January 21, 2018
by Todd Shaver | Jan 21, 2018 | Weekly Newsletter 7pm Sunday
The Weekly Summary
Time to get down to business. This week the US budget is in focus. The Senate rejected a one-month spending bill early Saturday, triggering the shutdown of many government services and setting off a partisan fight over who would bear the political consequences. The bill was blocked in a 50-49 vote, well short of the 60 votes it needed. After the vote, McConnell indicated he would take steps to set up a later vote on a 3-week spending bill, keeping the government funded through February 8th, but Senate Democrats are currently opposed to it, leaving lawmakers with no path to reopen the government. Fortunately, both chambers of Congress are expected to be in session Saturday, continuing discussions over how to resolve the underlying disputes over immigration and government funding. We are hopeful to see some progress made before the markets re-open on Monday.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight: Celgene, Microsoft, Splunk, Square, Cloudera and VMware.
BMR Companies & Commentary
Celgene (CELG: $103, down 3%)
Celgene is on a shopping spree to fill a looming revenue hole - a sensible course of action. The trouble is, there is no guarantee their purchases will solve anything. The biotech giant is in talks to acquire Juno Therapeutics (JUNO: $68, up 41%). This comes after Celgene announced the purchase of cancer startup Impact Biomedicines earlier this month for $1.1 billion upfront, plus significant milestone payments. Celgene, which already owns about 10% of Juno, would be acquiring a new kind of cancer treatment, known as CAR-T. The price tag of an outright purchase will be high - Juno’s market value approached $8 billion when trading opened on Wednesday and Celgene shares dropped Wednesday morning, which makes sense. CAR-T technology, which modifies and deploys a patient’s own immune cells to fight cancer, is a brilliant scientific innovation with highly uncertain commercial prospects. The treatment carries a high price tag and employs a complex, labor-intensive manufacturing process. When Gilead Sciences (GILD: $81) acquired Juno’s peer Kite Pharma over the summer, they warned that the deal wouldn’t contribute to earnings for about three years. Gilead and Novartis have programs that are already on the market, while Juno still is awaiting regulatory approval.
BMR Take: Celgene needs to take risks right now as some of their other pipeline drugs have not panned out as well as expected. For example, its best-selling product, the multiple myeloma drug Revlimid, is expected to face generic competition within a couple of years. Any erosion of the Revlimid business will sting. While financially speaking, Celgene can comfortably swallow Juno, the risk is that Celgene may soon have to open its wallet again to solidify its future.
Look, we get it, there are risks everywhere. We’ve had thoughts of throwing in the towel with Celgene. But the more we think about it, the more you have to stick with Celgene. Projections call for EPS of $8.80 in 2018 and $10.35 in 2019. Much of the bad news is already in the stock, as a major sell-off having recently occurred. Celgene is an $80+ billion large cap bellwether in Healthcare. They will figure this out. And when they do, we could be staring at big upside well in excess of standard market returns.
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Microsoft (MSFT: $90, flat)
Should the government break up large Tech companies? Standard Oil, American Telephone and Telegraph were the technological titans of their day, commanding more than 80% of their markets.
Today’s Tech giants are just as dominant: In the US, Google drives 89% of internet search; 95% of young adults on the internet use Facebook; and Amazon accounts for 75% of electronic book sales. Those firms that aren’t monopolists are duopolies: Google and Facebook absorbed 63% of online ad spending last year; Google and Apple provide 99% of mobile phone operating systems; while Apple and Microsoft supply 95% of desktop operating systems. A growing number of critics think these Tech giants need to be broken up or regulated as Standard Oil and AT&T once were. Microsoft has long dominated desktop operating systems, but has failed to extend that dominance to internet search or to mobile operating systems. It’s possible Microsoft might have become the dominant company in search and mobile without the scrutiny a federal antitrust case brought that opened the door for Apple and Google. Throughout history, entrepreneurs have often needed the government’s help to dislodge a monopolist - and may one day need it again.
BMR Take: We recognize this is a very real risk facing Microsoft and many of our other high technology companies. However, we see no near-term developments that suggest that anything materializes in 2018. Accordingly, we see compelling value in Microsoft as EPS is expected to grow from $3.40 this year to $4.50 in 2020. Without any major disruptions like an antitrust headache, we see this stock riding much higher.
Our Target has been $92 and it hit $92.80 on Tuesday, a new all-time high. With a market cap of close to $700 billion we expect to see $800 billion in the next 12-18 months. We’re going to leave our target at $92 for the time being, but we expect to raise it to $100 shortly.
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Splunk (SPLK: $90, flat)
Splunk, first in delivering “aha” moments from machine data, announced that Daimler, the German automotive group, will replace its legacy SIEM with Splunk® Enterprise and Splunk Enterprise Security (ES). The group will use Splunk ES as its nerve center for security analytics to gain security insights across the entire organization, including business critical environments such as vehicle systems and manufacturing lines. The company chose Splunk over open source alternatives as part of its strategy to buy best-of-breed solutions rather than building things in house. The automotive group will use Splunk ES to analyze multiple terabytes of data each day. The team expects to reduce security investigation times from hours to seconds, utilizing visualizations to improve analysts’ ability to explore and interrogate data as well as help spot and respond to issues more quickly to limit any potential impact to the business. By committing to a Splunk, the company is able to plan security for the future while benefiting from Splunk’s predictable pricing. The flexibility of the Splunk platform was also important; the group expects to realize future value from traditional IT use cases as well as in newly developed digital applications and services.
BMR Take: As digitization continues to transform industries and create new sources of security-relevant data, security strategies need to be built upon a strong data foundation. Splunk is very well-positioned in this megatrend happening around big data and artificial intelligence. This is a great example of how organizations are taking an analytics-driven approach and turning to Splunk software to do it. With EPS expected to grow from $0.60 this year to $1.30 in 2020 and $2.10 in 2021, there is a really big thing happening at Splunk and you definitely want to be involved.
Our Target is $95 and our Sell Price is $74. We hereby raise the Sell Price to $83. We don’t want to lose our tremendous gains in the stock, having added it at $46 a year and a half ago.
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Square (SQ: $43, up 3%)
The meteoric rise in the price of bitcoin in 2017, from just under $1,000 to above $15,000 at year-end, has attracted the attention of investors around the world. Powered by the blockchain, the distributed ledger technology which verifies transactions without the need for third-party validation, the cryptocurrency made great strides during the past year in achieving acceptance by businesses willing to accept it as a means of payment. Investors are looking beyond bitcoin itself to find companies that stand to benefit from the growing usage of bitcoin for commercial transactions. Square. The has released a beta trial enabling users to buy and sell bitcoin on its cash app.
BMR Take: Bitcoin and the blockchain is a windowpane into what euphoria looks like. We haven’t seen this kind of excitement in the markets since the peak of the housing market last cycle. We’ll save a discussion of the future of bitcoin, blockchain, and cryptocurrency for another forum. All that matters is that Square has been caught up in the mix due to this beta cash app trial and investors have benefitted. While we remain optimistic that CEO Jack Dorsey can innovate and create great new products, we still don’t see any specific EPS contribution being called out from the bitcoin cash app, so just be aware. All of that might not matter too much anyway, as the company’s EPS is expected to grow from $0.25 this year to over $1.00 by 2020.
Square Price Target Raised to $64 from $48 at Nomura
This represents a 59% potential upside from current levels. A "looming positive inflection" in gross payment volume growth can help "ensure that 2018 will be yet another phenomenal year" for Square, the company said. Accelerating share gains from payment peers and "relentless disruption of services" like payroll and human resources will make Square a very different company in 10 years. They believe little of this upside is evident using conventional valuation methodologies. The analyst keeps a Buy rating on Square.
BMR Take II: We’ve been saying this all along of course and Square has been a big winner for us here at The Bull Market Report. We added the stock at $17 last year in March and it is up 150% in that short time. It is going a lot higher. Our Target is $45, but we expect to raise that soon. What Nomura said above is very interesting – they can’t value this company on “conventional valuation methodologies.” We’ve been trying to put this in words for you but Nomura has done it for us. The company is in a business that is sweeping the globe, is the clear leader, sells at a high multiple – we know, and is going higher in our opinion.
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Cloudera (CLDR: $18.45, up 2%)
Cloudera, the modern platform for machine learning and analytics optimized for the cloud, announced that it has been named a winner of two Internet of Things (IoT) Breakthrough Awards: the Overall Connected Car Innovation of the Year with Navistar, and Connected Car Insurance Solution of the Year with Octo Telematics. Cloudera Enterprise was recognized by this year's judging panel for empowering their customers, Navistar and Octo, to become data-driven enterprises with innovative solutions that combine data from (IoT) sensors, machine learning, and predictive analytics. The IoT Breakthrough Awards honor the world's top IoT companies, products, and people for the creativity, hard work, and success of their achievements.
BMR Take: This is a huge deal as we are sure you are well aware, of how big this mega trend of IoT, machine learnings, and predictive analytics is to the future of the market and our economy. We could rant and rave to you about our opinion of how good Cloudera is at it, but the industry itself just selected Cloudera as the best. This company will scale revenue from $350 million to nearly $600 million by 2020 and break the $1 billion milestone in the not too distant future after that.
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VMware (VMW: $136, up 3%)
This week at the National Retail Federation’s annual show, VMware highlighted several customers who have deployed their technology to modernize data centers, integrate public cloud solutions, empower the digital workspace and transform networking and security. The velocity of change in retail IT is making recognized brands rethink their IT strategies and consider cloud as a way to speed delivery. VMware helps create a foundation of shared technologies to serve both digital and in-store needs to create a connected retail environment. For example, one of the UK's largest furniture producers - DFS - moved to a scalable cloud-first infrastructure powered by VMWare. With this solution, the retailer said it can handle spikes in online traffic year-round with ease.
BMR Take: We continue to see so much potential for ecommerce and companies that are part of the explosive growth still occurring. VMware is expected to increase EPS from $5.15 this year to over $6.00 by 2020. The company's steady business model as an IT vender provides great visibility and a reliable source of earnings that will benefit your portfolio.
Our Price Target is $137, so we are oh so close. The Sell Price is $118, so we hereby raise it to $128 – again, so we don’t lose these great profits, having added the stock at $83, exactly a year ago. 64% is solid, don’t you think?
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Economic Calendar
Richmond Fed Index
Tuesday, January 23rd, 10:00 AM
Period: January
Consensus: 17.5
Prior: 20.0
Existing Home Sales
Wednesday, January 24th, 10:00 AM
Period: December
Consensus: 5,700,000
Prior: 5,810,000
GDP
Friday, January 26th, 8:30 AM
Period: Q4
Consensus: 2.5%
Prior: 2.3%
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A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
UBS recently upped our estimate of S&P 500 earnings for 2017 from $131 to $133, and increased our forecast for 2018 earnings from $151 to $154 (last week Bank of America estimated 2018 earnings at $153). Also, UBS estimated earnings for 2019 would come in around $162. These are numbers which will obviously be revised as we go through the next two years, but they give at least a reasonable base line for valuing the current market based on earnings. The S&P 500 ended the year at 2674, which would mean it was trading at 20X trailing earnings and 17.3X forward earnings. Today, at 2810, it is trading at 18X forward earnings and 21X trailing earnings. As you see, the higher it goes, the higher both the trailing and forward PE's become. However, if the market trades at 20X trailing earnings at the end of 2018 as it just did last year, the S&P 500 would be at the 3080 level ($154 X 20). This is 10% higher than today, and that would make for another very good year in the market.
Apple is a one-company global economic stimulus plan. Apple plans to invest $350 billion in the U.S. economy along with paying $38 billion in repatriation tax as it brings back over $200 billion from overseas. Apple is also granting $2,500 in restricted stock units to all non-director level employees including retail employees at its stores. The tax reform bill again drives all these actions.
China reported that Q4 GDP growth increased 6.8% YoY which is slightly above the 6.7% consensus and in line with the 6.8% increase in Q3. China’s full year 2017 growth rate was 6.9% which is significantly above the government’s growth target of 6.5%. Expectations for 2018 are for another year above the 6.5% target growth rate. China’s strong GDP growth remains the world’s economic growth driver. This is good news for both the U.S. economy and the U.S. stock market.
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Update on BlackRock
BlackRock (BX: $590, up 6%) brought in $1 billion every day of the year in 2017. (On average of course.) Now THAT is amazing. And the $6 trillion in assets is amazing too, having added $1 trillion last year. They are the largest by far. Most of this money went to its iShares division, the ETF group. as investors are flocking to these indexed investments. Profits were big last year too as the income of $2.3 billion or $14 a share, compared with $850 million the year before, or $5.10 a share. Revenue was up a solid 20%.
We added the stock at $415 in August of last year, about five months ago, and we are sure some of you groaned that it was another high-priced stock that is hard to swallow. We tried to convince you not to worry about the stock "price" and we hope we did. We can see a stock split coming this year. Wouldn’t it be nice to see this thing split 5-1 and bring the price down around $100? You bet. If we were running the show and not Larry Fink, we would do a 10-1 split! Down to $50 a share. Well, even if that doesn’t happen, we can see this stock at $700 someday.
BMR Take: Guess what? We like this company. $590 was our Target. We are raising it to $650 now, and raising the Sell Price from $470 to $550.
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Tesla Update
Last week we were worried that Tesla (TSLA: $350) might drop due to all of the financing needs it faces this year and next. So we raised the Sell Price to $320 to protect our gains. Well the stock rose $14 or 4% to our Target Price of $350. Now what?
Good question. We are going to raise the Target to $375 and raise our Sell Price to a tight $335 and sit back and watch. We love this company, we love Elon Musk, but his delivery problems are making us nervous. This stock is going to $500 or $200. We just don’t know which one will hit first! So be careful with this great concept company.
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The High Yield Corner
By Michael Foster
Vice President High Yield
Ventas (VTR: $54, down 1%) was strong last week, but still sitting with a year-to-date loss of over 9%. That is a massive loss in a very short period of time. At the same time, both the REIT sector and the market as a whole are doing much better, which makes the situation with Ventas even more worrisome.
Let’s dig a bit deeper to understand what’s going on and how to respond.
Ventas has not released any news, and nothing particularly newsworthy has happened either to Ventas or to the Healthcare REIT world. The selloff, which really began in earnest back in September, has gained significant momentum in the last couple of weeks despite no news. Sales volumes, however, have increased significantly in the last two weeks, indicating that the number of sellers who are worried about Ventas’s future have increased.
This, then, is a typical market panic.
Market panics are rarely justified, and this is unjustifiable, too. Ventas increased its dividend in December slightly, and with the recent price collapse that means the stock is yielding close to 6%. Ventas has not yielded this much since early 2016. If an investor had bought at that time, their total return from then to now would be 9.6% - but much more importantly, their income stream would have gone up.
The reason for this is that Ventas is covering its dividends by a wide margin. The company’s dividend coverage ratio at its new dividend payout is 132% - just above the 130% level that readers know we prefer for REITs. This means that the dividend is well covered by rental income and is in no danger of being cut.
Yet it’s yielding near 6%, which is the market’s way of saying that the payout is in jeopardy. The market is wrong.
If the high dividend coverage ratio wasn’t enough to prove the market is wrong, let’s consider some recent disclosures from the company. The company’s senior housing property occupancy rate increased last quarter, reaching 88.7%. While that is slightly low (90% is typically the standard REITs aim for), the fast-expanding senior housing industry has faced a lot of headwinds from intense competition and looming bankruptcies or insolvencies from tenants who are poorly managing their businesses. For Ventas to get through these problems with an 88.7% occupancy and over 130% dividend coverage is a testament to management’s acumen and savviness.
Then there’s the life science portfolio - a part of Ventas that has seen the most aggressive growth. The numbers are breathtakingly good. Total occupancy is 97.5% and has remained at that level despite the company’s expansion. 75% of rents come from investment-grade tenants, and rents in the industry continue to rise.
Medical offices, another fast-growing part of Ventas’s more diversified strategy, have also seen strong, encouraging numbers. This arm of Ventas saw 91.8% occupancy rates and 80% tenant retention rates. These are high numbers for any REIT industry, but they are very high for healthcare REITs. Obviously, Ventas is doing a lot right.
So why is it crashing? Two reasons: SNF panic and the Fed.
Let’s start with the Senior Nursing Facilities panic, since that has hit Omega Healthcare Investors (OHI: $26.50, up 1%) for a long while. Omega’s 1% rise last week for a good showing for a stock that’s been beaten up a lot in the last few months. The reason, as we’ve discussed here repeatedly, is the looming bankruptcy or rent renegotiation with one of Omega’s big tenants.
Ventas does not have these problems.
Thanks to Ventas’s higher quality tenants, the company isn’t facing major declines in its cash flow from bankrupt tenants. That’s why the stock has always had a yield near half that of Omega. But recent sell-offs are coming from investors who are scared anyway, worried that the problems with some SNF operators are coming to the rest of the REIT universe. There’s no reason to believe this is the case.
A second and arguably much bigger specter that is hitting Ventas and REITs more broadly is the concern about the Federal Reserve. Interest rates are clearly going to go up three times this year. Even more rate hikes are a possibility, unthinkable a year ago. Aggressive hikes in interest rates are bad for REITs, because they cause debt costs to go up. Since REITs effectively work by arbitraging low interest rates on long-term loans and the higher rates buildings can get from rents, the higher rates theoretically cut into REITs’ profit margins. That is, however, if rents don’t go up.
But, as we all know, rents go up all the time. And, in fact, rents tend to go up faster in better economic times, because there’s more money floating around to pay rent and more demand to rent spaces. Thus, rising interest rates, while in theory bad for REITs, are only bad if they are not met with a commensurate rise in rents.
Rents are going up in America, although admittedly they are not going up as fast for SNF facilities. So there is a risk there, but the risk was priced into both Omega and Ventas at the end of 2017. Now instead of pricing in the risks of cash flow getting cut by 5% or so, we’re seeing the market price in a risk of a 20% or 30% reduction to cash flow. The math makes no sense. It’s impossible for these REITs to see such a major disruption to their cash flow unless there’s a really horrible recession AND the Fed keeps raising rates. But the Fed doesn’t raise rates when the economy is doing poorly. So. the market is pricing in a hypothetical that is impossible. And that is when assets get oversold, underpriced, and a bargain. That is the situation with Ventas and Omega right now.
Good Investing,
Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998
January 14, 2018
by Todd Shaver | Jan 14, 2018 | Weekly Newsletter 7pm Sunday
The Weekly Summary
Everybody has an opinion. Go search the internet and you’ll hear one fellow say the market is going to crumble, the next person say new highs are on the horizon, and the third individual tell you something that doesn’t make sense because they don’t even know what they are talking about. Accordingly, we feel the need to break it all down this week. No fluff. No spin. No wild opinions. Just a little ‘telling it like it is’ as a reminder that this The Bull Market Report. We aren’t like what you see on TV. And we aren’t like what you read elsewhere. We are just like you. Looking for the cold hard honest facts.
US equities ended the week higher in a quiet Friday of trading. Cyclical and value plays were among the better performers. The equity market is already up over 3% this year with some of our stocks like Amazon and Nutanix up more. Bonds are down this year and Treasuries were mostly weaker as investors realize the Fed is serious about raising rates. We saw more flattening of the yield curve indicating caution. In fact, the two-year T-note rose and hit 2.0% for the first time since 2008. Gold was higher for fifth straight week. Crude ended higher for the fourth straight week.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight: Cloudera, Blackstone, Amazon, Google, Eli Lilly, and Home Depot.
BMR Companies & Commentary
Cloudera (CLDR: $18.14, up 5%)
Cloudera met with investors this week at Citi’s Global TMT West Conference. The CEO discussed all that they are doing in terms of new technology. Let’s recap. Remember, understanding the big picture of what the company is doing is how you build real confidence in your investments.
First it is important to understand the backdrop of why Cloudera is such an exciting company. Everything right now is going through a major technological revolution. Look what is happening in cars, health, and virtual reality. Everything is getting connected. This newly-created connected world is creating a backdrop for data that is unprecedented. And in this area of the economy is where the world’s most valuable companies reside—Apple, Google, Facebook, and Amazon. They are all data driven. Economists say the world’s most valuable resource is now no longer oil, but data.
So where does Cloudera fit it? Cloudera helps enterprises enter this new world of machine learnings and artificial intelligence. Cloudera gives them access to this data to transform their business to become data dependent. The old days of just working with a database storage provider and some simple analytics are gone. Today, companies turn to Cloudera to build best-in-class artificial intelligence solutions that optimize all the available data out there, not just their own.
BMR Take: Machine learning and artificial intelligence are megatrends for the next 5 years. Get involved. Cloudera is a great opportunity. Revenue will explode from $360 million this year to $570 million in 2 years. We see Cloudera breaking the $1 billion revenue mark possibly as early as 2020. We added the stock at $22 in June so it has certainly been an underperformer for us. But we are very confident in the success of this company and continue to have a $28 price target on the stock. Sometimes one has to be patient to see the big gains that we expect. Cloudera is still tiny with a market cap of $2.5 billion. But they are growing 40% a year. We would expect to see this little gem grow to the $10 billion level at some point and then get plucked up by one of the big boys. And this might even happen sooner than you think.
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Blackstone (BX: $35, up 7%)
Blackstone is on a roll and caught an upgrade from JP Morgan. We love it when the professionals come around to our side of the table!
The reason to be excited at this point is that there is going to be a major fundraising cycle for Blackstone over the next two years. The company is expected to raise over $200 billion. The way the company makes money is through these massive fundraisings, then deploying the capital, and then getting a share in the profits from the investments.
The fundraising will happen in two funds. The first is Flagship Real Estate BREP-IX in 2018. The second is Flagship Private Equity BCP-VII in 2019.
BMR Take: Blackstone has been an underperformer relative to its peer group. And the peer group of these private equity companies hasn’t done too well. The entire space is relatively new to the public equity markets. Retail investors just don’t have the comfort level they have with other financials like AIG or JP Morgan. But we think that will all change. These companies print money. Blackstone will do over $3.00 of EPS in 2018. The stock is very inexpensive right now.
We’re up 30% on the stock since we added it in early 2016. Good but not great. The dividend has helped though, as that 5% a year adds up. But we expect more from this great company. Our Target was just reached this week, so we are going to go out on a limb and raise the Target to $42. If things go right, we would expect to see this by year end, but perhaps sooner.
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Amazon (AMZN: $1,305, up 6%)
Amazon Fresh prices are up to 20% cheaper than major UK supermarkets.
Look out! We are going to see Amazon really shake-up the grocery market this year. Amazon's online grocery service Amazon Fresh is selling some products up to 19% cheaper than major supermarkets, new research suggests.
Amazon Fresh is a subsidiary of the Amazon.com. It is a grocery delivery service currently available in some U.S. states, London, Tokyo, Berlin, Hamburg and Munich. It will also launch in Australia soon.
The cost of a shopping cart from Amazon Fresh turned out to be 11% cheaper than the same online shopping from Tesco, and up to 19% cheaper than other competitors. The study was done by the consulting firm Oliver Wyman. The geography was in London.
Amazon Fresh is still relatively small but the internet giant has very serious ambitions in the grocery sector, suggesting that it may be looking at more acquisitions.
BMR Take: Amazon is a never-ending innovation machine; essentially a massive start-up. Look, the company will do $177 billion of revenue this year and we could rant and rave about the revenue growth outlook. But nobody knows what businesses Amazon will even be in over the next 3 years. They are knocking down doors and running through walls into new markets. Grocery will be tens of billions of dollars for Amazon in a market that the firm has been in for less than a year.
The stock had a banner week and hit our $1300 Target, setting a new all-time high. We believe we will see $2,000 someday in the future, but obviously not right away. But we can see $1,500 in the not-too-distant future, so we hereby raise our target to that level. The Sell Price is raised from $1,030 to $ 1,225.
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Google (GOOG: $1,122, up 2%)
Apple came under massive scrutiny this week. Parental oversight organizations said Apple should take more responsibility over how children use their devices in particular addition to the technology. We think Apple, Google, and Facebook in particular are making so much money they are likely to be the target of increased scrutiny by governmental authorities. In fact, we saw this week similar outcries against Google. We keep an eye on this risk but would not let it shake us out of any of these holdings.
Google has been profiting from a practice in the United Kingdom but banned in the US, in which brokers secretly reap millions of pounds from addicts seeking treatment in the UK. An undercover investigation by the Sunday Times has discovered a large fraud in this area. As a result of an in-house investigation, Google pulled all addiction-industry-related advertisements from its UK platforms.
BMR Take: Without question, Google and its peers will have to invest more in meeting social responsibilities and being a good corporate citizen. That said, Google can manage through this. We are looking at EPS going from $32 this year to nearly $60 by 2020. We can live without $1 or $2 of EPS if the company addresses these social issues and spends money to prevent thing like this advertising scheme being run through the platform in the UK. In fact, we encourage it, as it could result in a premium valuation.
Google set a new all-time high this week and is now worth $780 billion, closing in on Apple at $900 billion. (Of course, Apple set a new all-time high this week as well, so it’s certainly a good race!) Our Target has been $11,00 which was hit this week, and we expect a continued strong stock market which should proper Google higher. Thus, we hereby raise our Target to $1,450 and our Sell Price to $1,010.
Don’t like high-priced stocks? GET OVER IT. Buy some Google. Buy some Amazon. Buy 7 shares. Buy 23 shares. Just own these fabulous companies!
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Eli Lilly (LLY: $87, flat)
Eli Lilly caught a big upgrade from Argus Research. Again, we love it when the professionals come around to liking our holdings!
What’s the excitement? Tax reform is a major positive for the company. Additionally, the company is working to sell its Animal Health business. The combination of these two events will create a cash windfall. Now the CEO is talking about doing a large acquisition.
Previously, big time M&A was just a distraction for the company as Lilly could not be competitive due to its balance sheet. However, now there is some real interest to move bigger into immune-oncology. Could we see them try to buy Bristol-Myers? (BMY: $63) Maybe; but that’s a big bite to chew off – around $120 billion.
BMR Take: Lilly is going to do $4.65 of EPS in 2018. They have $4.5 billion of cash. They have more cash than debt. They could do a mega-deal and this could get really exciting. We see why Argus upgraded the stock with a $115 price target.
We at The Bull Market Report have a Price Target of $88 on the stock at the moment, but we expect mid-90s by summer, so we hereby raise our Target to $96. Our Sell Price moves higher too, from $76 to $82.
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Home Depot (HD: $196, up 2%)
To be honest, we are frankly a bit upset at Home Depot right now. We expect a lot from our companies - we wouldn’t recommend them to you otherwise. Home Depot put out this official statement on tax reform back in November, “The Home Depot is very supportive of tax reform that would fuel the economy by putting more money in the majority of Americans' pockets while improving the competitive position of companies so they can create more jobs. We applaud Congress for its efforts in moving tax reform forward.”
What is it missing?
Where is the minimum wage hike? Where is the $1,000+ bonus to employees. Walmart, some big banks, and many other companies took additional actions. All Home Depot did was issue a press release of encouragement.
We will get over it. But Home Depot missed an opportunity to demonstrate its corporate leadership in this country.
BMR Take: Home Depot is going to do nearly $9 of EPS in 2019. EPS should grow at least mid-single digits. The housing market is doing great and we expect ongoing favorable tailwinds for Home Depot. The stock is still going to go higher, but it could go much higher if they would not miss opportunities to build goodwill with the market as an exceptional corporate citizen.
Our Price Target is $205 which we will leave here for the time being. The Sell Price of $178 is hereby increased to $186.
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Economic Calendar
Capacity Utilization
Wednesday, January 17th, 9:15 AM
Period: December
Consensus: 77.3%
Prior: 77.1%
Housing Starts
Thursday, January 18th, 8:30 AM
Period: December
Consensus: 1,278,000
Prior: 1,297,000
Michigan Sentiment
Friday, January 19th, 10:00 AM
Period: January
Consensus: 97.0
Prior: 95.9
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Time to Take Our Profits in Tesla?
Tesla (TSLA: $336, up 6%) had a great week, but the more we think about it, the more worried we become. They have orders for 400,000 Model S cars and said last year that they would be delivering 5,000 a week starting in October, 2017. Well, guess what, this 5,000 number has slipped a number of times so that now they are talking about the 2nd quarter of this year. That’s a big slip. Maybe there is something seriously wrong here. No one seems to know and the company certainly isn’t helping us with solid information.
The company is going to need massive amounts of cash this year. They are bleeding money each day, each week, each month, so we expect more secondaries this year, diluting existing stockholders. And more bond sales as well.
Can the company survive and thrive? That’s the question that we are wrestling with.
We love the company; the world loves the cars. We love Elon Musk, but he is a promoter for sure. A loveable genius with a $56 billion market cap company.
The more we think about it and the more we write about it, we just have to book our profits. We are up 69% since we added the company two years ago at $199. OK, wait a minute. We’ll let the market tell us when to sell: If the stock goes to $320, we are OUT.
It’s tough to invest in a visionary. The vision always takes longer than the genius or the masses of followers expect.
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Apple's App Store Broke Records this Holiday Season
Apple’s App Store started off 2018 by breaking app purchasing records on New Year's Day. Consumers spent $300 million in app purchases on January 1, 2018, marking the highest sales day for the App Store since its launch in 2008.
This outstrips last year’s record-breaking figure of $240 million in purchases on New Year’s Day. Customers spent $890 million on apps from December 24th-31st. Insights into app spending during the holiday season are indicative of the strength of the iOS platform for the year to come, as many consumers receive smartphone devices and purchase new apps, games, and subscriptions over the holiday period.
Apple’s App Store revenue gets bigger each quarter and each year. Developers received $26.5 billion for the year, up 30% year-over-year, and is now over $86 billion since 2008. For 2017 the $11.4 billion in revenue was almost 5% of the company’s projected $237 billion in total revenue.
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A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
Earnings season officially kicked off last week with the big banks leading the way. We expect decent to good numbers, but the big thing to watch for will be forward guidance, particularly on how much tax cuts will impact the bottom lines. Some sectors like Energy will likely benefit more than others which traditionally have been able to pay lower effective rates such astech.
Last week, Bank of America analysts raised their earnings forecast for the S&P 500 by $14 to $153 per share, as a result of the new lower 21% tax rate. (Source: Merrill Lynch). In market-speak, that means that if corporate earnings for 2018 reach $153, and the market's trailing PE is 18, the S&P 500 will be trading at 2754. Today it is trading at 2786…………………….oops, that doesn't sound very promising. For the market to reach 3029 (a 9% gain), the S&P 500 would need to trade around 20X trailing earnings. That is of course doable, and not outside the realm of just being a high-priced market rather than a bubble, but it would be a lot better from a fundamental standpoint if the market could see fit to earn a higher number this year. We should have a better grasp on a projected year-end earnings target after earnings and guidance are announced over the next several weeks.
Meanwhile, what a week the market enjoyed two weeks ago. It was one of the best first weeks of any new year in history. There are plenty of historical stats which show that if the market has a good January, most of the time the year will end up with positive numbers as well.
Even though the jobs report missed expectations for 191,000 new jobs being created last month by coming in at 148,000 instead, the great big story was that this number had 146,000 private sector jobs versus only 2,000 public sector ones. Always remember that government doesn't create jobs – it only takes away from the private sector when it grows, and because it is the private sector that creates jobs, a growing government is the worst case scenario for a growing economy. So "hip, hip hooray" for this ratio of jobs because it is just what the doctor could order for a healthy and robust economy.
The biggest winners for job creation were in Healthcare with 31,000 new jobs (300,000 for 2017), Construction with 30,000 new jobs (210,000 for all of last year), and Manufacturing with 25,000 new jobs (196,000). We also saw gains in Food Services & Drinking Places (government-speak for restaurants and bars), and Professional & Business Services. Thus, these are not part time or low paying jobs for the most part, which is equally important for a growing economy.
Again, we have to keep everything in perspective. The following stats are from Pension Partners:
"From August 18th to November 29th, the Dow went 72 straight trading days without an intraday move greater than 1%, by far the longest stretch in history.
“The S&P has now risen for 14 consecutive months, the longest run in history.
“The Dow closed at an all-time high 71 times during the year, the most in history.
“There was a sharp flattening in the yield curve throughout 2017. At 0.51%, the spread between 10-year and 2-year yields on the last day of trading was the flattest level of the expansion. (This is a "flag" we are watching).
“In spite of this backdrop, the Fed only hiked rates 3 times in 2017, to a year-end range of 1.25 to 1.50%. After subtracting inflation (core CPI of 1.7%), this leaves the Real Effective Fed Funds Rate in negative territory for the 9th year in a row – another longest stretch in history.
“On the flip side:
Unemployment rate (4.1%) – lowest since 2000
Jobless Claims – lowest since 1973
Consumer Confidence – highest since 2004
ISM Manufacturing Index – highest since 2004"
Our take is that we should expect a correction along the way this year to keep this market from reaching the dreaded "bubble status", but we should also not be scared out of the market due to the length of this bull market. All good things eventually come to an end, but all records are also made to be broken. We have no idea when this earnings growth cycle will come to an end, but we simply do not see earnings growth stuttering or falling at this time - just the opposite, in fact, as corporations become ever so more competitive with the reduction of what had been among the world's highest and most onerous tax rates. (35% now cut to 21%). In this environment, we believe earnings will be the game changer – i.e., we are in the proverbial market of stocks, not a stock market. Companies with outstanding earnings growth will continue to provide outstanding returns.
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PayPal Holdings (PYPL: $80.50) was upgraded by analysts at Cowen from a "market perform" rating to an "outperform" rating. They now have a $88 price target on the stock, up previously from $79. They must be reading The Bull Market Report. Interesting: Our price Target is $87, because that’s the price at which the company will be worth $100 billion. The stock set a new all-time high on Friday.
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The High Yield Corner
By Michael Foster
Vice President, High Yield
Let’s start with a stock that fell below an important number and then quickly recovered.
Omega Healthcare Investors, Inc (OHI: $26, down 3%) has been The Bull Market Report’s big contrarian call for a while now. If you’re a regular reader, you know that we’ve frequently discussed the issues regarding Omega’s tenant insolvency and current negotiations. This has spooked a lot of investors and turned a once 8% yielding stock into a 9% yielding one. At the start of last week, the stock dipped below $27 for the first time since 2014 - a significant development.
There’s no news to drive this. No insider selling announcements, no updates on the ongoing negotiations with Orianna, which could result in a small decline in income or a protracted dispute in bankruptcy court. In either case, Omega is very likely to get paid out something. In both cases, though, Omega’s cash flow is going to suffer.
And what of that cash flow? Again, it’s helpful to look at the numbers. FFO for the last 12 months is $3.40, while annualized dividends are $2.60. In other words, the dividend coverage ratio is 131% - just above the important 130% level that we demarcate as the start of the safest REIT distributions. At its current level, Omega will maintain its payouts with ease.
But what about the haircuts? Orianna provides 5% of Omega’s FFO, so if Omega lost all of that money (a virtual impossibility), the FFO would fall to $3.23, leaving Omega with a 124% coverage ratio. That’s lower than we like, but it’s still over 100%, meaning we aren’t anywhere near a cut.
Let’s project into the future to see exactly when the dividend would get risky. If Omega lost 5% of its portfolio every year, 2019’s FFO would fall to $3.07. The next year’s would be $2.92…and in fact, it would take until 2023 (i.e., 5 years from now) before Omega’s FFO would fall to less than its current payouts. Then, it would hit $2.50.
Keep in mind that we’re playing with the worst possible case here - but let’s play with the math and see what happens to our income stream.
If the future was as bleak as this, 2023 would result in a 3.8% dividend cut to make payouts sustainable. At current prices, that would make Omega Healthcare yield 9.2% (instead of its current 9.6%).
If this is our worst case scenario, it looks pretty rosy. Getting a near 10% dividend over 5 years before a dividend cut that then brings your yield to a still impressive 9% - that’s not much downside.
There is one other consideration. Omega increases its dividend by a penny per quarter. We’ve have written in the past about this; it’s good for investors in the short term, but it will expedite the schedule for when Omega will have to cut its distributions. For that reason, we think it would be best for Omega to stop its quarterly hikes and telegraph to the market its plans to do so many, many months in advance.
We are disappointed that Omega hasn’t done that yet, but we also wouldn’t be surprised if they did this sometime this year. The recent price action demonstrates that the market is expecting the dividend hikes to stop relatively soon. That gives Omega a nice window to make the move without hitting the stock too much further - but we are not sure they will actually make this move at all.
And the reason is simple. We on the outside see a very slow demise of the dividend - management does not. In the last earnings call, CEO Taylor Pickett addressed the issue with some promising numbers:
"We are hopeful, we can develop an out-of-court plan, which if successful, would likely result in cash rents of $32 million to $38 million per year, as compared to the current annual contractual rent of $46 million.”
If successful, that would lower FFO by 1.5% - in other words, hardly anything at all.
Additionally, Omega continues to expand. The company invested over $300 million in the third quarter of 2016, which on its own more than covers the lost FFO from the Orianna issue. By how much? Pickett noted that Omega targets a 9% capitalization rate for investments, meaning that $300 million investment will be almost twice that of the lost cash rents from Orianna.
What about the properties currently occupied by Orianna? Omega is currently working to sell or rent to new operators who are in a better financial position. If successful, this could cause FFO to grow significantly in the next 2 years - and that will make Omega shares skyrocket.
We have faith that Omega’s managers can navigate this admittedly complicated and tricky transition, and that’s why we remain constructive on the stock.
Finally, let’s quickly turn to some other high yield assets: Municipal bonds and closed-end funds. Nuveen AMT-Free Municipal Credit (NVG: $15.65, down 2%) and Invesco Municipal Trust (VKQ: $12.65, down 1%) had a decent showing for the week, in no small part thanks to a seasonal and rather predictable trend. Retail investors sell municipal bonds at the end of the year and buy again in January. This is classic tax loss harvesting at work, and any year where losses in munis are to be found, this trend is noticeable. So far, 2018 has been good to munis - and that is likely to continue. Thanks to the investors looking for their tax-free income streams, both the Nuveen and Invesco funds are seeing positive inflows - something that we are also seeing across the municipal bond market.
Good Investing,
Todd Shaver, CEO and Founder
The Bull Market Report
Since 1998
December 10, 2017
by Todd Shaver | Dec 10, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
The countdown to Christmas is underway, which means this year is coming to an end and the focus is turning to the outlook for 2018. This bull market has been nothing short of spectacular. We expect high-single digit returns in the stock market again in 2018. Our view is supported by rigorous analysis from Guggenheim Research, which points to the US not reaching a recession until late 2019 or 2020. Specifically, they say, the business cycle is one of the most important drivers of investment performance. It is therefore critical for investors to have a well-informed view on the business cycle so portfolio allocations can be adjusted accordingly.
At this stage, with the current U.S. expansion showing signs of aging, focus is now just gradually shifting toward the timing of the next downturn. Using history as a guide, however, you will find that it is possible to get an early read on when the next recession will begin by analyzing the late-cycle behavior of several key economic and market indicators. Together, they have provided advance warnings of a downturn. The best indicator is the Leading Economic Indicator Index, which compiles all the various indicators into one data set. The 10 components of the index cover weekly hours worked, manufacturing orders, initial jobless claims, building permits, new private housing units, interest rate spreads, and consumer sentiment. An analysis of these metrics suggests that the current expansion won’t end until late 2019. So keep your foot on the gas!
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks where you can still make good money, including: Tesla, Twilio, PIMCO Dynamic Income Fund, Amazon, Google, First Solar, and more.
BMR Companies & Commentary
Tesla (TSLA: $315, up 3%)
Anheuser-Busch has placed an order for 40 of Tesla’s new all-electric Semi trucks. The maker of Budweiser seeks to reduce fuel costs and vehicle emissions, along with other companies across sectors through the Tesla revolution.
Anheuser-Busch plans to use the trucks for shipments to wholesalers within 150 to 200 miles of its brewery locations - well within the 500-mile range that Tesla Chief Executive Elon Musk has promised. The vehicles would be deployed among the brewer’s dedicated fleet of 750 trucks, which bear the company’s branding but are owned and managed by outside carriers.
Anheuser-Busch’s preorder is still tiny relative to the broader heavy-duty-truck market, which produces 250,000 to 300,000 big rigs a year. Anheuser-Busch spends about $120 million on fuel each year for its dedicated fleets and long-haul transportation by for-hire carriers moving beer between breweries and wholesalers. The company wants to cut its carbon footprint by 30% by 2025, and has invested in alternative-fuel vehicles, such delivery trucks that run on compressed natural gas. This is big stuff!
BMR Take: Tesla is currently losing money, but the consensus 2020 EPS outlook is over $10. At some point we see all the innovation, like electric trucks, turning into major profits. Tesla remains one of the most exciting businesses in America.
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Twilio (TWLO: $25, down 5%)
Twilio hosted its analyst day in San Francisco this week. It was a good day. Twilio did a nice job of conveying the momentum in its business and how it plans to continue to drive rapid revenue growth at scale, but it did not guide to gross margins for 2018, and suggested that near term, gross margins may still move around a bit, even though management is confident in its longer-term target of 60-65%. The stock was under modest pressure accordingly.
Twilio provided three new disclosures to help investors better understand these gross margin dynamics, including: 1) gross margins have consistently been around 60%; 2) gross margins are negatively impacted by the international mix, which was 53% in 3Q17 for core voice and messages, far higher than the 24% figure Twilio discloses for the international revenue breakdown by account location; and 3) gross margins are positively impacted by application services revenue, which was $10 million in 3Q17, up 100% from a year ago and representing 9% of total revenue.
The company reinforced that demand is not an issue for Twilio. For example, the COO shared a story about how one sales representative was “drowning in leads.” He also disclosed that Twilio receives more than 7,000 “data-driven alerts,” or leads per month.
Twilio claims that it won 80% of new business opportunities against the top-five competitors in the first three quarters of the year. According to management, the top reasons customers select Twilio include: 1) trust; 2) omni-channel capabilities; 3) flexibility; and 4) innovation.
Twilio Investor Day tone was positive, says Baird. They remain positive on the company's competitive position and long-term growth opportunity fueled by increasing cloud communications use cases. They also remain positive on its stronger revenue growth and ability to improve margins long term. Baird reiterated their Outperform rating and $37 price target on Twilio shares.
BMR Take: Twilio currently trades at a big discount to where comparable high-growth cloud communications companies trade. We think this valuation disconnect will correct itself, leading to strong stock appreciation. With revenue exploding at greater than 60% per year towards $600 million by 2019, we see a compelling value here. The stock has been painful to watch but one of these days, Wall Street will take notice (again) and we will all be rewarded with our patience. If you can't take the pain, then you may just want to switch to some of the larger, safer investments like Apple or Google. We’re going to be right on this. Eventually. Watch and wait.
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PIMCO Dynamic Income Fund (PDI $31, up 1%)
With rising geopolitical tensions and good money been made in the stock market, we stress the importance of increasing your bond allocation. Pimco Dynamic Income is a great way to do it.
The portfolio maintains moderate exposure to US interest rates, where Pimco continues to emphasize the intermediate portion of the yield curve. However, due to historically low yield levels and continued flattening of the yield curve, the fund has some exposure to the long end of the US Treasury curve. Outside of the US, Pimco also has modest exposure to UK rates and an underweight to Eurozone rates.
Pimco maintains a focus on non-agency Mortgage-back securities (MBS) purchased at discounts to par, which provide a potential source of income and capital appreciation, as prices in this asset class continue to be supported by limited new supply and a strong US housing market. Pimco maintains exposure to corporate credit, including an allocation to high yield bonds in the Financial sector. The banking exposure is focused on slightly more risky opportunities that are more lucrative, given how stable the banking system is at this moment. PDI has exposure elsewhere in corporate credit, including allocations to select attractive names in Retail, Media, and Telecom. Pimco’s exposure to emerging markets remains highly selective and is focused on issues offering attractive spread premium and real yields coupled with strong underlying fundamentals, such as select Brazilian and Russian corporates, as well as Argentinian sovereign debt.
BMR Take: Pimco is offering just less than a 9% yield. And the fund is up over 20% this year. For fixed income this is amazing. This fund is a great place to increase your fixed income exposure and protect against unexpected drawdowns in the stock market.
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Amazon (AMZN: $1,162, flat)
The road is not always easy. Not even for Amazon.
Maine has canceled Amazon’s application to become a pharmaceuticals wholesaler. Their applications were canceled because they did not contain all the required information, and no action had been taken by the applicant to complete them, according to the state Department of Professional & Financial Regulation.
Amazon had submitted three pharmaceutical applications in October – all three expired on Friday, Dec. 1, according to the board’s online license check. Analysts are trying to decide whether Amazon merely stumbled and missed a local deadline, or if Amazon abandoned the license applications because it realized they were unnecessary if all it wants to sell are medical devices, not pharmaceuticals.
We have confidence Amazon will get it right!
BMR Take: The innovation machine is disrupting the globe. EPS estimates are now up over $20 by 2020. Amazon continues to have a long way to run. Our Target is $1200, but in our heads we are looking for $1500 and then $2000. We can’t tell you when the latter will occur, but we sure would like to see the former happen sometime next year.
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Google (GOOG: $1,037, up 3%)
Google is about to launch a small but useful update to Google Maps that will give you live guidance and interactive real-time notifications during your journey. The idea here is to give you real-time updates while you are traveling.
To get started, you search for your transit directions in Google Maps as usual. So far, so good. What’s new here is that you’ll soon be able to tap a “start” button at the bottom the screen with the details about your route and get live updates as you walk or ride on your local buses and trains.
Our understanding is that Google Maps will even remind you to get off your bus or train when you get close to your stop. That’s definitely useful when you’re traveling somewhere new. The notifications on the lock screen are also new. One nifty feature here is that they are interactive, so you can scroll right through your journey’s steps.
While Google Maps always did a good job of giving you detailed directions, the process generally involved keeping track of your own progress along the route. With this update, transit notifications become a bit more like using Maps for walking, biking and driving. This update is to go live soon.
BMR Take: Google is always advancing the world and this is just the latest example. When you can make the world a better place, revenue and profits follow. Google is expected to earn $57 of EPS by 2020 up from $32 this year. What a great place to invest!
The information here isn’t earth-shattering – (it’s hard to come up with earth-shattering news every single day (but we try)), but we’re trying to make a point here and that is that this company continues to innovate every day. A little here and a little there and eventually it goes to the bottom line. Revenues for the past few years look like this: $55 billion in 2013, $66 billion in 2014, $75 billion in 2015 and $90 billion in 2016. What about 2017? They’re on track for $105 billion. They made $19 billion after tax last year and they are going to better that for 2017, and with $100 billion in cash on the books and virtually no debt, we can’t think of a better place to put some of our hard-earnings savings.
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First Solar (FSLR: $70, up 16%)
A lot of bad press is confusing the outlook for renewables. Don’t get confused. Renewables are the future and First Solar is going to play a critical role.
What is being said? Less than a year into President Trump’s time in office, clean energy developers face a slew of unanticipated threats from the White House and Republicans in Congress that could slow the industry’s growth in ways unimaginable just a year ago. During Trump’s presidential campaign, energy analysts were skeptical of his promise to preserve the coal industry at the expense of wind and solar. Even the most aggressive attempts at regulatory rollback couldn’t reverse the market forces driving the decline in coal, they reasoned.
But the administration has not stopped at mere deregulation. From the threat of a subsidy for coal-fired power plants to a tax bill that hurts the financing of clean-energy projects, Republicans in Washington have launched a campaign against renewable energy that includes market interventions that alarm other industries, including Oil and Gas. Even if these measures never come to fruition (advocates of transitioning from fossil fuels are pushing back) the changed mood in Washington threatens to undermine the confidence of companies planning to invest in renewables.
BMR Take: First Solar is taking the Energy sector forward with the most sustainable technology on the market. Expected EPS of nearly $4 by 2020 is up from $2.50 this year, but the 10-year outlook is where the real money is. This company is just getting started. Our Target is $65, but the stock has blown through this. So we hereby raise our Target to $78 and our Sell Price from $45 to $61.
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Economic Calendar
JOLTS Job Openings
Monday, December 11th, 10 AM Eastern
Period: October
Actual: N/A
Consensus: 6,100,000
Prior: 6,093,000
PPI ex-Food & Energy NSA
Tuesday, December 12th, 8:30AM
Period: November
Actual: N/A
Consensus: +2.3%
Prior: +2.4%
Initial Claims
Thursday, December 14th, 8:30 AM
Period: December 9th
Actual: N/A
Consensus: 240,000
Prior: 236,000
Capacity Utilization
Friday, December 15th, 9:15 AM
Period: November
Actual: N/A
Consensus: 77.2%
Prior: 77.0%
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Some Tidbits – Apple, Home Depot, Cloudera, Bitcoin
Apple (AAPL: $169, down 1%) is confident that apps removed from the China app store will be reinstated, Reuters says. Apple's CEO Tim Cook said the company is optimistic that apps that were pulled from its China App Store will be reinstated.
Also, Dialog Semiconductor is losing staff to Apple, Business Insider reports. Apple is continuing to hire away designers and engineers from Dialog Semiconductor (DLGNF), one of its suppliers. Around 28 Dialog engineers and designers have moved to Apple between March 2016 and now.
Also, the new tax plan would cut $47 billion from Apple's tax liability, The Financial Times reports, if Republicans push through their current tax plan, making it the biggest beneficiary of the legislation now working its way through Congress.
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Home Depot (HD: $183, up 2%) set a new all-time high this week. It is now worth $215 billion. Wow. The company announced a $15 billion stock buyback, and the initial reaction on the Street was a slight sell-off. Silly.
How’s this for a 6-month chart?
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Cloudera Reports Strong Revenues
Cloudera (CLDR: $16.84, up 6%) reported that revenue rose to $95 million from $67 million in the year-ago period, a gain of 42%. Profits were in the negative, so although we are pleased with the revenue growth, we’re not happy with the losses. The stock had a little bump last week and it may go a bit higher, but it is not going to $30 or higher where it ought to be until it starts actually making money. We love this company but realize this is a multi-year investment from here. Patience is key here. But our patience is certainly running thin. The quarter was strong, so that gives us hope.
Bitcoin (BTC-USD: $14,840) has a market cap of about $250 billion, about the size of Visa. It was quite a week, as it rose from the $11,000 just one week ago. In the interim it hit $17,000 or so, and futures trading starts Sunday (the 10th).
Bitcoin Chart for the Past Month
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The High Yield Corner
By Michael Foster
While the stock market went nowhere fast last week, high yield investments were a bit more mixed. We saw strength in municipal bonds for the first time in a long while, as this was overdue. The uncertainty regarding tax reforms caused some selling, but now the market is realizing that muni bonds are vastly oversold, which is helping to bring some money back into the market. Additionally, the slightly more risk-averse market is helping some money flow into muni bond funds, driving them up again.
As a result, Nuveen AMT-Free Municipal Credit (NVG: $15.68, up 2%) and Invesco Municipal Trust (VKQ: $12.57, up 2%) both had a good week, meaning the strong buying opportunity is mostly over. It’s not entirely over, however. Both funds are trading at about a 6% discount to NAV on average, a bit lower than the 5% discount we saw for much of 2017. What’s much more encouraging is the positive change in NAV we’ve enjoyed throughout 2017 - these funds are up about 5% on average on their net asset value even after their 5% dividend payouts. That means these dividend payouts remain sustainable and investors can expect a strong total return in addition to the tax-free income stream these funds provide. We wouldn’t be surprised if we saw more investors jump into the muni market, driving these funds higher and their discounts lower.
Elsewhere in the high yield world, we saw growing discontent. Specifically, Government Properties Income Trust (GOV: $18.29, down 3%) had a challenging weak on no news. This is largely a result of continued concern that Government Properties is overly levered and highly dependent on government agencies who are squarely in the majority Republicans’ crosshairs when it comes to cutting expenses wherever possible.
Of course, neither of these facts have changed in the last week, but admittedly the 8% and 7.5% yields that this stock offered earlier in the year were too low to compensate for the risks that the fund’s portfolio afforded.
Some context is important here. The Bull Market Report first recommended this stock back in April of last year when it was yielding 9.5%. Since then, the stock has given a near 14% total return to investors thanks to a slight bump in price and a consistent 43 cent quarterly dividend payout.
The Bull Market Report did not recommend selling this fund during its run-up earlier in 2017 for one specific reason: income sustainability. The most crucial metric to look at with REITs is FFO* and its relation to dividend payouts. Over the last 12 months, this REIT’s FFO was $2.15, while the dividend is an annualized $1.72. That’s a 125% dividend coverage ratio, slightly short of our preferred 130% dividend coverage target. But that shortfall is compensated for by the higher yield.
* Funds From Operations
To put that into context, let’s think about another beaten-down REIT: Omega Healthcare Investors, Inc (OHI: $28, up 1%), which has around a 130% dividend coverage ratio and a 9.4% dividend yield. With such a strong and sustainable income stream and a high yield, these are ideal contrarian income plays despite the justifiable concerns about the fundamentals. With Omega, the worry is that there are too many skilled nursing facilities and lower-than-expected demand. With Government Properties, the worry is that there is going to be depressed demand from a belt-tightening government.
These concerns are well compensated for by yields over 9%. When you get to double-digit yields (which is very unlikely with Omega but not impossible with Government Properties), you’re getting paid too much for the risks. We believe there is a chance of seeing its stock drop to a level where yields are 10%, which makes it a hold right now but not an absolute great buy. But when it comes to the sustainability of the dividend, we clearly see no risks at all to the dividend for a long time - in fact, possibly for several years.
How many years? To answer that, we need to look at the duration of outstanding leases in Government Properties’ portfolio. At 5.1 years, 28% of the company’s leases will expire before 2020. And in the next 5 years, almost 60% of the company’s leases will expire.
This is a double-edged sword. On the one hand, there is a risk that the company won’t be able to lease those properties to new tenants, causing occupancy rates to fall, income to fall as well, and the dividend to be increasingly at risk. On the other hand, there’s an opportunity for the company to lease those properties to those tenants or new tenants at the same or higher (possibly much higher) rents. This latter scenario is how we feel. The government needs the space and the record of the government in cutting down its size is, as you know, abominable.
So what is the likelier scenario - falling occupancies or rising rents? Bears are arguing for the former, and we would argue that that scenario is already priced in. However, falling occupancies is more unlikely than the market is expecting for a couple reasons.
Firstly, commercial leasing activities are going up. According to Jones Lang LaSalle, one of the biggest commercial leasing firms in America, leasing activity is at its highest point in 2 years and it’s trending higher. Government Properties has been shifting away from government leasing to office leasing, so it will benefit more and more from this trend. Thus the chances of finding new tenants paying higher rents is actually pretty good.
Secondly, there’s a paradoxical market lockup in commercial real estate REITs despite strong rent growth. Office-space REITs are one of the most heavily discounted (infrastructure and data centers are the most premium priced) in large part because of the market jitters about future occupancy rates, which paradoxically is forcing more conservative fiscal decisions among office REITs like Government Properties. But we have clearly hit a bottom in terms of pessimism, and when enthusiasm comes back to office space REITs, which will likely come as soon as the market notes the strong growth in leasing activity and rent growth, companies like Government Properties will be able to expand even more.
That means patience is in order. Expect more negativity and worries about Government Properties in the short term. But the fears about its soon-to-expire portfolio are overblown, and when the market realizes this, more capital will flood into the stock. It may take until 2019, when 18% of the company’s portfolio expires. If those spaces are re-leased at the same or higher rates (which seems inevitable given the strength in the commercial real estate market), expect the stock to rise. Best to hold the stock now, collect the income, and wait for that bump in a couple of years.
Good Investing,
Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998
December 7, 2017
by Todd Shaver | Dec 7, 2017 | 6pm News Flash
Cloudera (CLDR: $16.60) beat earnings expectations after the close today. The company still can’t figure out how to make money but revenues were strong. Revenue rose to $95 million from $67 million in the year-ago period, a jump of 42%. The company reported a net loss of $55 million, or 40 cents a share, compared with a loss of $44 million in the year-ago period. Adjusted loss was 17 cents a share.
- Q317 revenue was up 41% year-over-year
- Subscription revenue was up 48% year-over-year. Subscription revenue represented 83% of total revenue, up from 78% last quarter.
Operating cash flow for the third quarter of fiscal 2018 was -$2.4 million compared to operating cash flow of -$32 million in the third quarter of fiscal 2017, a good sign.
As of October 31st, the company had total cash of $485 million and no debt. We like.
BMR Take: Cloudera produced a strong quarter revenue-wise, with not-so-hot losses. Wall Street wants to see profits but it appears that Cloudera will be losing money for the foreseeable future. Not good. We love this company; we like what they do,* but they continue to think that we will wait forever for profits and a doubling of the stock. This isn’t going to happen until they report profits which appears to be possible by the 2019 arena – a LONG time to wait. This wait of course, is up to you. We want this quarter to sink in with us a bit so stay tuned for an update in a week or two.
* They operate a data management, machine learning, and analytics software platform in the United States, Europe, and Asia. The company’s platform delivers an integrated suite of capabilities for data management, machine learning, and analytics to customers for transforming their businesses.
October 29, 2017
by Todd Shaver | Oct 29, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
US equities finished the week higher on Friday again. There was a notable rally in Tech with several mega-cap names hitting all-time highs after earnings. Apple, Alphabet, Microsoft, Amazon and Facebook, the world's five most valuable public companies, added $180 billion to their combined market value on Friday. Investors piled into the group a day after Alphabet, Microsoft and Amazon reported better-than-expected earnings. For the stock market, it was more of the same. Those five companies have gained almost $900 billion in market cap over the past year.
Shares of Amazon and Google both surged past the $1,000 mark and approached all-time highs, with Amazon closing above $1100. To many people’s surprise, we continue to see favorable broad market trends with US equities seeing $14 billion of inflows over the last three weeks.
Friday's Gains:
Market Caps:
There was nothing particularly incremental on tax overhaul this week, as the House narrowly adopted the Senate budget, paving the way for release of initial tax legislation next week. Trump is leaning toward Powell for Fed chair, and the official announcement is expected next week.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks where you can still make good money, including: Apple, Microsoft, Amazon, Celgene, Bristol-Myers, and UPS and a few others.
BMR Companies & Commentary
Apple (AAPL: $163, up 4%)
Well, Apple has still got it! Apple sold out iPhone X pre-orders. Thousands of Apple fans from around the world flooded the website to lock in their pre-orders for the iPhone X. Apple sold out pre-orders for the phone to arrive on the November 3rd launch day in 17 minutes, and the wait time has grown to five to six weeks.
Apple said, "We can see from the initial response, customer demand is off the charts. We're working hard to get this revolutionary new product into the hands of every customer who wants one, as quickly as possible."
Why is this so important? Despite major concerns over manufacturing the deluxe iPhone, and the high price of $999, demand is not lacking at all. This finding bodes well for the stock and future prospects.
BMR Take: Apple sold 41 million iPhones last quarter and will sell over 200 million this year. The holiday quarter is the busiest season of the year, of course, and this year Apple is projected to sell over 80 million iPhones in the Christmas quarter, a new record. With iPhone sales fueling great than 10% EPS growth, we continue to see bright prospects for the stock.
Microsoft (MSFT: $84, up 6%)
Microsoft crushed the quarter. Revenue of $24.5 billion increased 12% from a year ago and beat expectations for $23.5 billion. EPS of $0.84 increased 17% from a year ago and smashed expectations for $0.71.
Earnings rose to $6.6 billion, or 84 cents a share, from $5.7 billion, or 72 cents a share, a year earlier. They are still making 27% profits on sales, AFTER TAX! The strength was broad based.
Analysts were most impressed by momentum in cloud that pushed Commercial Cloud above the company's $20 billion targeted goal they set two years ago approximately three quarters ahead of schedule.
Microsoft’s Azure's cloud revenue increased 90% in the period and has exceeded Amazon’s AWS growth for at least eight straight quarters, but Microsoft has yet to break out the unit's sales. AWS controls 34% of the market while Azure has 12%. However, Microsoft is picking up high-profile clients as it adds features, lowers prices and expands data center capacity around the world.
Amazon’s AWS brought in $4.6 billion in sales, which represents an annualized run rate of $18.3 billion. So you heard it here first, Microsoft is leading Amazon in the world of cloud.
Microsoft continues to increase its share in overall IT spending, and momentum in its results was a clear theme this quarter. Margin performance and free cash flow generation also stood out in the quarter.
BMR Take: With the cloud business tracking way ahead of plan, free cash flow per share forecasts now closing in on $5, and with so many other great things happening at Microsoft we continue to view this stock as a core tech holding for any portfolio. The stock blew through our Target of $78 to a new all-time high, so we hereby adjust it to $92. Our Sell Price remains “We would not sell Microsoft.”
Amazon (AMZN: $1,100, up 13% - $129 a share on Friday!)
Revenue: $43.7 billion growing 34% from last year, but only $1.3 billion in sales included from Whole Foods, which Amazon acquired in late-August. North American sales were $25.4 billion, up 35% from last year, while international sales grew 29% to $13.7 billion. Amazon gave fourth quarter guidance in the range of $56-60 billion. Wow.
The company’s net income was $256 million, or 52 cents a share. Analysts on average expected earnings of 2 cents a share. (Now THAT is funny. 2 cents a share expected and they report 52 cents! Gotta love this company.
Here we go again! Another industry is about to get “Amazon-ed”. This should be fun to watch and great for the stock:
Pharmacies and Healthcare Distributors continue to trade lower following news that Amazon eying the space. The St. Louis Post-Dispatch reported that Amazon has received approval for wholesale pharmacy licenses in at least 12 states. The topic was discussed further on Amazon’s earnings conference call with the company noting that hospitals and labs were among the areas that could be served under its Amazon Business initiatives. Both distributors and pharmacies are reacting negatively to the perceived threat.
And one potential competitor has jumped the gun by looking to buy a Healthcare company. CVS Health is offering to buy Aetna (AET: $173, down 3% Friday) for more than $200 per share, which would value the company at more than $66 billion. Aetna rallied 12% after the reports. According to the WSJ sources, the merger proposal was spurred by expectations that Amazon might enter the pharmacy business. A tie-up between a retailer like CVS and a health insurer like Aetna may seem surprising on the surface. But experts say both parties need to make strategic moves to address the changes in the sector, including the possible threat from Amazon.
While the above news stole the news headlines this week, keep in mind the core business delivered stellar results.
Revenue beat across all three segment. AWS revenue grew 42% - matching Q2's growth rate, assuaging fears of a deterioration, and beating consensus AWS income by $130 million.
BMR Take: Amazon didn’t just hit smash $1,000 again, the stock rolled right on to $1,102, closing up $128 a share to a new all-time high. With the potential entry into pharmacy, the “innovation machine” called Amazon is alive and well. We see EPS heading to $20 taking the stock much higher over time. We hereby raise our Target of $1100 which it will hit Monday morning, to $1300. Our Sell Price is raised from $970 to $1030.
Celgene (CELG: $98, down 19%)
Celgene had the biggest drop in 17 years on Thursday. Celgene has stumbled, but now is the time to stick with it and accumulate. Why?
Let’s take out all the noise. The fact is the company’s long-term EPS guidance was hardly cut at all from $13 to $12.50. We are still looking at greater than 20% EPS growth through 2020 as revenue explodes from $13 to $20 billion. Specifically, consensus EPS currently resides at $7.30 in 2017, $8.80 in 2018, $10.50 in 2019, and $12.60 in 2020.
Admittedly, it may take a while and we must be patient. There is all sorts of debate about how R&D expenses could disappoint and there are no major catalysts on the drug development front foreseeable in the next 12 months. Then there is also a camp out there that believes that any day now management could make a transformation acquisition that re-ignites excitement about the prospects for the business.
BMR Take: Celgene is the 7th largest component of the Healthcare sector and a $77 billion market cap juggernaut. You have to trust that the franchise is viable and will learn and progress past this current point of disappointment. This looks to us like a classic case of Wall Street exuberance on the downside with this out-of-favor sentiment swing. Take advantage of the drop and accumulate the stock down here.
Bristol-Myers Squibb (BMY: $60, down 7%)
Oh Bristol-Myers. Thou shalt no longer disappoint us at The Bull Market Report. Overall third-quarter revenue rose 7% to $5.25 billion, meeting Wall Street estimates. Earnings rose to $845 million, or 51 cents a share, from $385 million, or 24 cents a share, a year earlier.
Bristol said its gross margin as a percentage of revenue fell to 70% from 73.5% a year earlier due to product mix and higher costs, including a $70 million write-off of inventory for hepatitis C products.
Sales of cancer immunotherapy Opdivo rose 39% to $1.27 billion, in line with the average estimate of $1.21 billion, while sales of blood thinner Eliquis rose 38% to $1.23 billion, matching analyst estimates.
Bristol’s Chairman & CEO had this to say, “We had a good quarter, demand for Eliquis and Opdivo was strong and we advanced our portfolio with important clinical and regulatory milestones, including exciting data for kidney cancer patients with Opdivo + Yervoy. Looking forward, our focus is on continuing to deliver strong commercial performance, advancing our pipeline and ensuring our resources are applied to priority areas of our portfolio for sustainable, long-term growth.”
That said, there remains plenty of merger and acquisition talk, so we are sticking around for what could be a one-day 20-30% premium or higher.
BMR Take: Remember, activist investor Carl Icahn who has a stellar long-term track record is in the stock as one of the largest shareholders. He believes the business is suspect to being taken over and such a sale could unlock tremendous value for shareholders overnight. Stay the course!
The quarter looked pretty good to us. We wouldn’t worry about it too much. The stock may sell off for a few weeks, but we expect it to slowly start to move higher by Christmas.
UPS (UPS: $121, up 1%)
UPS forecasts record holiday delivery of about 750 million packages globally in the 25 days between Thanksgiving and New Year’s Eve. The record-breaking seasonal global delivery volume is about 5% above last year’s season. Of the 21 holiday delivery days before December 25th, 17 are expected to exceed 30 million delivered packages. Mind boggling!
With the launch of UPS Saturday ground pickup and delivery service, customers in nearly 4,700 cities and towns across the country will benefit from five additional ground pickup and delivery days between Thanksgiving and Christmas.
Online and mobile commerce has transformed the retail industry, and UPS is ideally positioned to serve both consumer and business customers during even these busiest of times.
According to the National Retail Federation, retail sales in November and December are forecast to increase 4%, reaching between $680 billion. During the busy holiday shipping season, UPS flexes its global delivery network to process nearly double the regular daily volume of 19 million packages and documents.
UPS continues to invest in the operational and consumer technologies and facility improvements that enable the company to deliver the holidays for customers. Enhanced customer visibility tools, increased consumer convenience, and the availability of the new Saturday ground delivery and pick-up services are all part of the expanding solutions UPS is providing customers, to take full advantage of the holiday season.
This peak season, UPS plans to employ 95,000 temporary seasonal workers, including drivers, delivery helpers who ride with drivers, package sorters, and loaders. Candidates for seasonal jobs can apply on UPSjobs.com. This holiday work often is an entry point for future permanent jobs and career advancement. Almost 35% of those hired seasonally over the last three years now have permanent jobs with the company.
BMR Take: It is crazy to think about just where our country would be without UPS. This business is the backbone of our culture and our economy. It is a must-own in any portfolio. With EPS on track to crack $20 in a few years, the stock remains a good value.
Upcoming Economic News
Personal Income
Monday, October 30th, 8:30 AM
Period: September
Consensus: 0.40%
Prior: 0.20%
Consumer Confidence
Tuesday, October 31st, 10:00 AM
Period: October
Consensus: 121.0
Prior: 119.8
ADP Employment Survey
Wednesday, November 1st, 8:15 AM
Period: October
Consensus: 200,000
Prior: 135,000
Total Light Vehicle Sales
Thursday, November 2nd, 8:00 PM
Period: October
Consensus: 17,500,000
Prior: 18,500,000
Update on Tesla (TSLA: $321, down 7%)
Tesla had a rough week in the markets, dropping $24. We uncovered some information about how the firm is doing in China. It looks like Tesla is making great progress in the difficult China market after all. Elon is great! 🙂
Tesla is moving to begin manufacturing in China. The firm won agreement with Shanghai's government to build a wholly-owned factory in the city's free-trade zone, the first arrangement of its kind in China for a foreign auto maker. Generally, the government makes firms partner with a Chinese company. They didn’t require that in this case with Tesla.
The deal would help Tesla slash its production costs as it would bring down shipping costs and the final price on its electric cars. More significant, it would give Tesla a base from which to export to the rest of Asia. Beijing has mandated a dramatic increase in production of electric vehicles.
BMR Take: The ride with Tesla has its bumps in the road for sure. This week is a further indication of that. They are close to starting substantial deliveries of the Model 3 this year, as they hold cash deposits for almost 500,000 cars. But just as they get closer, production snafus are leaking out from the company and the stock gets hit.
You should only be an investor in this company if you are breathing the happy gas that Elon Musk is sending out. Again, the stock can go to $500 from here, or $200. We’re just not sure which will come first.
A Word From Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services
What's Right with the Market?
As we mentioned last week there had to first be a move to get 51 votes or "it was all just a waste of time". Well, the Senate did pass a budget bill which sets the stage for tax legislation later this year. The significance of the budget passage is that it allows the Senate to now pass their tax legislation with a simple majority of 51 votes rather than the needed 60 votes without one. And since literally no Democrats appear willing to vote for the plan, this was a crucial step for the administration to get their plan approved. The President's plan to cut corporate and individual taxes and to make other business-friendly changes to the tax code have helped to push stocks higher. And, under this potential first major overhaul in about 30 years, corporations would see their top tax rate cut from 35% to 20% - which should obviously be a continuing tailwind for shareholders.
[BMR: Of course, whether this happens or not is certainly not clear. But we will say this: If it doesn’t happen, we are going to see a lower stock market.]
Some thoughts about the length of this bull market and stock overvaluations.
When Treasuries are paying less than 3%, certificates of deposit (CDs) less than 2% and cash less than 1%, it makes quite a bit of sense to continue to use stocks in a portfolio, and not pile into bonds that are tied to the fate of a bond market where when rates rise, bond prices fall.
Anything else right with the market?
Yes. Earnings season started strong and consumer sentiment hit a 13-year high. Companies have started releasing their 3rd quarter earnings reports, and so far, 78% of them beat bottom-line expectations. Corporate earnings have been strong since 4Q16, and this quarter will likely continue that trend, although it may come in a little light due to all the natural disasters. And, the University of Michigan's consumer sentiment poll for September revealed that consumers held positive perspectives overall - across income, age, and political spectrums. Last month's reading reported the highest consumer sentiment since 2004.
One final note – don't get faked out by another 1000 point move in the Dow. That’s because, as the market rises, each 1,000-point advance becomes smaller in percentage terms. For example, the rally between 10,000 and 11,000 in 1999 was, of course, a 10% rise, while the climb from 20,000 to 21,000 for the Dow marked a 5% rise. It's still a good thing, but a 1,000 points is not what it used to be.
That said, next year we may have to get concerned about extended valuations if earnings don't keep up, the length of this bull market if the yield curve inverts, the bearish tendencies of midterm election years, and the ever present Geopolitical risk (N. Korea). Thus, there will still be a wall of worry for the market to climb ……..but this is a good thing. For now, at least, we can enjoy the fact that the "trend is your friend".
Ventas (VTR: $62.50, down 1%)
The company owns more than 1200 healthcare properties in the United States, Canada and the United Kingdom. They are paying a 5% dividend (just raised 6%) and the firm just keeps humming along.
The real estate investment trust, based in Chicago, said it had funds from operations of $373 million, or $1.04 per share, in the period. Funds from operations takes net income and adds back items such as depreciation and amortization. The company had net income of $615 million, or $1.71 per share, on revenue of $900 million in the period.
Ventas expects full-year funds from operations in the range of $4.13 to $4.16 per share.
“We delivered yet another strong quarter for our shareholders. With positive earnings and property growth, improved financial strength and recognition of over $500 million in gains from our ongoing divestiture of our skilled nursing assets, we are in an excellent position,” said Debra A. Cafaro, Ventas Chairman and Chief Executive Officer.
Note that Cafaro was recognized by the Harvard Business Review as one of “The Best-Performing CEOs in the World.” She is one of 23 CEOs named to the Harvard Business Review list for four consecutive years and one of only two women on this year’s list. Ventas’s financial performance ranked 32nd of 900 companies globally for Ms. Cafaro’s tenure, which exceeds 18 years.
During and immediately following the quarter, Ventas sold properties and received final repayments on loans receivable for proceeds of $630 million, with gains exceeding $500 million, consisting principally of the Company’s completed sales of 29 of its Kindred Healthcare skilled nursing facilities (“SNFs”) for proceeds of approximately $570 million. The Company continues to expect total aggregate proceeds of $700 million from sales of its 36 Kindred SNFs in 2017, representing a 7% yield on cash.
The Company has excellent liquidity with $2.9 billion of available borrowing capacity and over $100 million of cash on hand.
BMR Take: We have a Target of $72 so we have a ways to go, but we are happy collecting the dividend and looking for a move to the upper 60s when the world finally wakes up to what a great company this is. Our Sell Price is $58. If you are nervous about the stock market as a whole (and we are not) then moving assets from the Tech sector to Ventas would be a smart move. Big, solid, growth.
From: Trent Thompson [mailto:Trent@xxxxx.com]
Sent: Wednesday, October 25, 2017 2:23 PM
To: info@bullmarket.com
Subject: Options on Nutanix
Hi Mr. Shaver,
I have profited nicely from Nutanix. I have also done well on options strategies as recommended by Bull Market for both Twitter and Microsoft.
I am wondering if you can propose a simple bullish option strategy for Nutanix.
Thanks, Trent.
PS - I very much appreciate your newsletter especially the weekly and ad-hoc reports!
Trent Thompson wanted to see an options strategy for Nutanix (NTNX: $28, up 5%) in his letter above. Good idea, Trent.
So here it is:
Dear Trent:
[Note that this is a RISKY STRATEGY – check with your broker or advisor.]
I like to buy in-the-money LEAPS if I can and if they exist (some stocks don’t have LEAPS.) The reason is that you are not paying as much time premium for the LEAP. Time premium always goes away – it disappears over time and you can be left with losses.
I also like to sell calls against the long LEAP in order to get that time premium back. It’s like selling a covered call but using the LEAP instead of the stock.
The 2020 LEAPs exist, so that is good, but note that the spread is high (bid-ask) so that makes the numbers a little tougher. We are looking for the stock which is currently $28 to go to $40 or higher by January 2020, over two years from now. If this happens we have a home run.
You can buy the 20 LEAP for about $14. With the stock at $28 that means that $8 is the intrinsic part of the price of the option and $6 is the time premium. In order to get some of the time premium back you can sell some options against it. I like to go out 3-6 months to sell the calls and when they expire, just do it again. You can sell the January 30s for about $2 and if the stock stays below $30 they will expire worthless, lowering your price of the LEAP by that $2, to $12. (If it goes over $30, that’s a good thing and you can just buy back the 30 call and sell a 35 call or another option.) You could also sell the April 35 for $2 if you don’t want to get too close to stock price. Or you could sell the April 30 for $3. There are lots of choices!
If the stock is at $30 or below in January, you then sell the June 35s for another $2, lowering the cost basis to $10. Then in June if the stock is at $30 or $35, you sell the January 35 or 40 for another $3-4, lowering your cost basis to $6. NOW WE’RE TALKING! Now you have an option you paid $6 for that is worth $15 if the stock is at $35 and $20 if the stock is at $40.
Obviously this is a very movable strategy and you have to watch the stock and move in and out of the short calls. Plus it is very risky, as the stock could go below $20 and you would lose all of your money. Some of you don’t like to have to watch things so closely, in which case this is not for you. But if you pay attention you can get the cost basis close to zero and if the stock goes to $35 or $40 in two years your return can be very, very big. Did someone say infinity?
With that said, good luck to you, Trent! (And all of our readers.)
Todd Shaver, CEO
The Bull Market Report
I use this site for my pricing, but there are others.
https://finance.yahoo.com/quote/NTNX/options?p=NTNX&date=1579219200
Letter from a Subscriber about Cloudera (CLDR: $14.90, down 8%)
From: Robert Jolliffe [mailto:rjolly1@xxxxxx.com]
Sent: Thursday, October 26, 2017 1:41 PM
To: The Bull Market Report
Subject: Re: News Flash for October 26, 2017: Celgene Lowers 2020 Guidance – Stock Gets Killed
I feel your pain and feel the same with Cloudera. They beat as well and have been falling like a rock the last couple of weeks. I've looked everywhere and can't find anything negative about Cloudera. In fact they just picked up Hitachi as a customer*. WTF! I doubled down here and hope no bad news comes out in the near future.
Our Answer:
I can’t agree more, Robert. What can we do now when we like a company so much, but the market is not cooperating? We can have faith, buy more down here and hope there are no skeletons in the attic.
Look what Nutanix has done lately. And Shopify. And Square. Square has been AWESOME. (Nutanix too.)
Even little old Opko Health. Eventually good companies win out in the end ESPECIALLY when they have GOOD REVENUES. Last quarter saw revenues of $89 million up from $64 million in the year ago quarter, a 39% jump.
Todd Shaver, CEO
The Bull Market Report
* Earlier in the month, Cloudera announced a strategic partnership with Hitachi to offer customers advanced services, support, and training to strengthen adoption of Cloudera Enterprise, the leading machine learning and analytics platform. "Developments in Cloudera's sweet spots - such as machine learning and IoT - are already starting to transform businesses across Asia Pacific and Japan," said Mark Micallef, Vice President, Asia Pacific and Japan at Cloudera. "Partnering with Hitachi is a critical milestone in our journey to simplify the creation of IoT, machine learning, and analytic solutions. It offers a great deal of promise to global enterprises looking to use data to generate new business models and revenue sources, enrich the customer experience and innovate industries."
Some Research from the Street on Shopify (SHOP: $107, up 5%)
We uncovered a research report on Shopify from a big-name Wall Street firm. We found it timely in that the company has been under attack from a firm called Citron, run by Andrew Left. He has made a name for himself by shorting various stocks including Valeant Pharmaceuticals. That was his big winner, but he has had losers too. He shorted Nvidia at $108 in December and it is now at $195. And he has had others.
From the research report we gathered the following:
We expect Shopify to deliver strong 3Q results with revenue and operating income exceeding Barclays and consensus estimates when it reports earnings on October 31. Shares of SHOP have pulled back by 15% in the last month (vs. S&P 500 up 3%) after bearish reports on the company's customer acquisition strategies but are still trading up 130% YTD (S&P 500 up 8%) despite FY18 revenue estimates only increasing by 25% YTD. At 10x FY2 revenues, SHOP's valuation is still a significant premium to peers. We are bullish on SHOP's competitive position in the Small Business ecommerce platform space and the opportunity with Shopify Plus in mid-market category.
Key Metrics for 3Q17: In terms of key metrics, we are modeling total revenue of $166m (+67% y/y), in-line with consensus, near the high-end of company guidance. SHOP has exceeded the high-end of its revenue guidance by an average of 6% over the last five quarters.
FY17 Guidance: Despite the recent pullback, expectations are high for SHOP to raise its FY outlook on 3Q earnings. We forecast FY17 revenues of $650 million, near the high-end of SHOP's current guidance, but we think buy-side expectations are higher.
Subscription Services: We are modeling subscription revenue of $80m in 3Q, up +61% or 5-pt deceleration on 2-yr basis.
BMR Take: We’ve been saying the same thing for a long time. We sure hope the company doesn’t disappoint on Halloween when they report earnings. Because if they do, the stock is going to the 80s. If they produce, like they have been for the past few years, the stock will stay at its current level and may even shoot higher as Mr. Manic, Andrew Left, will have to BUY BACK HIS STOCK. We love short sellers!
But – note what we just said above. The stock could get sacked or it might shoot higher. This stock is not for the faint of heart. If you don’t like the story here then you have two days to sell. You can always get back in.
The Carlyle Group (CG: $22.40) was down 8% this week due to the changeover in leadership. We’re really not concerned and in fact think it was a good move as the founders have reached their late 60s (that’s really young if you know what I mean) and they have outlined the management progression plan that investors are always concerned with. Here’s the gist of the announcement this week:
The Carlyle Group Names New Executive Leadership Team
Glenn Youngkin and Kewsong Lee to Become Co-CEOs
Peter Clare to Become Co-CIO Alongside William Conway
Global alternative asset manager The Carlyle Group announced the following executive leadership changes, effective January 1, 2018: Kewsong Lee and Glenn A. Youngkin will become Co-Chief Executive Officers of The Carlyle Group. Peter J. Clare will become Co-Chief Investment Officer alongside current CIO William E. Conway, Jr.
Carlyle’s current Chairman Daniel A. D’Aniello will become Chairman Emeritus and continue to serve on the Carlyle Board and Executive Group
Current Co-CEOs David M. Rubenstein and William E. Conway, Jr. will become Co-Executive Chairmen of the Board and continue to serve on the Carlyle Executive Group
Glenn, Kewsong and Peter will join the Carlyle Board of Directors
Carlyle Co-Founders Conway, D’Aniello and Rubenstein said, “These promotions ensure continuity in our leadership and maintain the investment processes that have driven our success for 30 years. “As Founders, we are passionate about Carlyle. We will continue to be actively engaged at Carlyle. We are fully committed to and confident in the firm’s future and will continue to be substantial investors in Carlyle funds for years to come.”
BMR Take: This stock is vastly undervalued. We would back up the truck. The dividend is 5.3% and the Chairman of the Board, David Rubenstein, is not selling a share until it hits $30.
The Carlyle Group was founded in 1987 and is based in Washington, DC with additional offices in 33 countries across six continents (North America, South America, Asia, Australia, Europe, and Africa). Carlyle is a global alternative asset manager with $170 billion of assets under management across 300 investment vehicles
Our Price Target is $28 and our Sell Price is moved up from $13 to $20. It’s hard for us to like a stock more.
The High Yield Corner
By Michael Foster
It was a really busy week for The Bull Market Report's High Yield portfolio, with earnings releases and other news events causing a lot of excitement. But at the end of the week, the numbers actually didn’t move all that much.
Of course, there are exceptions. Digital Realty Trust, Inc. (DLR: $117, down 5.5%) saw a sharp decline over the week after reporting earnings that were far above expectations on both the top and bottom lines. The company saw 12% year-over-year revenue growth and FFO growth of 5%. At $1.51 per share, FFO is covering dividends at an even higher rate, which again indicates the need for aggressive dividend increases as we have mentioned over the last few weeks.
Dividend increases should be extremely easy to fund if the company meets its pretty modest guidance. Digital Realty is looking for full-year FFO at $6.00-$6.10, which is about a 3 cent increase from previous guidance. Revenue guidance also bumped up to $2.4-$2.5 billion for the full year.
So why did the stock get hammered so much?
The devil is always in the details, and this time is no different. Digital Realty announced a 4% decline in lease renewals as a result of a 11% decline in Turn-Key Flex renewals (see explanation below.) That was offset by increases for colocation and Powered Base Building products, which combined are slightly more in square feet than Turn-Key. But the massive size of Turn-Key as part of Digital Realty’s entire operations inspired a lot of panic.
So why were the renewals down? It has to do with falling prices. Keep in mind that the decline is in dollar terms, so what happened is a lot of companies renewed at lower prices, driving total revenue for the Turn-Key services lower.
So what exactly is this Turn-Key Flex? Simply put, it’s a 5-year old product that allows renters to design their own server space - meaning electrical, cooling, and other control systems are custom made before the customer moves in. This is different from colocation services, where you simply rent out offsite data facilities without bothering to design the space.
You might be able to see the problem. Turn-Key Flex is obviously a really big ticket item for really big spenders. It’s the kind of white glove service that companies paying 7 or 8 figures are going to demand. And these big customers, who are also dominating tech as the sector gets more consolidated (think Amazon destroying little competitors like Blue Apron), are demanding more discounts as they expand.
That means low sales growth or dollar sales declines, which is what we’ve seen for Digital Realty. But this is hardly a bad thing - it means big clients are spending more with Digital Realty and, as a result, are negotiating lower prices. It’s an understandable trend and actually a good one for Digital Realty.
Note that the company’s data center experts have designed, developed and currently manage over 3.6 million square feet of enterprise-quality data center space throughout the U.S., Europe and Asia Pacific, with over 500,000 square feet of additional, fully improved data center space under construction.
Digital Realty's customers include domestic and international companies across multiple industry verticals ranging from information technology and Internet enterprises, to manufacturing and financial services. Digital Realty's 157 properties comprise approximately 26 million square feet. Digital Realty's portfolio is located in 33 markets throughout Europe, North America, Singapore and Australia.
Elsewhere in earnings news, we saw Ventas (VTR: $63) fall slightly on the week thanks to a Friday recovery on earnings. Revenues rose 4% to beat expectations slightly, but $1.03 FFO was a slight 1 cent miss from expectations. That wasn’t really enough to hurt the stock by the end of the week, and definitely isn’t enough to adjust our expectations for this company.
Again, the details are key. Ventas announced it is expanding its university-based life science operations, meaning the firm is continuing to focus renting space for university research. This is incredibly good, because its mainstay in senior housing is not a growth industry. As paradoxically as it seems, the aging American demographic trend hasn’t actually been as good for senior housing as expected, partly because a lot of aging boomers don’t want to live in senior facilities. But much more importantly, there is a structural reason: seniors can’t afford massive rent raises, which limits organic growth for a senior housing provider.
Seeing this problem, Ventas has diversified into research facility rents, where growth is easy. Why? Because university tuitions keep going up and up, and universities have an incentive to spend as much as they can on research facilities without the market discipline of being cost conscious. In many cases, the signaling benefit of renting shiny new research facilities far outweighs expense concerns for universities struggling to compete in prestige, so that’s a nice profitable business to be in. And Ventas is getting more and more into it, which should result in better margins and a brighter future for Ventas shareholders.
While most of the High Yield portfolio was flat or down 1%, we did see municipal bond funds slide. This is not going to stop anytime soon. Nuveen AMT-Free Municipal Credit (NVG: $15.17, down 2%) and Invesco Municipal Trust (VKQ: $12.33, down 2%) are down largely as a result of selling in anticipation of end-of-year tax-loss harvesting and retail investors taking bets off bonds because of the December interest rate hike that seems a given by the market. While investors could sell these funds to save a possible 1-2% decline in the coming weeks, an even better long-term strategy would be to buy more and more of these funds over the next couple weeks as their yields get closer to 6%. Municipal bonds remain a great place for tax-free income, and the fears of muni regulations changing to remove that tax-advantaged status have dissipated entirely. Washington can’t touch munis. As a result, demand for munis is going to trickle in, especially from the start of 2018. Why not get ahead of that and buy now?
Good Investing,
Todd Shaver
CEO, Editor and Founder
The Bull Market Report
Since 1998
