Citi released a report with seven potential merger and acquisition targets for Apple. Tops on the list is Netflix. Elon Musk's Tesla, on the other hand, is only 5% likely. The full list of acquisition targets includes three media firms, three game developers, and, of course, one car manufacturer. Disney and Hulu are the media firms joining Netflix, while Activision, Electronic Arts, and Take-Two are the gaming companies.
Netflix makes a ton of sense, of course, as the company dominates streaming media both domestically and abroad. Disney has a strong list of properties as well, but slightly more oriented to traditional media consumption, whereas Netflix is well-positioned to take advantage of the continuing trend to cut the cord (cord-cutting has jumped 5x). Plus, Disney is worth $177 billion, whereas Netflix is worth $67 billion.
BMR Take: The future of TV consumption swings in the balance as the world moves away from traditional cable to the internet. Netflix is the powerhouse making the company a coveted asset in media. On track to do $10 of EPS by 2020 we see compelling value in the shares as a standalone entity even at current levels. A take-out could offer huge upside.
PayPal (PYPL: $49, +3%)
The PayPal network effect is working like charm. Investors in PayPal had plenty of reason to cheer last week when the company reported earnings. Nearly every metric was up by a better-than-expected percentage, surpassing expectations of all but the most bullish on the company.
More exciting to long-term investors, however, was the account growth and increase in user engagement with the company's core platform. Six million active accounts were added during the quarter, increasing the total to 203 million for the digital payments company. These active accounts now average almost 32 transactions per year, a 12% increase year over year. More customers using the company's platforms more often was a winning combination that the market liked.
PayPal's growth is beginning to fuel a powerful network effect opening a new window for the company. The beauty of this type of growth is that it drives itself. The more users that sign up for the platform the more important the service becomes for retailers to adopt it and the more places that accept it, the more attractive it becomes to new users. Get it?
At the end of March, 16 million retailers were accepting PayPal's core platform as a method of payment. Management is well aware of this virtuous cycle. During the conference call, CEO Dan Schulman stated: “Our powerful two-sided network engages both consumers and merchants, and the larger our scale, the stronger our network effect becomes. We made meaningful progress in advancing merchant adoption of PayPal in the quarter. At the end of March, the number of active merchant accounts on our platform increased to 16 million. The size of our merchant base is a formidable competitive advantage and is extraordinarily difficult for others to replicate.”
BMR Take: We think PayPal is in the middle of a decade-plus growth cycle that will deliver real value for shareholders. Stick around. They are already closing in on $3 of EPS.
Splunk (SPLK: $67, +4%)
Progress at Splunk is happening. Splunk, a provider of the leading software platform for real-time Operational Intelligence, recently announced support for SaaS Contracts in AWS Marketplace. Working with Amazon is a big deal!
The new globally available API capability* enables seamless procurement and deployment of Splunk® Cloud. The automated and accelerated purchasing process for Splunk Cloud via AWS Marketplace ensures fast time-to-value for customers leveraging Splunk solutions to gain real-time security, operational and cost management insights across their Amazon Web Services (AWS) and hybrid environment.
* Application program interface (API) is a set of routines, protocols, and tools for building software applications
The University of San Francisco is home to an innovative academic community of more than 12,000 students, faculty and staff. “As a higher education institution, USF prides itself on being at the forefront of technology, which is why we turned to Splunk and AWS,” said the vice president of information technology and chief information technology officer, University of San Francisco.
BMR Take: Working with Amazon gives Splunk big growth potential. The EPS outlook calls for great than 3x growth from $0.41 of EPS in 2017 to $1.35 of EPS in 2020. Ride this growth wave!
VMware (VMW: $94, flat)
VMware is out with some good news. The company is the first mobile application management provider to manage and secure hundreds of Oracle business applications and custom applications. As such, enterprise IT organizations can manage their Oracle application suite on a single unified platform together with their other business-critical applications and devices. Users who count on Oracle's business applications to make better decisions, reduce costs and increase performance can benefit by being able to access these applications through a simple digital workspace environment – be it from a mobile device, laptop or desktop – with VMware Workspace ONE and AirWatch.
What does that mean? VMware is continuing to make end roads in the lucrative cloud business, where growth is driving real results for stockholders.
The Chief Operating Officer, customer operations, said: "Mobilizing critical business processes is at the core of both of our organizations' DNA and this collaboration will help us advance this shared vision for our customers and their end users alike. We're proud to come together with Oracle to make it easier for IT administrators to secure and manage these critical mobile apps and help their end users seamlessly access them from any endpoint.” VMware Workspace ONE is the industry's only integrated platform for application and access management and unified endpoint management that enables simple enterprise secure access to any app from any device, accelerating adoption of digital workspaces.
BMR Take: The company is working. EPS is on track for $4.90 this year with growth upside to $6 in the next few years led by the cloud business and partnerships like the one described above serving Oracle.
Economic Outlook for the Coming Week
Monday, May 08, 2017 10:00 AM ET
United States - Labor Market Conditions
Period: APR
Actual: N/A
Consensus: N/A
Prior: 0.40
Labor market conditions index is derived from a dynamic factor model that extracts the primary common variation from 19 labor market indicators. It measures the changes of condition in the labor market. We expect to continue to see signs of a healthy labor market.
Tuesday, May 09, 2017 6:00 AM ET
United States - NFIB Small Business Index
Period: APR
Actual: N/A
Consensus: N/A
Prior: -$176B
NFIB Research Foundation has collected Small Business Economic Trends data from a sample of members from the National Federation of Independent Business (NFIB). Data from quarterly surveys since 1973 is based on 10 survey indicators. We expect to see an improving small business economy.
Tuesday, May 09, 2017 10:00 AM ET
United States - JOLTS Job Openings
Period: MAR
Actual: N/A
Consensus: 5,750K
Prior: 5,740K
Part of the US Bureau of Labor Statistics, the Job Openings and Labor Turnover Survey (JOLTS) program produces a monthly study that has been developed to address the need for data on job openings, hires, and separations. With the release of 2003 data, the JOLTS program began publishing industry estimates. We expect to see the JOLTS figures reveal a healthy labor market.
Wednesday, May 10, 2017 2:00 PM ET
United States - Treasury Budget NSA
Period: APR
Consensus: $166B
The monthly U.S. government surplus/deficit is published in the Monthly Treasury Statement (MTS). The MTS is assembled from data in the central accounting system. The major sources of data include monthly accounting reports by Federal entities and disbursing officers, and daily reports from the Federal Reserve banks. These reports detail accounting transactions affecting receipts and outlays of the Federal Government and off-budget Federal entities, and their related effect on the assets and liabilities of the U.S. Government. It is very critical what happens with Trump now negotiating the government budget and we are excited to see if he can get it under control and address the national debt.
Friday, May 12, 2017 08:30 AM ET
United States - Retail Sales ex-Auto
Period: APR
Actual: N/A
Consensus: 0.45%
Prior: 0.0%
Retail and food service sales data excluding motor vehicle are included in the Advance Monthly Sales for Retail and Food Service report, which provides an early indication of sales of retail and food service companies. We are keenly concerned about brick and mortar Retail sales declines and look to this economic release to assess the damage and potential impact.
MORE COMMENTARY ON BULL MARKET REPORT STOCKS
First Solar (FSLR: $35, up 17%) reported first-quarter earnings of 25 cents a share. The Street was looking for a loss of 13 cents.
Revenues hit $890 million in the quarter destroying the estimate of $700 million. (Who are these analysts anyway?) Revenues grew slightly from last year, up 2%. Profit was $84 million, down from $275 million a year ago. Ouch, but expected.
First Solar has $1.65 billion in cash, up from $1.35 billion at the end of the previous quarter. Long-term debt is $265 million at the end of the first quarter.
The big news is guidance. The company raised its revenue guidance to $2.9 billion from $2.85 billion. This is minuscule, but the Street liked it, pushing the stock up big. Gross margins guidance was moved to 13.5% from 12%.
Full-year earnings are now expected in the range of 25−75 cents per share, compared with the prior guidance of a breakeven to 50 cents.
We’ve said many times that this company is innovative and successful and that the turnaround will take time. This is the first positive information we have seen publicly that good things are actually happening. If you have patience, stick with First Solar. If you don’t, now is the time to take it off the table after this nice 17% run-up.
Facebook (FB: $150, flat)
Monthly active users totaled 1.94 billion while daily active users hit 1.28 billion. Expectations were for these numbers to hit 1.90 billion and 1.26 billion, respectively.
Facebook reported earnings of $2.5 billion or $1.04 per share on revenue of $8.03 billion. Expectations were for earnings of $0.87 on revenue of $7.83 billion. Huge beat. “We had a good start to 2017,” Mark Zuckerberg, Facebook founder and CEO, said. “We’re continuing to build tools to support a strong global community.”
Mobile is big at the company, as advertising revenue on mobile represented 85% of total advertising revenue, up from 82% a year ago. Ad revenue grew 51% over last year to $7.85 billion.
As of the end of the first quarter, the company had $32 billion in cash, and had almost 19,000 employees, up 38% from last year.
As Facebook nears the 5-year anniversary of its initial public offering, note this: In 2012, Facebook was the world's 10th-biggest seller of ads behind a bunch of traditional media companies such as CBS and 21st Century Fox. It has trounced almost all of them to rise to number two in the rankings, surpassed only by Alphabet, the Google parent that dominates search ads. Together, these two companies controlled 20% of the $550 billion spent on ads last year, up from 10% in 2012.
Source: Zenith Media
Jefferies hiked its price target on Facebook to $192 from $175, JPMorgan to $182 from $170, RBC Capital to $185 from $175, and Cowen to $170 from $156.
BMR Take: Our Target is in reach at $165. We would add to our positions at every opportunity. Wait until they hit 2 billion users. There will be fireworks and articles about the company galore and we just might see this as early as July. When this happens we can predict new all-time highs hit left and right.
Shopify News
We Tweeted this out on Friday:
“Shopify is on fire! All-time high at $86, up 5%. Stock was $73 a week ago. STRONG REVENUES will do it! Will eBay make an offer?” [The stock closed at $86 on Friday, up 13% for the week!]
The stock (SHOP) closed at $86 on Friday. We’re up 18% since we added the stock a little over a month ago. Our Target is $90. We can’t wait for it to hit so we can raise it to $100 or higher. And wouldn’t it be nice to see a stock split soon? What ever happened to stock splits? The markets in the 80s and 90s LOVED splits. We could see a 10-1 split for Amazon, bringing the price down to $93, and Google could split 20-1 bringing the price down to $46. Now wouldn’t THAT shake things up on Wall Street! The market would go wild.
Square (SQ: $19.78, up 8%) had a super good week. Square makes credit-card readers that plug into mobile phones and tablets and we were happy to see Square swing to a profit in the first quarter and raise full-year revenue guidance.
Led by Twitter Chief Executive Jack Dorsey, the company posted a quarterly loss of 4 cents per share on a revenue jump of 22% of $460 million. Analysts had expected a loss of 8 cents per share on revenue of $450 million, so of course the market liked what they saw. Square has predicted 2017 total revenue of $2.14 billion.
The company's gross payment volume - the total dollar amount of all credit card payments processed by sellers - jumped 33% to about $14 billion. We like numbers like this.
Another subsidiary, Square Capital, which offers loans to customers in exchange for a fixed percentage of their daily card sales, originated $250 million in loans in the first quarter of 2017, up 64% from a year earlier. We like large percentage increases like this. (We sound like a broken record…)
Square continues to move towards bigger customers. They said that 44% of the money flowing through its systems came from merchants that have over $125,000 in volume on the company’s platform, up from 39% a year ago. CFO Sarah Friar said: “That ongoing shift is good to see because those folks are not new to the payments world.”
Citigroup upped its price target on Square to $23 from $21, and Pacific Crest to $21 from $19.
BMR Take: We’re looking for $24, and hereby raise our Sell Price from $14 to $17.
Apple (AAPL: $148, up 4%) announced that it has $257 billion in cash as of the end of the quarter. They added $10 billion in the quarter which equates to about $800 million a week, or over $150 million per work day! Repeat: $150 million per work day. The company said it will return more of that to shareholders, announcing $50 billion in new stock buybacks and a 63-cent quarterly dividend. The company had already announced $175 billion in repurchases, helping maintain the stock price in lulls between new products, so the upcoming total is now $225 billion. Take a look at this chart of their cash buildup over the years:
Twilio (TWLO: $24, down 27%) We reported via News Flash on Tuesday that despite strong revenues the market didn’t like the results. The biggest knockoff was the fact that one of their big customers, Uber, has decided to go it alone. Uber provides 12% of total revenue for the company, but Twilio grew revenue by 60% not including Uber. So ultimately, we are not that worried about future revenues. We believe they will continue strong. (We think they will come back to Twilio at some point.) WhatsApp, owned by Facebook is also a large customer, so some people are worried about this large concentration of revenue in one customer. We’re not. There is no word as to whether they are considering leaving. We would suggest that they are quite happy with the service they receive. And again, note that the company added 4,000 customers in the quarter – amazing really – giving them more than 41,000 customers, up from 29,000 at this time last year.
We had a letter from a reader about Twilio and we said this to him:
Bob -- Be prepared for anything that might happen. We could see $20 before we see $30. I hope this is not the case, but it could happen. Uber is slowly leaving as a customer and they had 12% of revenues. So, this will take some time to work out. They did add 4000 customers last quarter and are now over 40,000. They normally add 2800 a quarter. But unfortunately, like First Solar, this is going to take some time.
The Options Corner
We had mentioned in our News Flash about Twilio that we would do a column about options if anyone was interested. Well, we had a strong show of support for this. So here you go.
There are myriad of options strategies if you want to maintain a position in Twilio and you believe it will come back like we do. Of course, most options trades are risky except for selling covered calls, which are still risky but less so than buying options outright. The premiums on Twilio options are relatively high so that usually points to two types of options trades: doing covered calls, and selling naked puts or calls. The latter two are very dangerous.
Selling covered calls: Selling covered calls on Twilio is fairly straight forward. With the stock at $24 you can get about $1.80 for the January $30 call. If you have 1000 shares, you can sell 10 options and receive $1800 in your account that day. The downside is that you would be obligated to sell your stock at $30 if it goes higher than that. But, you can always buy back the option if the stock goes above $30. Depending on how long it takes the stock to get there will determine the price at which you have to buy back the options. If the stock goes to say $32 by January, then you could buy them back for about $2, losing about 20 cents, or $200. But with the stock at $32, you would feel good about that. The downside is that if someone buys Twilio out at $40 a share, you would be forced to sell your stock at $30. Not pretty.
If the stock stays below $30 until January, then you can turn around and sell another out-of-the-money option for a few dollars and wait for the stock to move higher and each time you do this you put cash into your account.
As you can see there are lots of scenarios that can happen so you have to watch carefully. Make sure you have the advice of your broker.
Buying options: If you think the stock can get to the $40 level or higher by say January 2019, you can buy out-of-the-money options inexpensively. But you could lose all of your money if the stock doesn’t reach the strike price that you choose. For example, you can buy 10 options, controlling 1000 shares, at a strike price of $40 expiring in January 2019 for about $2,300. If the stock goes to $45, these options would be worth at least $5,000. If it goes to $50, the options would be worth $10,000.
Or you could buy the January 2019 50s for about $1400 and if the stock goes to $55 they would be worth $5,000. BUT, if the stock doesn’t get to your strike price, they expire worthless.
Selling naked puts: YOU SHOULD ONLY DO THIS IF YOU WISH TO BUY THE STOCK and if you have the money to do so. You could sell the January 2019 $25 put for about $7, or $7,000 for 10 options. That would obligate you to buy the stock at some point between now and the expiration date at $25, BUT you got $7 per share so your net price is $18. You could do the same thing with a $20 put and get $4.30 per share, obligating you to buy the stock for a bit below $16. We like this latter strategy. Suffice it to say that selling naked puts on stocks you want to buy at a lower price, is a good thing. Again – very risky. Why? What if the stock goes to $10. You would be forced to buy the stock at $18 or $16 as described above. Not fun.
Send us your questions and comments please! Info@BullMarket.com.
Tesoro (TSO: $80, up 1%) moves in the wind with crude oil. Crude got down to $45 early Friday and bounced back to $46 by the close. We like the company but can’t be part of it if crude is headed to $40. If you know where crude is headed you’ll know what to do with your position in this fabulous refiner. Unfortunately, we don’t. If we knew, we could make $1 million trading crude oil futures. We added the stock at $85 in November and have a Sell Price of $75. But we would hate to have the stock go that low, so we are hereby raising our Sell Price to $78, which is two dollars below the current price. So, if Tesoro closes below $78 we are out.
Carlyle Group (CG: $18.10, up 2%) posted first quarter earnings that handily beat expectations on Wednesday, in line with its peers, after a strong stock market last quarter lifted investment returns. Carlyle's peer Blackstone Group (BX: $30, down 2%), a Bull Market Report favorite, reported first-quarter earnings that surpassed expectations.
Carlyle said it earned economic net income (ENI)* of $365 million after taxes, more than six times what it earned a year earlier. That translated into $1.09 EPS, well above analyst forecasts for 38 cents per share and the second-highest on record since the fourth quarter of 2013.
* ENI is a crucial performance measure for U.S. private equity firms as it accounts for unrealized gains or losses in investments.
Carlyle said its private equity investments appreciated 9% in the first three months, better than a 5% gain in the S&P 500 index in the same period. Carlyle Co-CEO William E. Conway, Jr. said, “We deployed capital at a strong pace in the first quarter, with $4.4 billion of capital invested despite a difficult environment. We believe we are well-positioned to continue this strong pace. We have already announced substantial new investments and almost $4 billion of exits that we expect to close in the coming quarters.”
BMR Take: Carlyle is still way undervalued but is paying you 4% while you wait. We’re waiting patiently for the market to recognize this situation. We are up 12% since March, but we sure would like to see our Target hit of $20.
The High Yield Corner
By Michael Foster
It’s finally started.
It’s a bit late, but we’re finally seeing a correction in the BDC world. The UBS BDC ETF (BDCS: $23, down 3%) got hammered in a week that was pretty humdrum for high yield and not bad for the stock market as a whole, despite a lot of drama. Yet BDCs are back to underperforming, as they should. Overstretched valuations and high premiums to NAV were unjustifiable before this week. Now that many companies have reported lackluster earnings, those premiums are even less justifiable.
Ironically, however, this isn’t hurting the most overvalued BDC of them all: Main Street Capital Corporation (MAIN: $40, up 1%), which closed the week strong as investors sighed relief following the company’s earnings. Net interest income rose 9% from a year ago to 61 cents per share and the company’s NAV rose nearly 2% to $22.44. There are two big implications for this: firstly, the company’s dividend coverage is 109% and there’s room for years of dividend growth to continue. We have a feeling Main Street management has the ultimate goal of becoming the first BDC Dividend Aristocrat*. We’ve still got about two decades until they can qualify, so it won’t be easy. But if that is their goal, Main Street is easily the best managed and most long-term focused BDC in the world.
* The Dividend Aristocrats are a select group of 51 S&P 500 stocks with 25+ years of consecutive dividend increases.
That doesn’t mean you should go out and buy. We at The Bull Market Report were happy with our pick and happy to see it rise. But we are not happy to pay an 80% premium to net asset value. Consider this: if you considered Main Street to be the best BDC in the world, you wouldn’t want to compare its premium valuation to the valuation of other BDCs. You’d probably want something safer, like a megabank like Bank of America, which not only lends to small and medium sized banks but also mega-corps and governments while diversifying in other banking activities like M&A advisory, retail deposits, and so on. Or at least you’d want your BDC valuation to be less than the valuation of these banks, right? But if you compare Main Street’s valuation to the price-to-book valuations of these big banks, Main Street is overvalued by 40% at a minimum. This just isn’t good enough for a very well-run but extremely undiversified asset.
The market has begun to realize just how silly BDC valuations were getting, but the market has made an exception for main Street largely due to the fact that just about every other BDC reported awful earnings. Net investment income fell for almost all BDCs that have reported so far, with Hercules Capital (HTGC: $13) seeing NII down 33% from the prior quarter. The dividend is now less than 100% covered. NAV fell a bit as well (over 1%). What happened? The market dumped shares, which fell over 16% in a week. This used to be considered one of the safest and best specialty BDCs out there, but the market can turn very quickly on this asset class. We’re not saying anything similar will happen to Main Street anytime soon, but it is a serious risk.
Then there’s Goldman Sachs’s BDC (GSBD: $24), which fell 3% this week due to a decline in net investment income and virtually flat NAV. The stock is still up 3% year-to-date so you’re paying a higher premium for shares, though. Now you’re paying 32% over what the underlying assets are worth. Of course, this BDC is up big over the past year, thanks in part to the secular bull market in BDCs and thanks in part to the Goldman brand. But, as we’ve written here previously, there is a complicated conflict of interest going on with this BDC that makes us extremely cautious. Goldman Sachs’s management is not duty bound to restrict their deal making just to this BDC, and so there’s a chance (although no evidence this is the case) that management can select better deals for the parent company and keep lesser deals for the BDC business. Without clearer governance resolutions, this makes us extremely cautious. And, at the end of the day, this demonstrates one of the structural problems with many BDCs: management and investors’ interests do not align.
Some of the BDCs in the business were loved for avoiding this trap. The big Ares Capital Corporation (ARCC: $16.60, down 6%) is a good example. But this stock tanked as well, after reporting earnings fell 50% from a quarter ago and NAV rose less than 1%. We don’t need to emphasize how bad those results are, and how they deserve a discounted valuation. But Ares is still trading at a slight premium to NAV.
Obviously, a bigger correction in the BDC market is coming, so where else can we look? REITs and municipal bonds remain our favorite corners of the high yield market. The iShares S&P National AMT-Free Municipal Bond Fund (MUB: $109, flat) remained sleepy due to the risk-on nature of the market encouraging more investors to avoid the asset class, despite the growing number of undervalued bonds and great opportunities to get low risk yield for fund managers. Bull Market Report favorites remained flat for the week, Invesco Municipal Trust (VKQ: $12.69, flat) and The Nuveen AMT-Free Fund (NVG: $14.79, flat) Buying more of either fund at this juncture would make a lot of sense.
And then as REITs go, the SPDR Dow Jones REIT ETF (RWR: $92, down 1%) fell slightly with investor apathy hitting the asset class on little news. This again is resulting in plenty of good deals among REITs, and The Bull Market Report continues to have high conviction for long-term sustainable yields from Digital Realty Trust (DLR: $114, down 1%), Omega Healthcare Investors (OHI: $32, down 2%), and Care Capital Properties (CCP: $27, flat) in particular. Looking forward, we will be looking closely at how REIT earnings results and more market responses from the BDC market causes a reset in high-yield land that offers an opportunity to rebalance the portfolio.
Good Investing,
Todd Shaver, Founder
The Bull Market Report
CEO and Editor in Chief
Founded 1998
April 30, 2017
by Todd Shaver | Apr 30, 2017 | Weekly Newsletter 7pm Sunday
The Week Ahead
Tax season came to a close two weeks ago. We filed an extension of course. Now Tax Reform is front and center. A new plan released by the Trump Administration got the market excited about the prospects. The bull in us hopes to see the corporate tax rate dropped to 15% from 35% and tax repatriation bring home the bacon from overseas – they are talking 10% for this cash that totals $2.6 trillion. We personally are excited about that prospect. We look for more progress in the weeks ahead to drive continued improvement in sentiment and higher stock market prices.
There is always a bull market here at The Bull Market Report! This week we highlight the following securities: Amazon, PayPal, CBRE Group, UPS, Google, Celgene and Athenahealth.
Highlights From The Past Week
The biggest tax cut in US history? The announcement outlined the general principles of proposed US tax cuts and reform. The proposals outline the lowering of the marginal corporate tax rate to 15% from 35%. This rate will be applied to a simplified tax code. Border tax adjustments have been said not to work in their current form but discussions are continuing. Overseas cash will be repatriated at a one-time lower tax rate, although this rate is yet to be determined. The timeline for US tax reform is still unclear. The budget neutrality of these proposals has not been outlined in detail. Secretary Mnuchin stated that the reform would pay for itself with economic growth. But we know this is just impossible. Arthur Laffer would be laughing from the grave. Oh wait – he is still around – a healthy 76 years old.
Remember the Laffer Curve? Google it. It has come to be remembered as the concept of lowering taxes (thus cutting tax revenue to the government) causing so much growth that the increased tax revenues pays for the tax cut. Again – this has been completely debunked over the past four decades.
Cash repatriation a big deal for the Technology sector. In recent years, US companies have accumulated estimated overseas cash balances of $2.6 trillion on their balance sheets. Overseas cash holdings are dominated by the Information Technology sector. Companies such as Apple ($255 billion), Microsoft ($110 billion) and Google ($75 billion) have significant cash holdings well in excess of their working capital requirement. If this cash starts coming back we think it will be a boost to the economy and the stock market.
No healthcare vote this past week. The latest House attempt to pass a revised Obamacare replacement bill seems to have stalled. Despite continued pressure from the White House and recent speculation that a vote could take place over the weekend, House Speaker Ryan and his top lieutenants decided during a late-night meeting on Thursday that they still do not have the votes to pass the legislation. Note that at least 15 House Republicans remain firmly opposed to the bill, while at least another 20 are leaning towards no or are still undecided. Recall that Republicans can lose only 22 votes. The Hill recently reported that at least 21 Republicans have said they would vote no on the bill.
Big inflows to equities. Dampened risk aversion surrounding the French election, tax reform back in the headlines, and better earnings sentiment all are reflected in the latest flow data. Equities saw $21 billion of inflows this week, the largest since the US election. US equities saw inflows of $14 billion, the largest in 19 weeks. Inflows to European equities were $2.4 billion, the most since December 2015. Emerging market equities saw its sixth straight week of inflows. US value has now seen outflows in five of the last six weeks. At the same time, we saw the biggest inflows to small caps in 23 weeks, the biggest inflows to Financials in seven weeks and outflows from bond proxies like real estate, utilities and telecom. Investment grade bond funds attracted funds for an 18th straight week. At the same time, the biggest inflows to Treasury/government bond funds in 13 weeks occurred.
BMR Companies and Commentary
Amazon (AMZN: $925, up 3% - but being up $27 sounds better!)
Amazon reported better than expected 1Q17 results, whereby revenue came in 1% above consensus and operating income was 10% above consensus despite a continued ramp in investments globally. All around it was a great quarter. Check out the News Flash from Thursday.
While Amazon continues to invest globally with a focus on content and fulfillment center expansion, in addition to starting up newer markets, like India, and services such as Prime in Mexico, we believe it is increasingly attracting a greater share of consumer wallets globally as a result of these investments and is focused on cost discipline and efficiency where possible. It’s a great strategy – one that is working and working well.
Amazon remains in investment mode globally, and we believe margins can be sustained as the company continues to focus on cost discipline, as earlier projects become increasingly efficient. As an example, most fulfillment centers typically need to go through three peak periods before reaching sustained efficiency levels. To this end, the maturing of existing fulfillment centers helped Amazon’s operating margin of 5.2% in 1Q17 beat projections. This is great news. Recall, a few quarters ago the stock sank on weak operating margin.
Internationally, Amazon is investing in newer markets and is rolling out many of its products and Prime benefits globally sooner than prior, pressuring profitability in the short term as international losses reached $1.5 billion over the prior three quarters alone. We note that Prime recently launched in Mexico with 20 million eligible items. We believe these member benefits should result in greater adoption of Amazon’s services globally.
Amazon Web Services (AWS) revenue of $3.7 billion increased 44% from last year and was largely in line with projections. AWS continues to launch newer products and we note recent customer additions, Snap, Dunkin Brands, and Liberty Mutual, among others.
BMR Take: Our $1,000 price target is quickly approaching. We expect around $19 of EPS in 2018 versus the $13 in 2017. We believe Bezos will be focusing on earnings as the company moves forward and with nearly 50% EPS growth in the cards, Amazon moving to $1,000 is not a stretch at all.
PayPal (PYPL: $48, up 9%)
PayPal delivered a solid set of results and raised its revenue and earnings outlook modestly by around 3%. The metrics were quite robust all around, starting with acceleration in active accounts (partly helped by consumer choice), robust transaction growth, healthy growth in total payment volume, a lower deceleration in take rate and numerous partnership announcements in the quarter highlighting business momentum.
In particular, we love to see big growth as that confirms a bull market is alive and well. On this front, PayPal delivered through mobile. Mobile volume growth was +50% overall with Venmo doing +115%.
First-quarter revenue of $3.0 billion (up 17% annually) and EPS of $0.44 (up from $0.37), beat estimates of $2.94 billion and $0.41. PayPal expects second quarter revenue of $3.1 billion and EPS of $0.42; and full-year revenue of $12.6 billion (up 16%) and EPS of $1.76. Over $2.7 billion in free cash flow is expected this year. Wow.
Number of PayPal's total active registered user accounts from 1Q10 to 1Q17 (in millions)
And check this out:
PayPal's annual mobile payment volume from 2008 to 2016 (in $billions)
PayPal announced a new $5 billion stock repurchase authorization. This news caught investor’s attention and was one of the key drivers to send the shares up 7% in the trading session the day after posting results.
One noteworthy ongoing debate is the option to move to more of an “asset light” model, which should increase the valuation the business receives from the market. This strategy would require selling PayPal Credit so the company doesn’t do any lending but only runs technology and processing operations. We would be pleased to see this catalyst occur.
BMR Take: EPS estimates call for around 15% growth to upwards of $2.50 in 2019. With all fundamentals looking great, this freight train is rolling, baby! Our Price Target is $48. Since it hit this price on Thursday, we hereby raise our Target to $56. With a market cap of $57 billion now, if it reaches this new target we will see the cap reach $67 billion. Now THAT’S a story.
Oh – our Sell Price? It remains the same: We would not sell PayPal.
Google (GOOG: $906, +8%, or $63 a share)
Results were better than expected in 1Q17. Gross revenue of $24.8 billion grew a nice 24% from a year ago and was 2% above consensus. The results reflected continued strength from mobile search, YouTube, and programmatic ads as paid clicks growth accelerated 53% from a year ago.
What is really exciting? There is a belief that it remains relatively early days for “mobile search monetization”. To this end, we saw local shopping queries increase by 45% from a year ago and the company achieved 2 billion app installs since September 2016. What does this all mean? More and more people are on their phones searching for stuff as they walk through malls, sit in their cars, and do whatever they do every day. This trend is unlocking “mobile search monetization” we described above. Bottom line, mobile search continues to lead to good results for Google for the foreseeable future.
YouTube did great. YouTube usage was 1+ billion hours of video watched daily in February. Holy cow! This might be the best asset in all of video media. During the quarter, we saw large brand advertisers increasingly come back to the platform after some recent mishaps around inappropriate video uploads being attached to the marketing campaigns of some advertisers on the platform. Very nice to see the recovery unfold here.
BMR Take: We continue to believe Google is among the best-positioned Internet companies due to its leadership position in artificial intelligence, mobile, search, video, and programming, all of which are core Internet growth drivers. With EPS on track to do over $50 in 2018, you just have to own this one.
CBRE Group (CBG: $36, up 4%)
Another Bull Market Report stock delivered a good quarter. It was a clean beat for CBRE. EPS of $0.43 came in well-ahead of the $0.33 consensus, as expenses trended materially below expectations.
CBRE Group’s resilient first quarter result validated the persistent strength of the commercial real estate cycle and the company’s first-rate global platform.
EMEA* and Asia stood out for the company. Asia posted 10% revenue growth.
*Europe, Middle East and Africa
The company has a strong outlook. Management commented that it was not making any adjustments to its 2017 earnings outlook of $2.40. The backdrop remains favorable as rates have retreated, the election fallout has stabilized, global economies are growing and new construction remains strong.
M&A is emerging again. This could be a big boost for the company. The company closed two investments in the quarter, and an additional one at quarter end. Management suggested that after a year of remaining mostly absent from the acquisition markets, pricing was becoming more rational again, suggesting we could see slightly more activity from the company. With a balance sheet that remains healthy, with in excess of $3 billion of dry powder on hand, management could step on the gas if they choose to.
BMR Take: CBRE Group is the Rolls Royce of real estate. With nearly $3.00 in EPS due in 2018 with upside from possible M&A, the current price in the mid $30s sure looks like a cheap value to us.
Celgene (CELG: $124, up 1%)
Celgene reported 1Q17 light on revenues, but modestly ahead of Street consensus on lower spending, and provided positive 2017 guidance. EPS of $1.68 was above Street consensus of $1.64. Revenues of $2.95 billion were slightly below consensus of $3.05 billion.
The modest revenue softness was largely due to weakness in sales of Otezla, which were negatively affected by a greater than anticipated contraction in U.S. prescriptions for psoriasis/psoriatic arthritis, and a modest inventory draw-down through 1Q17. Other products - namely Revlimid and Pomalyst - were also negatively affected by Medicare prescription problems.
We note that previous guidance of $1.5-$1.7 billion in net Otezla sales for 2017 remains intact despite this soft quarter. Further, the contracts negotiated with large payers have significantly broadened access to Otezla for up to 100 million covered lives, intimating future tailwinds for the asset.
BMR Take: We remain bullish on Celgene and forecast total revenues to rise strongly. We expect Celgene’s four drugs (Revlimid, Abraxane, Otezla, and Pomalyst) to drive revenues to over $13 billion by 2017, and over $21 billion by 2020. Note that revenues were $7.7 billion in 2014, $9.3 billion in 2015, and $11.2 billion 2016. Now that’s growth. Recent acquisitions of Receptos and Delinia along with investments in collaborators such as Acceleron, Epizyme, Agios, and others likely ensure growth from 2017 and beyond. We continue to view Celgene as a top large cap pick in healthcare. The market cap is at $96 billion now.
United Parcel Services (UPS: $107, +2%)
UPS pleased investors with earnings results too, mainly on the top line. Total revenue climbed 6.2%. Revenue grew in all segments and in all major product categories, as balanced market demand occurred across the company’s broad product portfolio.
There was a wave of other good news to report. Total fuel expense increased $187 million or 43% over Q1 2016. The fuel surcharge revenue lagged expense, however a February 2017 surcharge change mitigates this variance for future periods. Capital expenditures to support network enhancements were $938 million during the quarter, demonstrating a run-rate at the annualized guidance level.
UPS paid dividends of $775 million, an increase of 6% per share over the prior year, rewarding shareowners with continued strong dividend yield. The company repurchased 4.2 million shares for approximately $450 million in line with the company’s capital allocation policy.
What is exciting? The company is accelerating investments to create the industry's leading smart global logistics network and value-creating portfolio. UPS customers are benefiting from expanded capacity, choice and improved time-in-transit, while technology solutions continue to deliver efficiencies. One example of expanded service is the company's new Saturday delivery program, which began rolling out this year. While the roll-out cost the company $35 million this quarter, UPS is hoping it will give the company a leg up on competitors. The service is now in 15 metro areas. By the holiday season, the company hopes to have Saturday delivery capability in 4,700 cities.
BMR Take: UPS is without question a top logistics franchise globally. With projections pushing towards strong EPS growth and nearly $8 of EPS potential in a few years, we expect the company to deliver. The stock is slowly making a comeback from the sharp drop we saw from $117 to $103 in early February. We wouldn’t be surprised to see $110 soon and $115 again in a month or so. This $93 billion market cap company is a well-oiled machine and with more and more people buying online instead in malls, their business is assure of growth in the future.
US Economic Outlook
The first quarter can be full of surprises. During the existing expansion, first quarter GDP growth has come in short of consensus expectations every time, with an average absolute forecast error of 0.5%. Initially, disappointing first quarter GDP growth led some to question the durability of the expansion, but that should fade now that the issue of residual seasonality has come to the forefront.
Residual seasonality in GDP implies that there is a predictable seasonal pattern. This is clear in the first quarter, as GDP tends to be noticeably weaker than in the subsequent three quarters. The differences are frequent and large enough that they are unlikely a fluke. Also, residual seasonality is evident across many of the major components of GDP, including parts of services spending, exports, federal and state and local government expenditures, and nonresidential structures.
The Bureau of Economic Analysis has made adjustments to correct some of the issues related to residual seasonality, but it likely remains a sizable weight on GDP growth. GDP came in weak in the first quarter, rising 0.7% at an annualized rate. Residual seasonality appears to be shaving 0.5% off first quarter GDP growth. There are other reasons for the weakness in the first quarter, including weather and possibly the delay in tax refunds.
We believe the Fed will look through the poor start of the year, as GDP is inconsistent with other hard data, including employment. Still, sub-1% GDP growth could create a challenge for the Fed, since we still expect it to raise rates in June. Though GDP is heavily scrutinized, the employment cost index for the first quarter could have greater influence on monetary policy. The Fed is worried that the tight job market will lead to a sudden acceleration in wages that would then boost inflation.
Federal Reserve policy makers are set to meet next week, and while there is little expectation that an interest-rate increase will be announced when the meeting ends on Wednesday, the latest economic reading could sway the Fed’s outlook. The monthly report on job creation is due next Friday, and a strong showing could ease some of the concern over the lack of vigor in the first quarter.
Reaffirming its recent findings, the University of Michigan said its consumer sentiment index finished April with a decidedly bullish reading of 97, up from 87 just before the election.
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
Viva Le Pen! Laissez les bon temps roulez! But wait a minute……..the market wants Macron to win and therefore is acting as though his election is a foregone conclusion. Does that ring a bell? Remember how Clinton was a "foregone conclusion" and how that night the market absolutely crashed……but made a miraculous recovery after the Trump victory. As far as we can tell, US stocks shouldn't be materially affected one way or the other and we view this as a "sideshow" to the earnings season that is under way here at home. Or, as Alfred E. Neuman might comment on the whole French thing, "What, me worry?"
President Trump announced a new tax plan which he called "bigger, I believe, than any tax cut ever". This news is, in our humble opinion, of much greater interest to the US investor than the French election. We are seeing a plan that is pro-growth and nothing but pro-growth, and which has a realistic chance of garnering enough support to get passed. If that happens, we expect a nice rally. If it doesn't, then we would expect the market to react with some sort of displeasure.
Earnings update: Thomson Reuters is reporting that earnings are expected to grow by more than 11% in the first quarter. 76% of the earnings reports have already come in above estimates. 62% of companies have beat revenue forecasts, and revenues are expected to be up just under 7% on the quarter. These are good, solid numbers. Numbers like these should provide durable support for the market.
Blackstone (BX: $31) killed in the first quarter of 2017. They earned 82 cents a share on revenue that rose 108% year over year to $1.94 billion. Analysts were looking for 68 cents on revenue of $1.6 billion. Total assets under management climbed to a record $368 billion. The company said that realizations totaled $16.6 billion, a company record. The bulk of the realizations came from the firm’s flagship private equity and real estate strategies, with an average multiple on invested capital of 2.6 times.
Underlying portfolio company fundamentals appear strong. Management noted its private equity portfolio companies are experiencing high single-digit EBITDA growth and in real estate, both rents and occupancy continue to improve.
BMR Take: And the stock took off this week. It was up 5%, counting the fabulous 87 cent dividend that it paid a few days ago. You know, we are always looking for new companies to invest in that will give you above-average gains. We will tell you this: There is going to come a time when this stock will skyrocket. We can see it hitting $40 down the road and it just might come sooner rather than later. Why? Because this stock has been undervalued so long that investors have given up on it. But don’t forget that Stephen Allen Schwarzman has NOT given up on it. From what we can gather he has 230 million shares. WOW. That’s 45% of the company, worth north of $15 billion. He thinks the stock is WAY undervalued and is working on a million ways to get the stock higher. We’re going with Steve on this one. We’re up 25% on Blackstone since early 2016, but our Target is $36 and we think hitting this is quite possible in the next few months.
Athenahealth (ATHN: $98) got hammered on Friday, dropping $23, all of our gains since we added the stock in November at $103. We’re down 5% now, not pretty, but not bad in the whole scheme of things. We just hate to see these overreactions. Look at this: revenues for the past three years are $750 million in 2014, $925 million in 2015, and $1.1 billion for 2016. The company reported revenue of $285 million in the quarter up from $255 million in the year ago quarter. And the company stated last week that they expect full-year revenue of $1.23 billion. So really, if you look at the numbers, everything is still solid. Earnings were $22 million, down from $24 million. Yes, earnings were a bit weaker, but revenue growth is key in our book.
We are going to stick with this company for now. We can see the overreaction continuing a bit, taking the stock down to $95 or even a little lower, so you have to make a decision – stick with it or bail. These are always tough decisions and of course, it is impossible to predict what will happen. Many investors say to cut your losses and move on. Others say, like we are saying here, that this great company is being punished by the market for a silly little miss on the earnings front.
Trump’s Repatriation Initiative
Credit Suisse told investors to buy high tech shares because the companies will thrive under President Donald Trump's tax reform, saying it will enable an increase to its shareholder return program and allow for more strategic acquisitions.
The firm raised its rating on one of the giant tech companies two notches, to outperform from underperform, a rare "double upgrade."
"We believe the possibility of an upcoming repatriation and balanced approach towards M&A [mergers and acquisitions] and capital return could drive long term earnings power," they said.
There is over $2.6 trillion of cash offshore, which can be "unleashed" under tax repatriation reform, at least half of which is controlled by Tech firms. If Trump's tax plan is passed, Credit Suisse estimated that about half of this ($650 billion) can return to shareholders during the next five years and another $500 billion could be used for mergers and acquisitions.
"The combination of a potential buyback combined with accretion from M&A, has the capacity to drive these firms’ earnings materially higher in the coming years," they wrote.
BMR Take: The firms with the largest hordes of cash are Apple with over $255 billion, Facebook, Google and Oracle, so we expect them to be the biggest beneficiaries of this tax cut if it every happens.
AstraZeneca (AZN: $30, flat) went up and down after reporting earnings. Revenue of $5.4 billion fell 12% from a year ago and EPS of 99 cents was 4 cents up from a year ago. The company’s ability to grow earnings with falling sales is impressive, and partly justifies the 24 P/E ratio. Most impressive was the company’s ability to lower core SG&A costs by 14% - greater than the sales decline, suggesting greater operational efficiency.
Why were sales down so much? Really this is a one-story issue: Crestor. This drug lost its patent in the U.S. and is a big hit to sales. The company still has plenty of cancer and diabetes drugs in the pipeline, indicating upside is still possible. We will be paying close attention to the company’s pipeline in the months ahead.
Shopify (SHOP: $76) hit an all-time high on Monday. Two weeks ago the stock surged from the $70 level to the $76 level and last week the gains were sustained. The market cap is still a tiny $7 billion and we continue to maintain that a firm could come in a make a $90 or $100 offer for them and it wouldn’t make a dent on the acquirer’s balance sheet. Apple with $255 billion in cash, or Oracle (ORCL: $45) worth $185 billion with $60 billion in cash are just two possible buyers. Don’t get me started on Google or Facebook or Amazon! With over 300,000 websites using Shopify software we expect great things for this company in the future.
The High Yield Corner
By Michael Foster
Special to The Bull Market Report
Of all the high yield sectors as a whole, junk bonds performed the best. The SPDR Barclays High Yield Bond ETF (JNK: $37, up 1%) closed the week stronger despite slightly disappointing GDP news, with the trend starting last Monday at its strongest and continuing throughout the week. The asset class did far better than U.S. Treasuries, especially on the long-term end of the curve, where yields slipped this week, although that slip began before the GDP data. This trend is not sustainable in the long term; junk bond yields cannot keep falling and U.S. Treasury yields cannot keep rising at the same time. At one point or another the gap between the two would narrow and there would be no risk premium for investing in assets that can and do default a lot (junk bonds), versus an asset that cannot default, outside of a major apocalyptic event (U.S. Treasury).
While junk had a good week, BDCs have had a good year so far. The UBS BDC ETF (BDCS: $24, up 1%) is up over 4% year-to-date versus junk bonds’ 1%, with the more popular BDCs becoming an increasingly popular trade. Main Street Capital Corporation (MAIN: $40) is now up 9% year-to-date after another 1% gain this week. But note that Friday was a peak that very swiftly and steeply fell, causing the stock to lose 1% in a day. With a premium to net asset value of 80% by the end of the week, we cannot expect this trend to continue. Of course, we have been saying this ever since we removed Main Street from the high yield portfolio and while we haven’t seen a correction, we have seen the stock’s run up stalling slightly. Timing a top exactly is impossible, but recognizing that we’re at or near a top is easy. This is the case with Main Street as well as several other popular BDCs. While we suspect a correction in the junk bond market to be uncomfortable, we expect a similar trend in BDCs to be much more severe. That may come next week or next year, but these 80% premium valuations cannot last forever.
We’ve given a similar word of caution regarding REITs. Last year, especially the start of the year, was a stellar time for the asset class, with post-August proving much more challenging and post-Trump proving even more difficult. The SPDR Dow Jones REIT ETF (RWR: $92, down 2%) had yet another rough week. Despite the problems surrounding REITs, we have not recommended exiting the sector entirely as we found most prudent with BDCs. The reason for that was simple: REIT valuations remained modest and much less efficient than in BDCs. Part of this is due to the greater ease of valuing BDCs in terms of the market value of their debt portfolio. Due to the strategy of accounting for depreciation with REITs, this sector is much more complicated. As a result, valuing these assets in terms of their book value is largely useless or must be done with extreme care. For this reason, many investors prefer to focus on price to FFO as a ratio - in other words, determining how much you’re paying for income instead of paying for the underlying assets producing this income. This of course is unwise because FFO and asset values can be extremely divorced from each other as a result of a variety of market factors.
Ultimately, this means a closer analysis of the underlying business is necessary when analyzing REITs, and in doing so investors can find amazing deals. This is the back story of our REIT picks, and is why Digital Realty Trust (DLR: $115, up 3%) has remained a major pick for a long time. This income stock is now up over 33% in the last year and the dividend has grown 6%, with more dividend hikes inevitable thanks to its strong and growing FFO. The market has no qualms giving this REIT a high valuation, so it’s no surprise that it jumped this week despite weakness in REITs elsewhere.
That weakness, however, impacted several other Bull Market Report picks. Omega Healthcare Investors (OHI: $33, down 4%), Kimco Realty (KIM: $20, down 6%), Government Properties Trust (GOV: $21, down 2%), and Care Capital Properties (CCP: $27, down 4%) fell with the broader market. These are extremely big movements, largely a result of market panic in the sector. It has also created tremendous opportunities, especially with the very safe Kimco Realty, which has an amazing track record and solid dividend coverage. This is a “buy the dip” opportunity.
A Note on Facebook’s Growth:
Facebook (FB: $150) has four operations that have over one billion users. There is Facebook itself with 1.9 billion. Messenger is at 1.2 billion, as is WhatsApp at 1.2 billion. Then there is Instagram. Listen to this: Since inception, the company has been adding 100 million users about every nine months. But something happened when they hit 500 million. Going from 500 million to 600 million took just six months. And getting to 700 million took just FOUR months. This is unreal growth. When will Instagram reach 1 billion? Good question, but at this rate it just might be in early 2018. And people wonder why the stock hit $150 this week, up 5%. Repeat – Facebook has FOUR operations with over 1 billion users. One billion. That’s 1000 millions. We are just in shock.
OK – the stock hit our Target of $150 Friday and we are now up 55% since we added it in January last year. The stock is going a lot higher folks, so we hereby raise our Price Target to $165 and our Sell Price from $125 to $140.
Good Investing,
Todd Shaver, CEO and Editor
The Bull Market Report
Since 1998
