February 18, 2018
by Todd Shaver | Feb 18, 2018 | Weekly Newsletter 7pm Sunday
The Weekly Summary
US stocks rebounded to have the best weekly gain since 2011 - how do you like that for a turnaround? So it turns out the bull is still running after a quick breather. Now all the talk on TV is “don’t worry about volatility. That markets had been abnormally calm for years. That we should now just expect more noise.” We concur. We adhere to the old adage: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” This means that bear markets are born on euphoria and grow on pessimism. Frankly we just don’t see that much euphoria in the markets. For example, while bank stocks are up 50% since the election, profits are up more, which suggests gains in bank stocks are honestly tied to the realities of profit levels. As another example, GDPnow suggests first quarter GDP is above 3.0%, again meeting the growth targets underpinning recent stock market gains. All in all, wake us up when you see broad-based euphoria, because until then this bull market is on cruise control, the ride might be a bit more bumpy going forward.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight: Twilio, Shopify, Square, Splunk, Amazon, and AstraZeneca.
Key Market Measures (Friday’s Close)
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BMR Companies & Commentary
Twilio (TWLO: $33, up 35%)
Twilio crushed the quarter. We mean absolutely crushed it. Revenue was $115 million up 41% from a year ago. EPS was a loss of $0.03 versus breakeven a year ago. There were so many good things that happened we can’t cover them all, but we will share a few.
The tone of business at Twilio continues to be exceptional. Founder/Chairman/CEO Jeff Lawson commented, “We feel we are poised for a great year ahead.”
The big focus for investors was on Twilio’s gross margins. Specifically, after Twilio’s gross margin declined for three consecutive quarters from a peak of 59% in 4Q16, investors were concerned it might continue to trend downwards into the 40s. Twilio’s 4Q17 gross margin of 53.5% was up sequentially from 3Q17. In addition, CFO Lee Kirkpatrick said, “For 2018, you should expect gross margins around this level or better.” That’s a relief!
Uber has been the biggest area of concern for investors. After peaking at $14 million in 4Q16, revenue from Uber declined sequentially three quarters in a row to $5.0 million in 3Q17, but ticked back up to $5.8 million in 4Q17. Despite the drop off in Uber revenue, the company continues to grow the top line greater than 40% and we haven’t seen any other big customers leave, which is a major reassurance.
BMR Take: Founded in 2008, Twilio is the leading cloud platform for communications. Similar to Amazon Web Services, Twilio plays a critical role for software developers by allowing them to easily and securely build communications services, such as voice, messaging, video, and authentication into their software applications and then scale those services elastically and globally. This stock has a bright future and the current valuation of 5x sales is still at an unwarranted discount to the peer group of high-growth cloud communication companies trading for 7x.
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Shopify (SHOP: $138, up 15%)
Another stock crushed earnings for us this week. Shopify. Revenue of $223 million was up 71% from a year ago. EPS was a loss of $0.16 versus a loss of $0.12 a year ago.
2017 was undoubtedly the company’s best year yet. There was exceptional top line growth, but also immense learnings that will drive meaningful progress in terms of product and geographic expansion in the future.
The proof is in the pudding. Fourth quarter is the seasonally strongest of the year with the holidays. Shopify’s merchants sold more in this fourth quarter than in all of 2015, in fact doing $1 billion of sales over just a 4-day period.
For all of 4Q, Shopify’s merchants sold $9.1 billion, an increase of 65% or $3.6 billion from a year ago. This is the definition of sales flying off the shelf. The more Shopify’s merchants sell, the more opportunity there is for Shopify shareholders to make money.
BMR Take: Shopify is a clear leader in commerce, that is building scale, realizing strong growth consistently, and the firm is now considering additional product and geographic expansion to sustain these explosive growth rates for a long time. Revenue is set to double from $675 million in 2017 to $1.4 billion in 2019.
Our Target has been $125 and we wanted to make sure it smashed this target before we raised. Well, “smashed” is the right word here, as the stock shot higher to $140, before dropping a tad on Friday. Yup – an all-time high – never been higher. The company is now worth $14 billion and anyone buying the firm would have to pay $20 billion and we think that management would probably fight any buyout at that level. Why? Because they feel like we do that the company will be worth $30 billion someday. What? Yes. You heard it here first - $250 a share. (We didn’t say when!)
We hereby raise the Target to $160 and the Sell Price from $105 to $122.
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Square (SQ: $44, up 11%)
The one and only CEO of two publicly traded companies at the same time, Mr. Jack (Billionaire) Dorsey tweeted this week that Square’s Cash App is now up and running for instant buying and selling of bitcoin. We’ll cover the product below, but first the most important point needs to be made.
CEO’s like JP Morgan Jamie Dimon called bitcoin a fraud. Countless more expressed dissent or caution about the new sector. Regardless of what is the truth and what you or we think, the question to ask is what did Jack do? Well, he is already out with a product. It is undeniable that wherever the world is going in payments, Jack and Square are the NextGen warriors that are moving … and moving fast. The innovation is impressive.
According to Square’s Cash App, you can buy and sell bitcoin right from your Square Cash App. You have to fund it with a cash balance and have to read and agree to Square’s virtual currency terms of service, prior to proceeding. Interestingly, the terms of agreement are very onerous giving Square the right to withhold payments if fraud is suspected, for example.
BMR Take: We see Square growing revenue from just under $1 billion 2017 to $1.3 billion in 2018 driving EPS growth from $0.25 to $0.45 over the period. To be honest, we care a lot more about the long run revenue growth than the EPS picture. Visa’s market cap is $275 billion. MasterCard’s is $185 billion. Square is only worth $17 billion today and we believe the company can easily chip away at these giants to find strong growth over the next 10 years.
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Splunk (SPLK: $93, up 7%)
Splunk was up but did not participate in the broad equity market rally as much as it should have. What’s the deal?
The big news was selling by key stakeholders. Activist Jana Partners was a large 5% holder. They exited completely. It was also reported that a Senior VP sold a big block of his stock. Several other prominent investors sold out, like Sands Capital, Clearbridge, and Winslow Capital.
You just have to take note of insider selling. There is no reason to fall in love with any stock. When money has been made, recycle it into the next idea when the time comes.
BMR Take: Splunk is covered by 43 Wall Street analysts. 80% rate the stock a buy. However, the average price target is only $92. (Our Target is $95 which it just hit this week.) With the stock up about 50% over the last year, we are taking a closer look at rotating into a new idea. The risk we see is that with big owners selling, and analysts not raising target valuations higher, we could be in a big correction in sentiment.
So, with that said, we are hereby raising our Sell Price from $83 to $88. If it falls to this level, we are out. Having added the stock at $46 in 2016, we are up exactly 100%. We want to make sure we don’t lose these gains.
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Amazon (AMZN: $1,449, up 8%)
Amazon seems to announce a new disruptive business idea every week. This week Amazon is looking to expand its medical supplies Amazon Business marketplace offering to serve the Healthcare industry. Amazon is pushing to turn its nascent medical-supplies business into a major supplier to U.S. hospitals and outpatient clinics that could compete with incumbent distributors of items from gauze to hip implants.
Amazon has been making moves and dramatically disrupting the Healthcare industry over the last year. In October, analysts and the media noticed that Amazon was granted wholesale distribution licenses for medical devices in several states. CVS Health announced in December it will acquire Aetna for about $69 billion in cash and stock. Many Wall Street analysts said the merger was triggered by concerns Amazon will enter the drug business. Last month, Amazon, Berkshire Hathaway and J.P. Morgan Chase announced a partnership to cut health costs and improve services for employees. The announcement was light on details, but said three top executives from each company will take the lead on the project.
BMR Take: The stock was up $110 this week to another new all-time high! It’s leader is the richest man in the world by far, at $121 billion. Amazon just won’t stop. The company is an innovation machine. They are disrupting new industries seemingly every week. Essentially the company is the world's biggest start-up. There could be $50 billion or more of revenue down the road to come from Healthcare. We say you just have to have Amazon in your portfolio. We know it can look expensive on current revenue and earnings, but we don't know who Amazon will grow up to be yet. It's all still developing.
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AstraZeneca (AZN: $34, up 4%)
There was a big drug development this week. According to the FDA, AstraZeneca has been granted Orphan drug designation for selumetinib (MK-2206 & AZD6244) for the treatment of Neurofibromatosis Type 1 (a disease causing tumors on nerve tissue). AstraZeneca and Merck collaborated to investigate the combination of the two compounds. All development costs are shared jointly. FDA orphan drug designation is primarily a function of the disease not the drug - drugs that target diseases with fewer than 200,000 US patients will be granted orphan designation, and in some cases drugs targeting more than 200,000 patients can be granted the designation when the FDA judges that costs could not otherwise be recovered.
The bigger driver right now is the oncology business. While the company has gone all-out in immuno-oncology, there is more work to be done. The potential of the broader cancer portfolio should see growth in 2018, in part by acquisition. We are excited to see new data and potential acquisitions related to immune-oncology this year. Remember, we are in a new era of fighting cancer that is honestly more exciting to think about than just simply what it means for stocks. It’s a big deal for the world.
BMR Take: We feel AstraZeneca is a strong value here. Revenues are steadily running around $16-17 billion annually. EPS is closing in on $3. Many argue the stock could be worth 20x EPS or more. And you get a 4% dividend yield while you wait. This feels like a profitable situation to us. And if we are wrong, it is hard to see the stock trading too much lower as the dividend yield should hold the stock up.
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Economic Calendar
Existing Home Sales
Wednesday, February 21st, 10:00 AM
Period: January
Consensus: 5,600,000
Prior: 5,570,000
Initial Claims
Thursday, February 22nd, 8:30 AM
Period: 2/17
Consensus: 230,000
Prior: 230,000
Leading Indicators
Thursday, February 22nd, 10:00 AM
Period: January
Consensus: 0.65%
Prior: 0.60%
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A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
Let’s talk about the recent volatility and what happened, why and what's next, and put it all in a historical perspective. The bottom line is that, from peak to trough, the S&P 500 fell 10.2% this month, while the VIX volatility index (^VIX: 19, down 33%) spiked to multi-year highs. We believe that the selloff itself was largely technical in nature, driven by forced selling among investors employing systematic strategies. These strategies are compounded (negatively, in our opinion) by the fact that there are now 5,025 exchange-traded funds (ETFs) trading globally and 9,510 publicly traded mutual funds that are all tied to computerized systems causing redemptions and liquidations of stocks during a market free fall. Yet, there are only about 4,000 companies that are actively traded on the NYSE or Nasdaq. Thus, ETF's and mutual funds outnumber available domestic stocks to own by nearly 4 to 1.
Whether the lows of this correction are in or not, volatility is baked into the cake – the numbers simply won't allow anything less than extreme moves whenever these "systems" are triggered. This brings to mind a quote from Peter Lynch, made nearly 30 years ago: "Everyone has the brainpower to make money in stocks. Not everyone has the stomach." Keeping emotions in check and sticking to the philosophy of being a "long-term" investor are more important today than ever before.
That said, from here, provided the fundamental economic and earnings growth picture remains unchanged (UBS forecasts 4.1% global GDP growth and 16% US earnings growth), we should still be confident that the market will eventually regain its footing.
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Square is Upgraded on the Street
Nomura Instinet reiterated its buy rating for Square (SQ: $44, up 11%) and raised its price target to $64 from $48. This represents a substantial upside potential.
According to Nomura, Square is like Amazon and Google in their early days, meaning that it’s difficult to decode the company’s true potential using traditional valuation methods. Using a discounted cash flow model to value Square, Nomura gave it the highest price target on Wall Street. Amazon and Google have disrupted their industries of course, so this type of pronouncement carried some serious weight in our book.
Square is a financial technology company whose services span payment processing, cash transfer, investing, and lending, an area where it competes with PayPal and Amazon. Square has supplied more than $1.8 billion in loans since launching its credit service in 2014. PayPal and Amazon have loaned about $3.0 billion each.
Over $17 billion in payments processed
Nomura sees Square taking market share from its competitors, which could transform the company’s fortunes in the coming decade. Square processed $17.4 billion in payments in 3Q17, an increase of 31% from 3Q16.
BMR Take: If you’ve been reading The Bull Market Report you’ll know that we love this company and think a lot of its future potential. Our Target is $45 which it reached in November, a bit ahead of schedule. After a pullback at the end of last year which washed out a lot of non-believers, the stock has moved back nicely in the first six weeks of the new year. We can’t WAIT to move our Target up to $53! We are moving up the Sell Price from $32 to $38.
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The High Yield Investor
By Michael Foster
VP, High Yield
The Bull Market Report
For the Bull Market Report portfolios, the story of the week was the multitude of earnings reports. Two reports came from our High Yield portfolio while the other two came from the REIT portfolio. The recap and analysis of these reports will be covered below, after a brief discussion of the broad market action over the past week. As we noted in last week’s summary, the quick drop in the S&P 500 Index was not a worrisome event. Fear might have taken control of your mind if you paid attention to the general financial media. If you didn’t, you probably saw many opportunities to add more to the positions in your portfolio. One prime example of this, which we’ll talk about in more detail below, is the situation with Apollo Commercial Real Estate Finance (ARI: $18.70, up 6%). The overall market drop pulled Apollo down by approximately 5% since the beginning of February, offering a fantastic price area to pick up shares before their earnings report.
With that said, it’s also true that short term price movements to the upside should not be immediately praised, just as one should not immediately become fearful when a drawdown occurs. While volatility may maintain a presence for the next few weeks, it should die down as the earnings season wraps up and investors realize how positive the 4th quarter was for most companies. Along with that note, inflation fears were slightly quelled after CPI (inflation) numbers were reported under the 2% mark at 1.8% for the month of January.
In relation to our portfolios, all signs are bullish. High Yield and REITs both lagged behind the market bounce last week, indicating slight caution among investors.
AllianzGI Equity & Convertible Income Fund (NIE: $21.53, up 4.5%) has been in line with the S&P’s rebound over the past week. Much of the increase can be attributed to the broad market. The fund’s investment in Tech stocks, in which it holds Microsoft, Alphabet, and Amazon, led to the strong performance for the fund, which comes during the best weekly gain for the Nasdaq since 2011.
Let’s dive deeper into Apollo’s report. As stated above, the dip prior to earnings ended up being a great opportunity and we should be content with this position. The Q4 results were stellar. While the company posted a 29% YoY growth in NII of $69 million, beating the consensus estimates of $68 million, it firm also posted an EPS of $0.12 against the consensus estimate of $0.10. Full-year operating earnings (backing out the CMBS sale – see below) of $191 million or $1.89 per share vs. $137 million in 2016 also helps maintain the bullish thesis. The total loan portfolio at the end of the year was about $3.7 billion, with a weighted average remaining term of 2.8 years and all-in yield of 9%. The company announced dividends of $0.46 per share, which translates to a dividend yield of 10%. The ending book value per share was $16.30 with a P/B ratio of 1.1x. The company also got rid of its loss-creating CMBS portfolio, which had become a lesser focus for ARI. Although the sale of CMBS portfolio resulted in one-time losses, the event was viewed positively by analysts.
Digital Realty Trust (DLR: $102, flat), the second earnings report within the High Yield portfolio, had relatively poor performance compared with the broader market, based on poor Q4 results. It dropped over 3% after the announcement. While the company showed a 27% YoY growth in Q4 revenues to $730 million, the company reported FFO of $1.48, down 6% from the year ago period of $1.58. These numbers led to a small drop in share price. Guidance is generally more important and this area left us reassured: the company reiterated a 2018 outlook for core FFO/share of $6.50 and EPS of $1.50. These numbers were based on assumptions of total revenues equaling $3.1 billion, and adjusted EBITDA margins of 59%.
Invesco Municipal Trust (VKQ: $11.90, up 2%) lagged slightly behind the broader market for the week, with no significant news to note. Nuveen Municipal (NVG: $14.45, up 2%), another fund with major investments in US investment grade municipal bonds, also ended up a bit for the week. We’ll take it. Little by little.
As we move on to the REIT portfolio, one should keep the CPI data that we noted above in mind. Annaly Capital Management (NLY: $10.68, up 5%) had a GREAT week. The company reported Q4 earnings, which was in-line with the consensus estimates. The interest income was down 7% YoY to $745 million in Q4, while core EPS was at $0.31 per share vs $0.30 per share in Q3. The ending book value per share, $11.34, was up from $11.16 in 2016. This represents the stock trading at a significant discount to its book value, so we are in no way paying a premium for this company with an 11.3% dividend yield. In fact, Annaly was another example of the general market in the large February drawdown pulling down a solid company, falling to $10.03 a week ago Friday when the S&P hit its lows. This drop provided prudent investors with bargain prices.
Government Properties (GOV: $16.10, down 2%) underperformed the market. The company posted a 52-week low of $15.63, although it recovered 3% at the close of the week with a sudden spike in volume during the last trading day. The spike should be viewed favorably, as it was the highest level of volume since mid-2017. When selling or buying occurs on small amounts of volume, the movement shouldn’t be taken as seriously as when large volume appears. Since this spike in volume corresponded with buy orders, we remain confident about the position.
Omega Healthcare Investors (OHI: $26.74, up 2%) didn’t fare especially well after posting its Q4 results and 2018 guidance, although the drop was a meager 2%. The company posted Q4 FFO per share at $0.77, in-line with estimates and slightly worse than the $0.84 per share one year ago. Rental revenue was flat at $194 million and missed the consensus of $220 million. The company guided full year FFO for 2018 at $3.00, much lower than the $3.60 reported in the current year. The company stated that 2018 would not be a growth year due to its strategic re-positioning of assets, with an estimated $300 million worth of assets to be sold in 2018. The company increased the dividend to $0.66, leaving the annual yield at close to 10%. However, the company highlighted challenges in increasing the dividend in 2018.
Owning this company requires patience. In past newsletters we’ve highlighted the events occurring within the company, from missed payments by Signature HealthCARE to the Orianna developments. During the earnings conference call, executives made sure to note considerable progress being made with Signature. The firm is in good hands and we can sit tight knowing the attractive dividend yield is being covered nicely by cash flow.
Good Investing,
Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998
February 11, 2018
by Todd Shaver | Feb 11, 2018 | Weekly Newsletter 7pm Sunday
The Weekly Summary
Volatility is back and in an uproar. We’ll run through what is happening in the markets below, but don’t lose sight that although the backdrop warrants caution, the bull market is alive and well. US equities ended their worst week in two years on a positive note with the Dow up 330 points on Friday, but rate-hike fears that pushed markets down remain in place as investors await inflation figures on Wednesday. The S&P 500 tumbled 5.2% in the week, its steepest slide since early 2016, jolting equity markets from an unprecedented stretch of calm. At one point, stocks were 12% below the highs set just two 11 days ago, before a strong rally Friday left the equity benchmark 1.5% higher on the day.
Still, the selloff has wiped out gains for the year. Signs are mounting that jitters spread to other assets, with measures of market unrest pushing higher junk bonds, emerging-market equities and treasuries. The CBOE Volatility Index ended at 29, almost 3x higher than its level January 26th. We at The Bull Market Report are staying calm. We believe stocks are on sale so we would suggest picking out one or two of your favorites and slowly buying more shares.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight: Blackrock, The Carlyle Group, Synaptics, Tesla, CBRE Group, and Ventas.
Key Market Measures (Friday’s Close)
BMR Companies & Commentary
Blackrock (BLK: $522, down 5%)
BlackRock is trusted to manage more money than any other investment firm. Its business is investing on behalf of clients from large institutions, to parents and grandparents, teachers, nurses, doctors and people from all walks of life who entrust their savings to the firm. Well, the company is getting even bigger.
BlackRock is seeking to raise $10 billion for "BlackRock Long-Term Private Capital" to buy and hold $500 million to $2 billion minority stakes in companies for periods of up to more than a decade. The move establishes BlackRock as a potential competitor to Wall Street private-equity giants like Carlyle Group and Apollo Global Management. It is the first-ever attempt by the world's largest asset manager to make such direct investments.
BlackRock has praised Berkshire Hathaway as the best-known example of the strategy. Well, of course. No one has ever done it better. We all know this. BlackRock Long-Term Private Capital will operate differently from most private equity funds, taking full commitments up front and reinvesting as it exits investments. As compared with most investments that return capital to investors after one deal. This is great for Blackrock shareholders because there is no need for ongoing fundraising.
BMR Take: The rock of the investment management industry right now is Blackrock. The company is going to generate nearly $14 billion of revenue this year and produce about $28.60 of EPS. With revenue and EPS growing to over $15 billion and $32.00 next year, respectively, the stock is far from expensive leaving a lot of room for upside.
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The Carlyle Group (CG: $23, down 10%)
Carlyle delivered a solid quarter. Revenue was $1.0 billion versus just $435 million a year ago. EPS hit $1.01 versus just $0.02 a year ago.
Management discussed how the business concluded 2017 with great momentum across all businesses. Carlyle had record activity deploying $22 billion into new investments and raising $43 billion of capital across the platform. Investment performance was exceptional with 20% appreciation across carry funds enabling realizations of $26 billion that went to investors as proceeds for their investments.
The company declared a quarterly distribution of $0.33 per share on February 21st. For full year 2017, they paid out $1.41. That is nearly a 6% yield at the current price.
BMR Take: In private equity The Carlyle Group is a top-notch franchise, known everywhere, the who’s who of business, doing deals in the top floor offices of every major city. The business is raising money like weeds and generating big returns. It is a very compelling opportunity. EPS should hit $3.00 next year leaving this stock dirt cheap.
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Synaptics (SYNA: $44, up 7% - yes really!)
Synaptics reported revenue of $430 million versus $461 million last year. EPS was $1.11 versus $1.49 a year ago. Not terribly pretty, but Synaptics is starting to benefit from the transition encompassing a more diversified product portfolio and customer base, and expects to see strong momentum from investments in infinity displays and consumer IoT in the second half of this calendar year. They continue to make meaningful strides across core growth priorities within chip-on-film, OLED (organic light-emitting diode*), in-display fingerprint technology, and consumer IoT. This includes retail availability of flagship smartphone products, such as new fingerprint, display, and voice-enabled technologies.
* OLED panels are made from organic (carbon based) materials that emit light when electricity is applied through them. Since OLEDs do not require a backlight and filters (unlike LCD displays), they are more efficient, simpler to make, and much thinner - and in fact can be made flexible and even rollable.
BMR Take: With all of the growth investments happening, and the lucrative opportunity emerging for consumer IoT, the quarter’s results were less important than the outlook for attacking this major opportunity. And the outlook is bright. EPS is expected to ramp from around $4 this year to $5 next year and substantially more in the years ahead. We added the stock at $41 in December and our Price Target is $54 and we are hopeful of seeing this during the current year. It would be helpful in achieving this goal if the market calms down and resumes its bull run.
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Tesla (TSLA: $310, down 9%)
Tesla reported revenue of $3.3 billion this quarter versus $2.3 billion last year. For the full year Tesla did $12 billion versus $7 billion a year ago. EPS this quarter was a loss of $3.04.
However, the big ramp in profitability is on the horizon. Revenue is expected to jump to $20 billion this year and $27 billion next year. EPS is expected to swing from a loss to a positive $3.25 in 24 months.
The stock traded about flat after the earnings release that included a fractional revenue miss, and narrower-than-consensus EPS loss. Gross margins came in 190 basis points below consensus, with the Model 3 production ramp weighing on the overall margin profile. But that didn’t really matter as management reiterated its target of 5,000 Model 3 production units per week by the end of Q2.
BMR Take: Most continue to see many moving parts to the Tesla story, with the guidance for sustainable positive operating profits sometime in 2018 garnering more of a show-me attitude, especially given the checkered track record of not hitting guidance milestones or production targets. However, most agree the healthy demand for the Model 3 continues to be a good problem to have, and are spectators on the pace of production execution.
We put a Sell Price of $335 on the stock a few weeks ago so we don’t lose the tremendous profits we have on the stock, but the market this week smashed most stocks down including Tesla. Our Sell Prices are for YOU to decide what to do.
--- We love the concept of the company.
--- We love Elon Musk (Space X with its new successful launch this week has had positive ramifications on Tesla).
--- We love the cars they make.
--- But the debt is crushing.
--- But they have been able to weather the storm through debt and equity sales.
As we’ve said before, this stock could go to $200 or $500. And we’re not sure which will come first? It is very speculative. Should you be in this stock for the wild ride ahead? Only you can decide.
Here’s a 5-year chart. Pretty impressive:
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CBRE Group (CBG: $42, down 5%)
CBRE is crushing it. The company reported revenue of $4.4 billion versus $3.8 billion last year. EPS was $0.99 up from $0.93 a year ago. The consensus expects this year’s revenue to grow from $14.2 billion to $16.5 billion in 2019. EPS is similarly expected to grow from $2.70 this year to $3.20 in 2019.
Fourth-quarter results capped another excellent year for CBRE. Performance significantly exceeded the expectations discussed on the third-quarter earnings call as some concerns surfaced about occupier outsourcing and leasing fee revenue growth. But all that went to the wayside as revenue and earnings for 2017 ended up reaching all-time highs. 2017 marked the 8th consecutive year of double-digit EPS growth for CBRE.
BMR Take: The macro environment is a supportive backdrop for this business, and management continues to operate within an industry poised for long-term growth. This is due to the growing acceptance of outsourced commercial real estate services, the increasing capital allocation to commercial real estate as an institutional asset class, and the continuing consolidation of activity within the industry to the highest-quality, globally diversified market leaders. CBRE Group is a must-own holding in your portfolio in the real estate sector.
We’re up over 60% in two years on this wonderful firm. No dividend yet, but we can see that coming. Our target is $54 and there’s an outside chance it can hit that this year. We know what this company does first hand – they save big multi-national companies money. Big money as in millions and millions of dollars. And the firm gets rewarded in brokerage fees, fixed fees and more. And so few people know about this great firm.
This chart shows the value this stock offers here, after this rough week:
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Ventas (VTR: $52, down 5%)
Ventas reported revenue for the quarter of $895 million versus $875 million a year ago. Revenue for 2017 ended at $3.6 billion versus $3.4 billion in 2016. EPS was $0.50 versus $0.58 a year ago. EPS for 2017 ended at $1.78 versus $1.86 in 2016. Consensus expects revenue to drift upward toward $3.7 billion over the next 2 years. EPS is expected remain stable around $1.75 although we see several sources of EPS upside that are likely to drive revisions closer to the highest Street forecast of $2.15.
All in all, 2017 was another excellent year for Ventas, as the business generated record cash flow from operations and delivered same-store property cash net operating income growth at the high end of internal expectations. To further enhance their diverse portfolio, the company made nearly $2 billion in value-creating investments, including significant expansion of their university-based life science business. And they profitably disposed of almost $1 billion in assets and completed innovative deals with leading operating partners.
BMR Take: Ventas has proven resilient through cycles for two decades. They remain one of the world's best REITs with a specialty in healthcare among other areas.
This success is founded on solid strategic vision, superior foresight and innovation, intelligent and timely capital allocation decisions, rigorous execution and a cohesive, expert team. As they enter 2018 – the company’s 20th anniversary year – management is confident that they can continue the long track record of superior consistent performance as the industry leader.
We added Ventas at $60 in last 2016, a little over a year ago. Until the last two weeks, it was hovering around $56, down a bit, but still paying a nice 6% dividend. It’s worth $18 billion, and has over 1200 properties across the US, Canada and the UK. And as you know, they are in the senior living business along with medical facilities as well. Yes, the stock is down, but this company is strong, and we can only see good things happening from here. If you bought at $60 now is the time to add to your position to bring your cost down. Two years from now we wouldn’t be surprised to see the stock in the 70s, as remember, 10,000 people a day turn 65 in the US. They have to live somewhere!
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We got a letter from one of our readers about Ventas
From: Richard Reed [mailto:reed995@]
Sent: Wednesday, February 07, 2018 10:21 AM
To: The Bull Market Report <Info@bullmarket.com>
Subject: Re: EARNINGS PREVIEW FOR THE WEEK AHEAD
Hi Todd,
Ventas (VTR) is below your Sell Price. Are you lowering the sell price? Thanks.
Richard
Our answer:
Hi Richard –
Look – they own 1200 assets in the United States, Canada and the UK. The properties are senior living properties and more. Are they all going down the tubes? NO WAY. A $19 billion asset paying 6%. We would buy more.
Furthermore, our Sell Price on Ventas is $58. But at $52, we have to say that we like it even more. Nothing has changed for the company in the past two weeks. Yes, interest rates are a shade higher, but nothing out of the ordinary. When the economy is good, rates go out. This is just normal. So to answer your question above, yes, we are lowering our Sell Price to $48. Of course, YOU can make up your own mind on this one, as always, but we would take this opportunity to buy an amazing company at an even lower price.
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Economic Calendar
CPI Ex-Food & Energy
Wednesday, February 14th, 8:30 AM
Period: January
Consensus: 1.7%
Prior: 1.8%
CPI
Wednesday, February 14th, 8:30 AM
Period: January
Consensus: 1.9%
Prior: 2.1%
PPI
Thursday, February 15th, 8:30 AM
Period: January
Consensus: 2.5%
Prior: 2.6%
Housing Starts
Friday, February 16th, 8:30 AM
Period: January
Consensus: 3.7%
Prior: -8.2%
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Apple has $285 Billion in Cash
Can you believe this? Again – a record high for any company in history. Apple (AAPL: $156, flat for the week) has $285 billion in cash, or $56 a share. With the stock at $156, that’s 36% of each share of stock in cash. We’re not sure of the Wall St. record, but we are guessing this is twice as much than any other company in history. With the stock flat for the week (amazing) this just screams out at us to add more to the portfolio.
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If the Market Heads Back Up
No one knows where the market is heading. Will it calm down and move higher this coming week and month? Or will it be heading for 23,000 and lower? Again, we don’t know. But if things simmer down and the volatility abates – AND IT WILL – there are a few stocks that we would want to add to our positions in. Here are just a few:
Microsoft
PayPal
Google
Facebook
Apple
Eli Lilly
Yes, many of these are the super Tech stocks that have been leading the market. But guess what? These stocks will continue to lead the market for many years to come.
And one more note. Did you see Annaly Capital Mortgage (NLY: $10.21, down 1%) this week? Solid as a rock. So if you are super worried about things, we believe Annaly can be a store of value for a month or two or 12, and you can enjoy the 11% dividend in this $12 billion market cap company.
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A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
There was no comment Monday or Tuesday because everything I wrote was outdated and the numbers were obsolete within minutes of writing, rewriting and re-rewriting them. The dust may or may not have settled, but a few things are much clearer today.
In short, the seismic swings over the past few days have been based on three primary factors that we believe now form a consensus:
1. The threat of higher inflation (Rising bond yields)
2. The possibility of more Fed hikes
3. The long streak without a normal and healthy market shakeout.
How does that stack up against the best economy we've seen in over a decade? In other words, is it good news or bad news that economic growth is so strong the Fed may have to raise rates sooner than expected? Or, is it good news or bad news that nearly half the companies in the S&P 500 have reported fourth quarter results and more than 80% of them have beaten Wall Street's revenue expectations, the highest percentage since the third quarter of 2008? And, is it good news or bad news that the tax law will boost those profits further in the quarters ahead?
Let's put all this in perspective:
First, the market isn’t overbought anymore. We now know that. There was a "10% correction." Let’s get over it.
Second, earnings are robust.
Third, the rise in bond yields has been a headwind, but it’s not signaling a looming recession. Importantly, the 10-year vs. 2-year Treasury yield spread has widened out as yields have risen, implying the bond market is now discounting higher inflation and better economic growth, which over the medium term has almost always been positive for stocks.
While volatility has returned with a vengeance, the market fundamentals are now better and earnings growth prospects haven't looked better in years. Basically, all of the reasons why investors have been bullish on the market last week, last month and last year are still here.
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The High Yield Report
by Michael Foster
VP High Yield
It should always be emphasized that much of a stock's action is not caused by only the underlying company, but also by the industry and the overall market. In a volatile environment, this emphasis is especially important. While our High Yield and REIT portfolios have shown lackluster performance over the past two weeks, the fundamental aspects of the companies that make up the portfolios have not changed.
The S&P 500 decreased 5.1% over the past week, leading to stocks officially being in correction territory. Much of the decline is being attributed to interest rate and liquidity fears, which is why much of the analysis on the portfolio below will focus on those aspects. It takes just one week to rattle bullish sentiment. As an investor, you should not put too much weight on what the general financial media is discussing. What should take priority is thinking about whether the fundamental aspects of the economy and market have changed. When this is the priority, our fear diminishes as we realize that earnings are still strong, nonfarm payrolls on February 2nd were above expectations, and a deregulatory environment is still present.
One metric, the yield curve, is worth looking at though. The spread between the 10-year Treasury yield and the 2-year Treasury yield has been constantly decreasing as a result of the Federal Reserve tightening policies and the lack of inflation. On a basic level, you can note that the presence of an inverted yield curve, if it were to happen, has been a common predictor of past recessions. Going deeper, the economic repercussions of the inversion are much more important. Consumers and banks are directly impacted. For consumers, the cost of credit increases, which leads to a larger portion of expendable income being dedicated to servicing debt. For banks, the spread between long-dated loans and deposits decreases, which leads to worse financial performance. We’re sharing this information so that you can keep the yield curve on your radar, but there’s no need to worry as of now. When the curve inverted in the past, it still took between 7 to 24 months to reach any sort of recessionary state.
AllianzGI Equity & Convertible Income Fund (NIE: $20.59, down 4%) fared slightly better than the S&P’s drop of over 5%. It moved from the weekly low of $19.50 to its current level after recovering about 2.5% in the last hour of trading on Friday. The performance of individual equities which it holds, including Microsoft, Alphabet, and Amazon, led to the recovery in the last hour. Given that the fund invests little in the bonds and the scenario of the inverted yield curve, we can expect the funds to be shifted from Equity to Bonds.
We still see Apollo Commercial RE Finance (ARI: $17.70, down 3%) as a cyclical play on the U.S. commercial real estate sector. Given that commercial real estate in the U.S. remains solid, with Apollo’s loan originations hitting $1.5 billion YTD and the economy of the US continuing to get stronger and stronger, Apollo is not a position to be worried about.
Digital Realty Trust (DLR: $102, down 5%) dropped almost by the same amount as the S&P. This was the opposite of the week prior, where the company maintained strength in the midst of widespread declines. While we noted the continued demand for data centers in the last summary, there are some other metrics to note. Digital Realty, owning many data centers in US and internationally, is affected by rising interest rates as the cost of borrowing rises. The company has a massive debt level of $5.8 billion with a Debt/EBITDA ratio of 22. Rising interest rates could cripple the company’s dividend payout and future prospects.
Invesco Municipal Trust (VKQ: $11.83, flat) ended up at the same level as the beginning of the week. With its investments primarily in investment grade U.S. municipal bond obligations (85%), the fund can expect to yield better returns amidst the current rising interest rates scenario. Also, a Fitch report stating that plans to cut federal funds to them won't impact the revenues of the municipal bond funds and ETFs, played a large part in keeping the fund’s price level stable. Nuveen Municipal (NVG: $14.43, flat), another high yield fund with major investments in U.S. investment grade municipal bonds, also maintained its price level.
Pimco Dynamic Fund (PDI: $30, down 1%) was less volatile. The firm, investing primarily in a range of debt securities, including mortgage-backed securities, high yield corporates, and emerging market bonds, could witness further issues with rising interest rates, changes in tax structure, and better yields.
The REIT sector has been partially impacted by the recent economic data, heightening fears of higher interest rates. Primarily, the sector is engaged in massive borrowings, and rising interest rates could increase the cost of the borrowings. With that said, rising interest rates often occur in a booming economy, which indicates higher demand by consumers.
Market corrections generally provide prudent investors with great buying opportunities. One way of going about this is finding relative strength in strong industries. Applying this analysis to REITs, the overall REIT sector was down only 3%. Within out portfolio, three of the five positions outperformed the sector. Annaly Capital Management (NLY: $10.21, down 1%), Government Properties (GOV: $16.37, down 1%), and Omega Healthcare Investors (OHI: $26, flat) composed that group.
As a company that primarily engages in buying mortgages and mortgage-backed securities (as well as other assets), Annaly could fare very well as interest rates go up and correspondingly coupon rates do as well. While this is not necessarily the reason for the less-than-average drop this week, going forward it is something we will keep in mind. Both Government Properties and Omega should not feel a significantly negative impact by rising rates either. The former gets offered attractive rates by the government as a result of its leases and the latter’s healthcare-related real estate is, for the most part, unaffected by the business cycles.
The other two positions, Ventas (VTR: $52, down 5%) and Welltower (HCN: $55, down 5%), ended up having declines that were in-line with the S&P 500 but larger than the move in the REIT sector.
Ventas reported positive 4th quarter earnings on Friday, which provided a minor boost to the stock. The reported income from continuing operations for 2017, $640,000, was a record for the company. In turn, the EPS and FFO per share numbers were also records. In a rising rate environment, this is a positive sign. With the earnings report occurring during a stock market decline, any overall S&P bounce should result in outperformance by Ventas.
The other relatively weak company, Welltower, did not have any news this week to explain the larger than average decline in the stock. As it is focused on owning senior living properties and funding real estate infrastructure, the large amount of debt maintained could pose an issue within the rising rate environment. Currently, though, the extensive track record of stock appreciation over the past 25 years leaves us unworried. Welltower is also at the lower end of its range for the past four years, so it is a good area to pick up more shares.
Good Investing,
Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998
February 4, 2018
by Todd Shaver | Feb 4, 2018 | Weekly Newsletter 7pm Sunday
The Weekly Summary
The stock market took a hit this week. It was down almost 200 on Monday, almost 400 on Tuesday, rallied a tad on Wednesday and Thursday, and got hammered on Friday to the tune of 666 points. It’s a week we can happily say has been put to bed and we can now forget about it. The long-awaited correction has now occurred. Happy now Wall Street pundits? (We don’t feel this way.) The big reason for the sell-off was interest rates. The 10-year was up again to 2.84%. And the 30-year moved up above 3%. But this is what happens when you have a strong economy – interest rates move up. This has been happening for over 100 years. The economy shines; interest rates go up. Why do you think rates have been so low? Because the Fed drove down rates after the debacle of 2008-2009 and kept them there for almost 10 years. Look at this chart here; it’s a bit hard to read at first – note that the right column shows the rate today – 1.48% and in 2008 it was 1.04%.
Now take a look at these two charts. The first one is the 10-year Treasury for the past six months. It's gone straight up.
And this one is the 10-year for the past 20 years. Basically straight down.
The key takeaway here is the interest rates are STILL VERY LOW HISTORICALLY. This is actually good news for the economy and stocks. Thus it is our take that 1) We had a bad week last week 2) Things will calm down this week and in the coming months, and 3) Good solid companies will continue to thrive and grow as the US economy continues to strengthen.
Easy for us to say. Hard for you to implement. We understand that. But we want you to put this past weekly move in perspective. The market is where it was just three weeks ago, at 25,500. A year ago it was at 20,000.
The big oil companies came up a bit short on the earnings front last week. Most of the Street was expecting good things, as the price of crude has remained strong at $65. But Exxon’s production dropped by 130,000 barrels a day and has lost money now for 12 quarters a row on its US drilling business, even as US production touched the record production of 10 million barrels a day in November, the previous record being set in 1970. Plus they took a $1.3 billion write-down on its natural gas business. But overall, Exxon made $3.73 billion, a decline of just 2%. These big companies are expected to generate huge amounts of cash in 2018, so we aren’t feeling too sorry for them. The number could be over $40 billion, in excess of dividends and new spending.
Super Bowl Sunday is here! $5 million for a 30 seconds ad. Over 110 million viewers likely watched. The legacy of Tom Brady’s Patriots against the surprisingly better than you think Eagles. The Patriots are favored by 4.5 points. It is interesting. Very often in sports or in the markets whatever people expect to happen, doesn’t materialize. For all sorts of reasons: Cognitive dissonance. Conservative bias. Confirmation bias. Extrapolating past performance. Loss aversion. Overconfidence. Self-control. Regret aversion. Affinity. Status quo. The list of mental mistakes people make when investing is long and always at play. We saw a 666 point drop on the Dow on Friday. This was the 3rd largest one-day point decline in history. The market is digesting something. The Bull & Bear indicator managed by Merrill Lynch has finally flashed a firm sell signal after weeks of overextended conditions. We will see what happens Monday. The unexpected could happen. Just like in football.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight: Microsoft, Google, Amazon, Facebook, PayPal, and Blackstone.
Key Market Measures
BMR Companies & Commentary
Microsoft (MSFT: $92, down 2%)
Revenue was $28.9 billion and increased 12%. EPS hit a solid $0.96 crushing the $0.87 consensus. This quarter’s results speak to the differentiated value Microsoft is delivering to customers across productivity solutions and as the hybrid cloud provider of choice. The firm’s investments in IoT, data, and AI services across cloud, position the business to further accelerate growth. In particular, Microsoft delivered another strong quarter with commercial cloud revenue growing 56% year-over-year to $5.3 billion, which is just amazing to see such a huge growth figure in the lucrative cloud opportunity. Guidance for Q3 was largely in-line or better than consensus expectations. All in all, a very good quarter.
BMR Take: Microsoft is a stock market darling. The business is well-rounded. Legacy Window products to the up and coming Azure product in commercial cloud. We see Microsoft continuing to piece together solid earnings results in the year ahead. With $4.25 of EPS in direct sight, the stock still screens reasonable at around 22x.
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Google (GOOG: $1,112, down 5%)
Revenue of $32 billion increased 24% from a year ago. EPS of $9.70 just missed the consensus for $10.00. Overall, we are interpreting the quarter’s results favorably (unlike the Street.) Mobile and desktop search along with YouTube are powering accelerating growth and these trends should drive sustained above average growth going forward. Google Cloud momentum is good now generating $1 billion in revenue per quarter, where the number of $1 million or more contracts across cloud products tripled in 2017. Google has now sold ‘tens of millions’ of its Mini, Max, and Chromecast devices as Google Assistant is now on over 400 million devices globally. Waymo’s progress is accelerating. They plan to launch a ride-sharing program in Phoenix operated by self-driving cars this year. Wow.
BMR Take: We really don’t care much about the slight EPS miss. The stock being down is an opportunity to accumulate shares. Scouring through all the analysis on the quarter, nobody is really saying anything that seriously concerns us. What we want to see going forward is more progress on the cloud business. Amazon AWS is now at 35% market share versus Google Cloud only in the high single digits. If Google can close that gap, this stock can continue its strong move higher. With nearly $50 of EPS coming into view, the current valuation of 23x is far from stretched.
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Amazon (AMZN: $1,430, up 2%)
Amazon is crushing it. What else is new? (!) Net sales increased 38% to $60 billion in the fourth quarter, compared with $44 billion in 4Q16. EPS of $6.15 was well above $4.90 a year ago. There is so much to discuss here. What we are really excited about is the Echo business. Earlier in the year Amazon introduced three new Echo devices: the all-new Echo ($100), featuring a new design, improved sound, a lower price, and a choice of colors to personalize your device; Echo Plus ($150) with a built-in smart home hub so customers can easily set up and control their smart home devices; and Echo Spot ($130), a compact Echo with a screen so you can see the weather, get the news with a video flash briefing, view lyrics with Amazon Music, watch a camera monitor, browse and listen to Audible, and more.
This new business opportunity could be huge. Said Jeff Bezos, Amazon founder and CEO, “Our 2017 projections for Alexa were very optimistic, and we far exceeded them. We don’t see positive surprises of this magnitude very often — expect us to double down. We’ve reached an important point where other companies and developers are accelerating adoption of Alexa. There are now over 30,000 skills from outside developers; customers can control more than 4,000 smart home devices from 1,200 unique brands with Alexa; and we’re seeing strong response to our new far-field voice kit for manufacturers. Much more to come and a huge thank you to our customers and partners.”
While Amazon doesn’t break out the financials on Alexa and its other electronics business, the results from its cloud-computing business, Amazon Web Services (AWS), were obvious and contributed much more to the company’s record profit total. AWS saw revenue shoot 45% higher to $5.1 billion, with profits of $1.3 billion. Wow – that’s 26% after tax. AWS and the tax gain of $790 million for the changes in the U.S. tax code, which lowers Amazon’s tax rate to 21%, were the biggest contributors to the company’s overall net income of $1.86 billion. Watch for a possible spin-off of the cloud business sometime this year. Can you imagine what this will do to the stock? Does “shoot higher” ring in your head?
BMR Take: Look, when Jeff Bezos gets surprised by how good a business is doing, and says he is doubling down, you have to take note. But don’t just take note. Take action on it too. You have to have Amazon in your portfolio. You can’t look at the business on current revenue or earnings and say it’s cheap or expensive. It’s an innovation machine. They are constantly doing start-ups, like Echo. More new paid members joined Prime in 2017 than any previous year — both worldwide and in the US. The business is roaring with momentum and still has a very bright future ahead even at the current stock price level.
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Facebook (FB: $190, flat)
Flat for the week. Not bad in the whole scheme of things. Facebook increased revenue 47% to $13 billion. EPS of $1.44 was up 19%. What a good quarter frankly. Though while 2017 was a strong year for Facebook, it was also a hard one," said Mark Zuckerberg, Facebook founder and CEO. "In 2018, we're focused on making sure Facebook isn't just fun to use, but also good for people's well-being and for society. We're doing this by encouraging meaningful connections between people rather than passive consumption of content. Already last quarter, we made changes to show fewer viral videos to make sure people's time is well spent. In total, we made changes that reduced time spent on Facebook by roughly 50 million hours every day. By focusing on meaningful connections, our community and business will be stronger over the long term."
Some analysts were scrambling a bit to figure out what this all mean. But monthly active users increased 14% from a year ago to 2.13 billion. Essentially, the issue is that Facebook has had a huge growth engine coming from adding users. Seriously 2.2 billion users is huge. The runway here is slowing down and that means Facebook is going to have to find another way to take over the world. And that is what Zuckerberg is saying. They will be focusing on quality of usage and fully monetizing existing users.
BMR Take: The company is look at EPS growing from $5.40 in 2017 to $8.70 in 2019. It is not easy to find a 20% earnings growth story. We really like the global platform Facebook has built and all the future opportunities it creates for advertising and other revenue opportunities. We see the same story here as elsewhere in large cap tech, trading for 22x is just not stretched.
The stock hit a new all-time high of $195 on Thursday and even traded at $194 on Friday, before the deluge. What a great company.
Stay the course.
Look at this 5-year chart. Where do you think it is headed, as it moves to 2.5 billion users?
Active Users Chart
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PayPal (PYPL: $77, down 10%)
PayPal delivered strong numbers. Revenue increased 26% to $3.7 billion. EPS increased 57% to $0.50. Overall, PayPal had a transformative year in 2017. The company brought record numbers of new customer accounts to the platform by simplifying life for consumers and merchants.
PayPal also substantially expanded its opportunities for future growth and redefined its competitive position through successful partnership strategies. For example, PayPal and Synchrony Financial announced an agreement expanding their consumer credit relationship. Under the terms of the transaction, Synchrony Financial will acquire PayPal's U.S. consumer credit receivables portfolio, which totaled approximately $6.4 billion at the end of 2017.
BMR Take: So why is the stock down? PayPal and eBay have signed a term sheet to make PayPal available as a way to pay on eBay, through July 2023. But the fact that PayPal’s exclusivity on eBay is going away has people up in arms. This aspect of the PayPal and eBay relationship has been well-discussed and should not surprise people. Don’t let it fool you.
We look at PayPal like this. This quarter new customers increased 9 million up to 227 million total customers. Facebook has over 2 billion users. With time PayPal could look a lot more like Facebook. That means massive growth still lies ahead. We believe in riding this train. We are talking about the next gen MasterCard or Visa here. A 10% drop in the stock is a good opportunity to take advantage of.
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The Blackstone Group (BX: $35, down 4%)
Total revenue ended the year at $7 billion up 39% from last year. EPS of $2.21 compared to just $1.56 a year ago, a huge 42% jump. This business is grooving! It was another strong quarter of core business trends. Specifically, total assets under management increased an elevated 12% sequentially to a record $435 billion, driven primarily by $62 billion of inflows. Capital deployment of $20 billion in the quarter represented a record. And dry powder remained elevated at $95 billion, which bodes well for future capital deployment levels. Just to put that in perspective, Blackstone realized half of the $7 billion of revenue this year from carried interest on prior year inflows, that were deployed to generate big gains of which Blackstone gets a percentage of the profits.
You are telling me the company has $95 billion to put to work to do more of this? Let’s assume on average they can collect a 10% carry on that money. They just doubled the business.
BMR Take: It was a truly exceptional year for Blackstone, reflected by outstanding earnings growth and record capital activity that drove their highest-ever level of aggregate cash distributions to shareholders. Blackstone’s tireless drive to innovate has enabled the company to launch large-scale new product areas that reach a wider client base and serve existing clients in new ways. Our investors in turn have entrusted the company with more capital than ever before, leading to a new record total assets under management of $435 billion, up 18% year-over-year. The stock is a good value at just 10x the current EPS of $3.25.
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Economic Calendar
Total Light Vehicle Sales
Monday, February 5th, 10:00 AM
Period: January
Consensus: 17.2 million
Prior: 17.8 million
Consumer Credit
Wednesday, February 7th, 3:00 PM
Period: December
Consensus: $19.5 billion
Prior: $28.0 billion
Initial Claims
Thursday, February 8th 8:30 AM
Period: February 3rd
Consensus: 233,000
Prior: 230,000
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Apple Reports Earnings
Apple (AAPL: $161, down 6%) sold 77 million iPhones in the holiday quarter. Apple’s forecast for the next quarter was also lighter than expected. Apple says they expect to sell 50 million iPhones this quarter, slightly lower than the Street expected, and this equates to slightly lower revenue and the main reason the stock got hammered last week.
Apple still blew past its own and analysts’ expectations for revenue and profit for its fiscal first quarter, reporting record sales of $88.3 billion and net income of slightly more than $20 billion. The company was able to increase revenue by 13% year-over-year by increasing iPhone prices and generating more money from the people buying Apple’s smartphones.
Apple jacked up the price on its premium iPhone X smartphone, starting the 10th-anniversary model at $1,000, pushing the average selling price, or ASP, of an iPhone far higher than analysts had ever experienced. IPhone buyers paid an average of more than $796 for their phones in Apple’s fiscal first quarter; iPhone ASP had never previously topped $700.
Apple also boosted its software and services segment revenue 18% year-over-year in the quarter to $8.5 billion. And listen to this:The App Store, Apple Music, iCloud and Apple Pay all had their biggest quarters ever.
Apple said, “During the week beginning Dec. 24, a record number of customers made purchases or downloaded apps from the App Store, spending $900 million in that 7-day period, followed by $300 million in purchases on New Year’s Day alone.”
“Other products” revenue grew the biggest of all. This includes smartphone accessories like the Apple Watch, which grew sales 50% year-over-year for the fourth consecutive quarter, as well as AirPods. Revenue hit $5.5 billion by selling such hardware, up 36% more than a year ago.
Apple is capitalizing on the opportunity at hand by producing more money out of iPhone users in every way possible. Apple is making more money on each iPhone, selling a few accessories to go with it, then signing up iPhone users for monthly subscription plans for services such as Apple Music and iCloud.
If Apple Music continues to grow at its current rate, it will officially overtake Spotify this summer as the streaming world's number one service. Apple Music has a monthly growth rate of around 5%. Spotify has a growth rate of just around 2%. If that keeps up, Apple Music will officially bump Spotify off the top in summer - and there's no reason to believe it can't, given that part of Apple's success in building an audience for Apple Music lies in the fact that the service comes bundled with most of the major devices the company sells.
BMR Take: The all-time high of $180 was hit January 18th. Two weeks ago the stock was down $7 and last week $11. Looks like a sale is going on in shares of this great company. Wait until that overseas cash starts hitting the books here in the US.
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VMware (VMW: $123) is Wrapped Up in a Dell Move
One way or the other it’s time to move on from VMware. Why? Dell Technologies owns 80% of the company and is discussing in the press whether to have VMware buy Dell in order for Dell to go public. It’s a back door tactic very rarely, if ever used before. It has impacted VMware greatly because no one really knows how it is going to play out. It looks like VMware might end up owning Dell, creating a behemoth Tech company consisting of Dell, VMware and EMC, plus a host of other tech businesses like cloud computing and cybersecurity. This might be a good investment, but little is known of its financials at this time, so we feel it best to wait and see how things shake out.
VMware was much higher a week ago, and Wall Street is quite nervous because it doesn’t really understand what is going on. The Street doesn’t like uncertainty, remember? (!)
BMR Take: We added the stock a year ago at $83 and we are up a shade under 50%. We think that’s a nice return (a GREAT return) and with everything going on with these new moves by Dell, we think it is time to take profits, sit on the sidelines and watch. Dell may be a stock to buy someday after they go public, but we will leave that decision for another day.
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The High Yield Corner
By Michael Foster
Vice President of High Yield
After the S&P 500’s 2% drop on Friday, which has inspired headlines such as “stocks have worst decline in 2 years”, it’s easy to lose sight of the fact that the S&P 500 is up 3.4% YTD.
Before the decline, stocks were up 7.5%, so a drop was clearly necessary [so they say.] Investors who have gotten comfortable with a bull market may be a little scared, because they aren’t used to down days. And it’s easy to forget what is driving the bull market. Wages are up nearly 3% in the U.S., unemployment keeps dropping, corporate earnings are rising, and, perhaps most impressively, this strong economy is being mirrored around the world. The typically cautious IMF and World Bank have asserted that growth is strong around the world, and while these institutions have made a lot of blunders in the past, they aren’t SO euphoric as to bring out the contrarian bear in us.
For high yield, the cautions are amplified. Riskier income producers like Government Properties Income Trust (GOV: $16.65, down 7%) and AllianzGI Equity & Convertible Fund (NIE: $21, down 5%) are down heavy, although they operate in very different markets and are entirely different asset classes (REITs versus convertible bonds and covered-call stocks). To wit: the AllianzGI’s 5% decline on the stock is far steeper than its 2.9% NAV decline, which is itself slightly better than the S&P 500’s 3.2%. Now, of course we can’t read too heavily into short-term price movements, but at the very least this tells us something about the AllianzGI Fund: it is not making extremely risky bets on very volatile assets, so it isn’t in any danger right now. So why did it sell off in excess of its NAV selloff? You got it. Because of fear. And that’s why the fund remains a buy. It’s up 1.6% for the year, lagging the overall market by a bit.
And what about Government Properties Trust (GOV: $16.65, down 7%)? We recommended this REIT back in 2016 and although the REIT is down 7% since then on a price return basis, much more importantly its dividend has not been cut since then, and investors have actually gotten cash dividends of about 19% on their original investment since our recommendation. As a result, we’ve made a profit on a total return basis. And the dynamics of the fund haven’t changed. The REIT’s FFO over the last 12 months is $2.28, while the dividend is $1.72. Thus its FFO is 133% of dividend payouts, so it’s out-earning its dividend. There is no threat to the dividend stream in the short term, and rising rents thanks to a booming economy mean FFO will go up, resulting in even higher FFO coverage.
The income stream here is not at any risk, despite the implications of the recent absurd sell-off. Revenues have been rising by about 8%, so we don’t see any indication that revenues can’t support the current dividend payout. For this reason, there’s no reason to be more cautious about Government Properties, and plenty of reason to shrug off the recent price declines. In fact, it is a great time to add more to this very stable company that is absurdly undervalued.
Elsewhere in REITs, declines were much less severe. Only Omega Healthcare Investors (OHI: $26, down 3%) saw a decline in-line with the S&P 500, but that’s not surprising. We’ve discussed at length why this company’s dividend hikes are threatened, but the threat won’t materialize for years (we’ve estimated 5 years). Dips are buying opportunities for now, as long as investors are cognizant of the fact that the dividend hikes won’t last forever and the stock could sell off in a few years as a result. But if you want a strong and secure high income stream now, Omega is one way to do it.
Digital Realty Trust (DLR: $108) was the second-best investment in the Bull Market Report High Yield portfolio. It was flat for the week. That sounds bad, especially if you’ve gotten used to gains upon gains and few down days, which has been the market norm since the High Yield portfolio began in 2016. But it also shows, interestingly, that the market has a lot of confidence in Digital Realty (which also outperformed a lot of the Tech sector). This week, Amazon, Apple, and Alphabet reported earnings that proved the world’s demand for data centers isn’t going away. Alas, Digital Realty’s yield is tiny, but as an investment in a good company, it’s a great option for investors.
Apollo Commercial Real Estate (ARI: $18.14, down 1%), Ventas, (VTR: $54, down 3%), and Welltower (HCN: $58, down 3%) all saw slight declines, which we can consider to be more a result of REIT investors following the broader market trend. No big news came from any of these companies last week to warrant the selloff.
Similarly, AstraZeneca (AZN: $36, down 2%) fell a lot less than the broader market after weeks of strength in the Biopharma sector. AstraZeneca has not released any major news and there wasn’t any major sector announcements. We can dismiss this 2% decline as being relatively good in a week of short-term worriers cutting bets on all kinds of things more because of fear than for any fundamental reason.
Now, on to municipal bonds. The end-of-year sell-off in this asset class in anticipation of 2018’s rate cuts meant that these funds were attractively priced for income investors, and we still think long-term capital gains are in the cards. What we need to see is the market get used to our new Fed Chairman. While Janet Yellen did a wonderful job of managing monetary policy and bringing the Fed funds rate closer to historical norms, the job isn’t done. Jay Powell has already said that he will continue in the same mode. And that will limit enthusiasm for municipal bonds. that is, until the booming economy results in higher tax revenues for municipalities that, in turn, results in credit upgrades and thus increasing NAVs for our muni Closed End Funds. The timing on this eventuality is unclear, but there is good reason to be confident that it will happen eventually. Nuveen AMT-Free Municipal Credit Fund (NVG: $14.48, down 3%) and Invesco Municipal Trust (VKQ: $11.83, down 4%) are worth holding for the tax-free income as we wait.
PIMCO Dynamic Income Fund (PDI: $30) is the only High Yield holding to be up for the week, and for that we are grateful! But just as there’s little to read into the short-term declines, the short-term gain here isn’t a reason to celebrate. The market is all about short-term emotion-driven trading. If anything, the fact that the panic didn’t hit the Pimco fund may indicate that no matter how crazy the broader market is, we aren’t in full-blown panic mode. And that, quite possibly, could mean this correction won’t last very long.
Good Investing,
Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998
January 7, 2018
by Todd Shaver | Jan 7, 2018 | Weekly Newsletter 7pm Sunday
The Weekly Summary
Welcome to the New Year! As we begin 2018 we want to first say the capital markets will not always be this friendly to us. We are up against too many horses and mysterious dark forces. So let’s all make sure we enjoy these times. The recent and current times will be remembered as the good old days of the greatest bull market ever recorded in human history.
You have probably noticed that we at The Bull Market Report don’t make prognostications very often. People ask us all the time where the market is going and whether this bull market will come crashing down, and whether this is the time to sell, sell, sell. The problem is that we are in the “no one knows” camp. Anyone who predicts future stock price moves is just guessing. Now, we look at the numbers and base our research and comments on how we see things economically, for the country, the world and for the individual company we are writing about. But if you think we can predict the day the bull market ends, you are mistaken. No one can.
So, what does one do? Well, we have said many times this past year, if you are nervous, then take some profits off the table. Put them in the high yield sector. We have two fabulous portfolios of companies that are stable and are paying strong dividends, to the tune of 6-8% and higher. We, personally like equities and we like the economic numbers that this country is producing, so we wish to stay invested in the companies that are thriving from this strong economy. If and when things turn down, we’ll give you our opinion and you can make those important decisions as they apply to your own personal portfolio, and the financial health of you and your family.
Now to the investing. We read and review countless expert stock market outlooks for you on the topic of what will happen in 2018. While views differ on various things, and nobody has a crystal ball, there is one prevalent belief that institutional investors are positioning for. Essentially everybody is saying that international stocks are the place to be when analyzing the valuations of the marketplace. Now look we are not going to recommend purchase of China Construction Bank or anything of the sort. We instead favor the plenty of great US companies with international revenues. This year keep an eye out in particular for multi-national stocks. Fundamentally, they are positioned to outperform.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight: Microsoft, Google, Amazon, Facebook, Carlyle Group, and Mazor Robotics.
BMR Companies & Commentary
Microsoft (MSFT: $88, up 3%)
One of the biggest things happening right now is US tax reform. Microsoft is sitting front and center. While a lower cash repatriation tax rate in the GOP's tax-reform bill may encourage large tech companies to bring home large amounts of cash currently held abroad, it is unclear how they may deploy those assets. Many worry it will not be used for new investments or higher wages, but simply returned to shareholders. We’re not worrying one bit. We expect the majority of it to indeed go to shareholders, that’s us!
While there has also been a sense that the surge in repatriated assets could spark an M&A boom, these tech companies have hardly been shy about using low interest rates and strong cash flows to fund acquisitions. Some $630 billion is held by the nine tech companies with the largest overseas holdings. Accordingly, we think the freed-up cash is likely to flow toward stock buybacks, paying down debt, and dividends.
For Microsoft, they have over $130 billion of cash parked internationally. After paying the 15.5% tax or $20 billion tax bill, we believe Microsoft will proceed to steadily hike the current dividend rather than pay a one-time special dividend that could be as much as $3. Either way, this is good news for income-oriented equity investors.
BMR Take: Microsoft is currently paying a $1.67 dividend. The consensus outlook calls for $1.81 in 2019 and $1.95 in 2020. This dividend action alone is likely to keep pushing the stock upward. Microsoft remains a core holding for us.
Microsoft was given a new $100 price target on by analysts at Royal Bank of Canada and by Oppenheimer Holdings last week. We have a Target of $92 on the stock and can’t WAIT to raise the Target to $101 when it hits $92.
Not a bad 6-months chart, don’t you think?
Where do you think Microsoft is heading in the next six?
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Google (GOOG: $1,102, up 5%)
China is the largest consumer market of any country in the world: With 1.4 billion citizens and counting, it has 19% of the global population. This has drawn the attention of some of the world's largest companies seeking to capitalize on its rich opportunities. Even more enticing are its 750 million internet users, many of whom are part of the country's emerging middle class.
A number of U.S. technology companies have been effectively shut out of China's growing internet market, including Google. Chinese regulators took to the podium at the Internet Governance Forum in Geneva recently and said Google would now be welcome. This is fabulous news for the company.
After four years there, Google announced in 2010 that it would no longer censor its Chinese search site, effectively banning itself from the country. This self-imposed exile followed what the company called a "highly sophisticated" hack, which resulted in the theft of intellectual property and attempts to gain access to gmail accounts belonging to human-rights activists.
The changing outlook for growth in China could be huge for Google.
BMR Take: Google’s EPS outlook is $32 for 2017 heading to $41.50 in 2018 and $48 in 2019. This is 29% and 17% EPS growth, respectively, without any material surge in business in China. If we get the upside from China, look out. The runway for earnings growth could be longer than the Great Wall of China.
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Amazon (AMZN: $1,229, up 5%)
At this week's Consumer Electronics Show, we're going to see the battle between Amazon Alexa and Google Assistant kick in to high gear.
Last year, Alexa was the clear winner of CES, with companies like Ford, Huawei, and LG agreeing to integrate their products with Amazon's virtual assistant. Since then, Alexa has only gotten bigger — over the holiday season, Amazon says that it sold "tens of millions" of Alexa-enabled products, led by its own Amazon Echo Dot.
This year, Google is striking back. While the search giant's Google Home speakers still lag the Amazon Echo in terms of market share, it's picking up momentum: Google claims that it sold over 6.7 million Home and Home Mini speakers over the holiday shopping season.
You can expect both companies to make announcements about new partners, new products, and new ways to use their respective voice agents. LG has already announced that it will be showing off new TVs with Google Assistant built in; a company called Vuzix will be debuting a pair of Alexa-powered smart glasses.
Amazon got in on the smart speaker market early, and has moved quickly to ensure its stays out in front. By most measures, the Amazon Echo is dominating the smart speaker market. This could be a great driver of future earnings growth so we are watching closely.
BMR Take: This week we wanted to present a bit of a different perspective on Amazon. The view is Mark Cuban’s. He says you can’t even value Amazon on revenue or earnings like other publicly traded stocks. Essentially Amazon is one massive start-up with scale. You know when they bought Whole Foods the market cap of Amazon went up so much that day the increased value covered the purchase price of Whole Foods. They literally bought Whole Foods with no capital. So you see this innovation machine can’t even be analyzed like other businesses out there. You just have to own it. It’s the innovation machine that will lead the way wherever technology and the world go. The Amazon Dot is just the latest example of innovation.
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Facebook (FB: $187, up 6%)
The company's founder and CEO Mark Zuckerberg posted his annual personal memo on Thursday — mostly about being a better CEO — but one throwaway reference to cryptocurrency technology captured everyone’s attention.
Writing about how the last year saw many people lose trust in social media and tech companies, Zuckerberg noted the growing importance of de-centralizing forces, like the rise of cryptocurrency. He said, "There are important counter-trends to this — like encryption and cryptocurrency — that take power from centralized systems and put it back into people's hands. But they come with the risk of being harder to control. I'm interested to go deeper and study the positive and negative aspects of these technologies, and how best to use them in our services."
Zuckerberg was referring to bitcoin. It is telling that Zuckerberg specifically called out cryptocurrency in his annual new year's resolution post. When you look at the broader landscape of social media companies and messaging platforms, it makes perfect sense that Facebook would be paying very close attention to such technology.
First, consider that nearly 100% of Facebook's revenue comes from online advertising. This figure shouldn't be all that surprising — the social network has long been one of the single most dominant players in digital advertising. Still, the company would be foolish not to pursue other meaningful revenue sources long-term. Adopting some kind of cryptocurrency plan could be one way to do that. But rather than buying into one that's already established, like bitcoin, what might be more likely is Facebook creating its own. Who better to pull off a legit crypto currency than Facebook?
BMR Take: Facebook is going to generate about $6 of EPS this year. We are looking at EPS growing to $10 by 2020. Layer into this the possibilities of a proprietary Facebook coin and look out, this could be a stock set to surge even more than it already has on bitcoin mania.
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The Carlyle Group (CG: $24, up 5%)
Carlyle Group has brought on a new leader of its U.S. capital markets division. Matthew Savino was named managing director and head of U.S. capital markets. It is a new position. Mr. Savino works with Carlyle's U.S.-based corporate private equity executives on publicly syndicated and privately placed loan, bond and equity offerings for portfolio companies. Mr. Savino was a managing director and global head of alternatives sourcing at BlackRock.
Why does this matter? Private equity is all about sourcing deals. That is the business model. Exclusive deal sourcing is the key to the fabulous earnings we see. And getting this done is all about good people. Let’s review a few of the heavy hitters on the board. This company is stacked with talent.
Mr. D’Aniello is a founder and Chairman Emeritus. Prior to forming Carlyle in 1987, Mr. D'Aniello was a Vice President for Finance and Development at Marriott Corporation where he was responsible for valuation of all major mergers, acquisition, divestitures, debt and equity offerings, and project financings.
Mr. Conway is a founder and Co-Executive Chairman and is also the firm’s Co-Chief Investment Officer. Prior to co-founding Carlyle in 1987, Mr. Conway worked at MCI Communications from 1981 to 1987, serving as Chief Financial Officer.
Kewsong Lee is a Co-Chief Executive Officer. Mr. Lee also serves as the Head of the Global Credit segment and is Chairman of the Executive Group. Prior to joining Carlyle in 2013, Mr. Lee was a partner at Warburg Pincus and a member of the firm’s Executive Management Group.
Ms. Lawton Fitt is a member of the Board of Directors. Ms. Fitt is currently a director of Ciena Corporation and The Progressive Corporation. She was an investment banker with Goldman Sachs, where she was a partner and a managing director. She retired from Goldman Sachs in 2002. Ms. Fitt is a former director of ARM Holdings and Thomson Reuters
Tony Welters is a member of the Board of Directors. Mr. Welters is Executive Chairman of the Black Ivy Group. He recently retired as Senior Adviser to the Office of the CEO of UnitedHealth Group having served in such position since 2014.
BMR Take: With the S&P 500 index trading at 20x earnings, we just can't explain why Carlyle trades at 8x earnings. There is no reason for such a massive discount. This stock needs to be a lot higher. Others overlooking the stock creates your opportunity. If we had a category for stock of the year (2018), this one would be at the top of the list. The consensus calls for nearly $3.00 of EPS this year! This company is way undervalued. Repeat – WAY UNDERVALUED.
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Mazor Robotics (MZOR: $56, up 10%)
Mazor Robotics is a pioneer and a leader in the field of surgical robotic systems. In September the company announced CE Mark approval for its Mazor X Surgical Assurance Platform. The CE Mark allows Mazor and its commercial partner, Medtronic, to market the Mazor X in the European Union, as well as other countries that recognize the CE Mark.
This is big stuff and we saw the benefits last quarter when Medtronic essentially sold almost all of the company’s new orders.
Receipt of the CE Mark is an important step in the plan to expand the patient, surgeon and hospital benefits of the Mazor X Surgical Assurance Platform to the European market. The commercial partner for the Mazor X, Medtronic, will be responsible for marketing and selling the system in Europe and they have a great footprint and brand to do so.
BMR Take: Mazor shares increased 150% in 2017 and we think the momentum is going to continue. The company is coming off of a record 3Q17 earnings where it was announced that orders were received for 22 systems comprised of 19 Mazor X and 3 Renaissance. Medtronic was responsible for 11 of the 19 Mazor X purchase orders, which is only the second phase of the commercial agreement, where additional orders are in the pipeline to occur. There is just clear surgeon interest in everything Mazor is doing. Why? When you step back and think of it, this is the start of artificial intelligence and robots beginning to increase productivity. Mazor is at the center of the action in the medical technology sector where the advancement will change lives, and the economic opportunity for investors will be lucrative.
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Economic Calendar
Consumer Credit
Monday, January 8th, 3:00 PM
Period: November
Consensus: $18.5 billion
Prior: $20.5 billion
JOLTS Job Openings
Tuesday, January 9th, 10:00 AM
Period: November
Consensus: 6,025,000
Prior: 5,996,000
Wholesale Inventories SA M/M
Wednesday, January 10th, 10:00 AM
Period: NOV
Consensus: 0.70%
Prior: 0.70%
PPI ex-Food & Energy
Thursday, January 11th, 8:30 AM
Period: December
Consensus: 2.5%
Prior: 2.4%
CPI ex-Food & Energy
Friday, January 12th, 8:30 AM
Period: December
Consensus: 1.7%
Prior: 1.7%
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Oil Holds Near Two-Year High. US Shatters Production Record
The Permian Basin* has shattered its 1973 record to produce 815 million barrels of oil during 2017, or more than 2.25 million barrels a day. The previous peak of 790 million barrels was set 44 years ago. The huge oil field is projected to push total U.S. oil output to a new all-time high by the end of this year. Some analysts see total US production exceeding 10.5 million barrels per day by the end of 2018.
*The Permian Basin is located in the western part of Texas and the southeastern part of New Mexico. It reaches from just south of Lubbock, to just south of Midland and Odessa, extending westward into the southeastern part of New Mexico.
Oil prices are expected to keep rising in 2018 on the back of OPEC-led production cuts and a growing global economy. Most analysts see oil trading in the high 50s for 2018.
The U.S. total rig count will reach above 1,000 rigs in 2018, for the first time since 2015, according to one oil analyst. Rig counts ranged from 660 to 960 in 2017. The current level is 925.
BMR Take: The best way to take advantage of the robust Energy market is with our portfolio item, iShares US Energy ETF (IYE: $41, up 4%). We’ve had this stock in our portfolio since September and it is up 11%, but we feel it has a long way to go higher. It’s a small fund, with just $1 billion in assets, paying a 2.7% dividend, and it is diversified nicely among many strong Energy companies. Exxon is #1, with 23% of the portfolio invested in this global leader. Chevron is #2 at 15%, Schlumberger is at 6%, ConocoPhillips is at 4%, and other companies, like Valero and Kinder Morgan are held as well. Our Target is $44, but we can see this one hitting $50 in 2018 if crude holds or goes higher than its current level of $60.
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Some Target Updates
Visa (V: $119, up 4%) had its price target raised by analysts at Susquehanna Bancshares from $126to $148 last week. Our Target is $123, and we can’t wait to raise our Target into the $130s. The way the market is going, it might just hit our Target this week.
Apple (AAPL: $175, up 4%) was given a new $180.00 price target on by analysts at Rosenblatt Securities. We think this firm has its head in the sand. Our Target is $194 which is when the stock will hit $1 trillion in market cap.
Omega Healthcare Investors (OHI: $27, down 2%) Director Bernard J. Korman bought 100,000 shares stock just before Christmas. The shares were bought at an average cost of $26.90 per share, for a total transaction of $2,700,000. Following the transaction, the director now owns 900,000 shares, valued at $24 million.
We always like to see these types of transactions – management buying stock with their own money. The stock is paying a 9.7% dividend. It is below our Sell Price by $1, but we aren’t going to remove the stock just yet. With their more than 900 nursing facilities and assisted living facilities in the US and UK, we believe the firm to be solid as a rock. Worried about the bull market ending? (we aren’t….), then lighten up some of your portfolio and buy some Omega. You’ll be glad you did.
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The High Yield Corner
By Michael Foster
We saw some significant macroeconomic news stories over the last couple of weeks that are very important for high yield. They’re important because they’re easily misunderstood, but not because they’ll have a huge impact on high yield assets.
Quite the opposite, in fact. What is happening right now is a blip that means little for the high yield world, although it may be a bigger deal for some pockets (most notably Energy and Utilities). Beyond that, however, what’s happening right now really doesn’t matter for high yield.
What are we talking about?
The first is the polar vortex. If you’re on the east coast or in the midwest, you know what we’re talking about. We were working in New York City for the 2013-2014 polar vortex, and we must admit we are still a little traumatized by the experience. The biting wind, the endless cold, the layers of snow covering more layers of snow was enough to make us leave NYC. We still feel bad for friends who were stuck at banks and hedge funds, unable to leave the Big Frozen Apple.
Beyond this malaise with the cold, the broader economy was suffering. The American economy saw a 0.1% GDP growth rate, and the S&P 500 barely ended the quarter in the green (January of that year saw a 3.6% decline in the stock market). The polar vortex put a freezing chill on the 30% S&P 500 return that 2013 enjoyed.
It seems like history is repeating itself. After the S&P 500 rose 22% in 2017, we’re suddenly hit with a cold snap to start 2018. The stock market hasn’t responded to this yet, and we doubt it will. Enough people remember 2014 to know that a sudden freeze isn’t enough to hit stocks.
However, the high yield market is a lot more volatile and easily scared. We’ve already seen at the retail level, fund outflows at several major high yield ETFs in the first few days of January. And many popular high yield assets are starting 2018 in the red.
For instance, look at REITs. Omega Healthcare Investors (OHI: $27, down 2%), Government Properties Income Trust (GOV: $17.86, down 4%), Digital Realty Trust (DLR: $112, down 1%), and Apollo Commercial Real Estate (ARI: $18.30, down 1%) are all weak in the first week of January. We may see more declines in the future as retail investors remember 2014 and pull out—while also forgetting that markets adapt and counterbalance recent tendencies. Trends last only until they don’t.
So much for the first big trend hitting high yield—it’s definitely worth ignoring, or going against. As these REITs slip on cold weather panic, buying opportunities become bigger as yields go higher.
The second big news story for high yield is much, much more obscure, but is arguably more important. Morgan Stanley quietly recommended to clients that investors avoid junk bonds. Here’s what he wrote:
"While the tax cuts just enacted in the U.S. may lead to better growth in the short term, they may also bring forth the excesses we typically see before a recession—which is something credit markets figure out before equities. We recently took our remaining high yield positions to zero as we prepare for deterioration in lower-quality earnings in the U.S. led by lower operating margins.”
In other words, tax cuts cause short-term gains but are long-term negative for economic growth. This is Wall Street and mainstream economic orthodoxy (Goldman Sachs said something similar nearly a year ago when Trump’s tax cut plans were first getting started). That long-term negative is really, really bad for high yield bonds. Why? Because short-term economic growth encourages bad businesses to expand really fast, which means they will go bankrupt faster and at a bigger scale when the economy reverses course and starts to crash.
Morgan Stanley rightly observes this conventional fact about financial markets, but they wrongly assert that it’s a risk that is around the corner.
One of the big problems for macroeconomic analysts is understanding that the 2007-2009 recession was so deep, and the recovery so slow, that the business cycle and the credit cycle are prolongated. Instead of the 7-10 year business cycles of the 80's, 90's, and early 2000’s, we’re now facing a new longer cycle that will be far longer than a decade long.
So Morgan Stanley is right to suggest that we’ll see a boom in high yield credit now only to see a big crash later. But they’re wrong to suggest that big crash is coming this year or even next year.
How long will it take for that big crash? Honestly, it’s too early to tell. It may happen in 2020, or it could happen much later—say 2025 or beyond. There’s still damage to repair from 2007-2009 before we get to bubbly territory.
That means pulling out of high yield right now is premature. Sure, you can pull out now to avoid a big loss in 5 years, but you’ll also miss out on 20% gains in the next year.
That’s why AllianzGI Equity & Convertible (NIE: $22, up 2%) and PIMCO Dynamic Income Fund (PDI: $30, flat) remain holds for now, but investors need to prepare to sell in the next couple of years. And if the high yield market reacts to Morgan Stanley and sells off in the next month, it might even be a good time to buy more now and wait for the market to truly look, feel, and act like a bubble.
So far so good for high yield, despite growing misplaced fears. In fact, those misplaced fears are making me feel better about high yield, because it proves we haven’t hit irrational exuberance territory yet. And when that comes, I’ll quickly change my tune.
Good Investing,
Todd Shaver
Founder and CEO
The Bull Market Report
Since 1998
November 19, 2017
by Todd Shaver | Nov 19, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
The big story this week was the sale of a Leonardo da Vinci painting for $450 million. Leonardo da Vinci’s Salvator Mundi went to auction Wednesday night at Christie’s in New York and the selling price broke sales records. Watching the top part of the market is an interesting tell. It is noticeable when the luxury art market hits fresh highs. We further note that luxury apartment prices in New York City are down 10% to an average of $8.1 million this month compared to a year ago.
Construction is under way setting new height records of high-rise buildings in cities like Los Angeles and Philadelphia. What does this mean? Things are good, though often new peaks signal a top. We must watch very closely. When the luxury market starts hitting new records, you have to step back and realize trees don’t grow to the sky, and that this bull market is not guaranteed to last forever.
Don't get us wrong. We're still very bullish and expect a strong earnings year in 2018. But it never hurts to be a bit cautious.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks/funds where we think you can still make good money, including: VMware, Annaly, Shopify, Tesla, Nutanix, and Celgene.
BMR Companies & Commentary
VMware (VMW: $123, up 1%)
Singaporean communications company M1 Limited and software and services provider VMware announced a new cloud offering made for digital start-ups, and small-and-medium enterprises. The service will enable budding tech businesses to develop software-based products quickly in addition to growing their business without an expensive infrastructure expenditure.
M1 said it is improving its next-generation software-defined data center, which is powered by the VMware cloud provider program, with shipping support from Pivotal Container Service. The new cloud offering provides advanced technology that allows businesses to run faster and introduce new products quicker.
BMR Take: It is great to see new product development! VMware is expected to produce earnings of $5 per share this year and $6 by 2020. With such a solid market presence and brand, we see additional upside in the stock.
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Annaly (NLY: $11.49, up 2%)
CEO & President Kevin Keyes bought 300,000 shares of stock this week in the open market. There is nothing like insider buying to signal a stock is a good buy. Who is Mr. Keyes?
Kevin Keyes serves as President and Chief Executive Officer of Annaly and is a member of the Board of Directors. Prior to joining Annaly in 2009, Mr. Keyes worked for 20 years in senior Investment Banking and Capital Markets roles in the Real Estate and Financial Institution Industries among others. From 2005-2009, Mr. Keyes served in senior management and business origination roles in the Global Capital Markets and Banking Group at Merrill Lynch. Prior to that, he worked at Credit Suisse First Boston from 1997-2005 in various Capital Markets Origination roles and Morgan Stanley from 1990-1997 in the Mergers and Acquisitions Group and Real Estate Investment Banking Group. Mr. Keyes holds a B.A. in Economics and a B.S. in Business Administration from the University of Notre Dame.
BMR Take: Mr. Keyes is a smart businessman. Annaly is currently producing earnings of about $1.20 and pays this out in a dividend yielding over 10%. Follow the smart money here. The company has been successful over 20 years through bull markets and bear. With a market cap of $13 billion, this stock is rock steady.
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Shopify (SHOP: $105, up 5%)
Shopify is just not the ‘short’ some of the naysayers say. The best way for the company to prove it and crush the shorts is by building the underlining business. The truth is that while the stock market is a voting-machine in the short-term, over the long-term it is a weighing machine. You build a great business with earnings and the stock goes higher, every time. This is just what Shopify is doing.
Just in time for the holiday season, UPS and Shopify are unveiling a platform integration that make UPS's premium services available to small businesses. Shopify’s hundreds of thousands of small U.S. business customers will now receive competitive, pre-negotiated domestic and international rates that save on list prices, along with a streamlined shipping and fulfillment solution.
By embedding UPS natively into Shopify’s platform, merchants will get the breadth and reliability of UPS’s services to more than 220 countries and territories, while easily managing all aspects of shipping and fulfillment in one place
BMR Take: The consensus outlook calls for Shopify to put up EPS of $0.05 this year, $0.27 next year, $0.75 the following year, and over $2.00 in 2020. Look up “earnings growth” in your financial dictionary. We suspect you might find a picture of Shopify’s logo!
We wonder if Andrew Left knows when to throw in the towel? Remember, Mr. Big Short has to BUY BACK his stock to get out of the positions. MY OH MY we can’t wait to see him get SQUEEZED with this amazing company.
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Tesla (TSLA: $315, up 4%)
Tesla made a huge announcement this week. Electric semi-trucks. They go 500+ miles and cost $1.26/mile to operate, and can haul 80,000 pounds. It might even one day drive itself. Companies like Walmart, JB Hunt, and UPS all immediately placed orders. This is going to be huge and change the entire infrastructure of the trucking industry.
Environmentally, the impact is massive. Every truck you move with electricity instead of diesel has an outsize effect on the health of the planet and everything living on it. Eighteen-wheelers are the ultimate force multiplier. This green effect is worth real money to the world.
BMR Take: Yes, Tesla is losing money. Specifically, they will lose almost $9 per share this year. But recall that the list of other companies down this path include Amazon and Netflix. Elon Musk will go down in history as a visionary. Let the man build a better world. There will be surreal profits for shareholders over the course of time.
ANOTHER TAKE ON TESLA
In case you missed it, here are a couple of views of the new Tesla semi-truck. Gorgeous! Unbelievably awesome features!
https://www.tesla.com/semi - Just view and scroll down for a brief video and beautiful photos.
This one is a 9 minute condensation of the 51 minute presentation. It shows all the outrageously wonderful features of the truck.
https://www.youtube.com/watch?v=5n9xafjynJA
And how about the new Roadster that they announced with speeds of just 1.9 seconds for 0 to 60 and 4.2 seconds for 0 to 100. It can handle a quarter-mile in 8.9 seconds. And it’s only $200,000!
(Funny – Porsche announced the new 911 two days before Tesla had this big PR event and said their Porsche was super-fast, going from 0 to 60 in 2.9 seconds. And then Tesla comes out and blows them away!)
This will be the fastest production car ever produced.
Check this out here:
https://techcrunch.com/2017/11/16/tesla-unveils-the-new-roadster
BMR Take: Are these new vehicles going to help the bottom line this year? No. How about next year? No. Is a lot of these new announcements hype until they actually start producing these new vehicles? Yes. But if you believe in Elon Musk it may just make you want to own more stock in this amazing company. We personally believe he will make it work. The losses will be stemmed next year as the Model 3 is delivered (500,000 orders are on the books. At $45,000 each, that’s $22 billion in revenue for just the orders on the books. Can you imagine the new orders they will receive when your best friends get one delivered and they RAVE about it?)
Is this stock an investment for the conservative investor? Not really. But for money that you can afford to lose, some say Tesla could be worth $1000 a share by 2020.
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Nutanix (NTNX: $29, up 1%)
This stock is on fire. Let’s review why.
Nutanix closed its fiscal year with a bang recording 62% Q4 revenue growth year over year, exceeding analyst expectations. For the 2017 fiscal year, Nutanix grew revenue 72% from 2016. Other notable highlights from the most recent quarter include a record number of large deals, 75% growth in adoption of the AHV hypervisor product that is the future, and 875+ new customers added. The company guidance for its fiscal 1Q18 was above Wall Street expectations.
Other notable metrics highlighted:
• 96% increase in software-only bookings in fiscal 2017
• Closed the quarter with a strong balance sheet with approximately $350 million in cash and NO debt
• 4th year in a row with a customer satisfaction score of 90+
• Total customers of 7,000+, with enviable repeat purchase metrics of 4.1x for all customers greater than 18 months, and 8.1x for the Global 2000 greater than 18 months
• 404 customers that have purchased greater than $1 million lifetime to date; 39 customers that have purchased greater than $5 million; and 11 customers with greater than $10 million in business lifetime.
BMR Take: Nutanix could be the stock of the next decade. The company could cut marketing expenses and deliver earnings of over $1.00 per share tomorrow versus $0.05 expected by analysts. But why do that when you are adding new customers like mad and generating 50% revenue growth? Invest in the future with this company. One of our favorites.
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Celgene (CELG: $104, up 2%)
Scripps Research Institute hopes for a royalty windfall from the potential blockbuster drug, ozanimod. If the new drug achieves blockbuster status, it could generate tens of millions of dollars a year in royalties for Scripps, and provide relief from the ongoing financial challenges facing the nonprofit lab. Scripps won't say how much it stands to receive from sales of this drug, a drug that slows brain atrophy in patients with multiple sclerosis. Scripps discovered the drug, then partnered with Celgene to shepherd the medicine through clinical trials. Celgene expects to begin marketing the drug to multiple sclerosis patients in late 2018.
The drug is expected to generate sales of $4 billion, all but 2% of that would go to Celgene. Dr. Hugh Rosen, a Scripps researcher who's the co-inventor of ozanimod, said the institute's agreement with Celgene calls for royalty payments through 2033.
BMR Take: Don’t lose faith in Celgene. This business is a core part of the Healthcare sector and is not going anywhere. The company will continue to find big opportunities as highlighted above. Celgene is still likely to double revenue and deliver over $12 of earnings by 2020. Look out - this stock can roar back!
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Upcoming Economic News
Leading Indicators
Monday, November 20th at 10:30 AM Eastern
Period: October
Consensus: 0.80%
Prior: -0.20%
Existing Home Sales
Tuesday, November 21st at 10:30 AM
Period: October
Consensus: 5,440K
Prior: 5,390K
Durable Orders
Wednesday, November 22nd at 8:30 AM
Period: October
Consensus: 0.30%
Prior: 2.0%
Initial Claims
Thursday, November 23rd at 8:30 AM
Period: 11/18
Consensus: 240,000
Prior: 249,000
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A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
In the UBS 2018 Market Outlook report we discuss "What worries us the most?" UBS answer: "Inflation - a sudden return that is independent of growth (e.g. persistent oil-price spike,
supply-side bottlenecks) is one worry. We show that, at least in the context of labor-market dynamics, this risk is still reasonably low. The flip side of the same coin reflects the risk of policy "overtightening" despite stale inflation. Low inflation, however, allows policy makers the optionality to reverse course and stabilize markets……"
As we mentioned last week, there seems to be a lack of broad-based inflation with respect to the sizable gains in stock valuations and the rise in earnings growth rates. Yet, UBS believes the markets need to worry for two reasons: first, a sudden surge in inflation without matching earnings growth, and secondly, a lack of inflation accompanied by continued Fed rate hikes. While UBS rates the inflationary risks as low, we believe the bond markets (and yield curves) will help alert the markets to the occurrence of any substantial inflationary problems on the horizon.
Meanwhile, the good news is that UBS believes that the markets still have room to grow in 2018.
With that said, bonds are not signaling "full speed ahead." When President Trump was elected, the yield on the 30-year Treasury bond surged from 2.60% to almost 3.20%. This was probably because the bond market reassessed the likely influence this political shock would mean for the markets.
As a reminder, there were three key pieces to the accelerating economic growth argument: Increased infrastructure spending, deregulation (mainly the repeal of Obamacare), and most importantly, tax reform.
Unfortunately, the once-in-a-lifetime Republican trifecta is 0-3, and right now the 'smart money' in the bond market is not impressed with how things are going in both D.C., and the broader US economy.
The 30-year yield has retraced almost all its post-election move higher and is now only slightly higher than it was pre-election, and the 10-year yield curve has flattened rather than steepened.
Meanwhile, progress on tax reform, the real engine behind the stock rally, has been pretty slow. As we have said numerous times, the market needs tax reform to happen or we can expect a correction. At this moment in time, our best guess on tax reform getting passed isn't any better than a coin flip.
Bottom line, while stocks climb to new highs due to optimism about tax reform and the subsequent improving uptick in growth, the bond market continues to display doubts about the health of the economy and the general outlook for risk assets, both medium and longer term. Maybe that's another wall of worry that the market likes to climb. It is, however, very much worth monitoring.
For now, though, most stock gurus still give the benefit of the doubt to the stock bulls based on momentum alone. Today, the stock market is in the hands of tax reform. But tomorrow, next year, and as it always is for the long-term, it will be in the hands of earnings growth.
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PayPal (PYPL: $76, up 3%) Gets a Target Upgrade
Jefferies ups PayPal’s target. After rolling forward their valuations to reflect 2019 estimates, Jefferies raised their price target for PayPal to $86 from $80. The market cap is now $92 billion. Most people have no idea this company is so big. With the stock setting a new all-time high Friday we are going to jump on the band wagon and raise our Target. Wait. They are jumping on OUR band wagon as we added the stock in January of last year at $31, so we are up 145% on the stock. We hereby raise our Price Target to $87.
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Square (SQ: $44, up 13%) Gets Some Target Upgrades
What a week for our favorite payments company, Square. Wait a minute – what about PayPal? Ah yes, we love them both. But Square is a pipsqueak compared to PayPal. Just $17 billion (up from $10 billion a few short months ago.) Jefferies raised its target for Square to $47 from $44
The Square price target was raised to $48 from $45 at Nomura Instinet saying the company is "well underway to becoming a major disruptor in the payments ecosystem." After speaking with Sarah Friar, Square's CFO, the company raised its long-term estimates for the company. They see Square's revenue and profits being lifted by its "intuitive and cohesive software ecosystem."
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The High Yield Corner
By Michael Foster
After tons of big news stories coming at us hard and fast, it was nice to have a bit of a quiet week with little news relating to The Bull Market Report’s High Yield portfolio. A lot of picks remained flat over the week as a result, such as Nuveen AMT-Free Municipal Credit (NVG: $15.43), Welltower (HCN: $68), and Government Properties Income Trust (GOV: $18.85).
Government Properties’ dull week was a bit of a sea change. We wrote about the intense reaction to the REIT’s slightly disappointing earnings results a few weeks ago, predicting a recovery. We’re now at price levels we saw in mid-October, so it seems that the market has realized its initial shock was overblown. Furthermore, growing stability in the credit market and the realization that REITs are already positioned for next year’s interest rate hikes has also helped this and other REITs stabilize. For instance, Apollo Commercial Real Estate (ARI: $18.41, up 1%) had a healthy albeit somewhat quiet week, and we fully expect the market to slowly pour back into REITs in the coming weeks thanks to a better understanding of the robustness of the balance sheets throughout the sector. This is a good time to sit back and wait for capital gains to continue to roll in.
Of course, there are exceptions to the quiet in REIT-land. Most notably, Omega Healthcare Investors, Inc (OHI: $27, down 3%) continued its protracted sell-off. This was partly to be expected. As we wrote a couple of weeks ago, the market is going to panic about this company’s cash flow in the short run until they realize their mistake in the long run (probably in early 2018 after the company’s next earnings report).
This is a good buying opportunity, and staging into the fund if you have cash on the sidelines would be a great way to secure this stock’s now 9.6% dividend yield. We’re approaching 10% yields - an unthinkable feat, but not impossible. We can’t imagine the market being that horrified about a company that is out-earning its dividend by a large margin. But the market’s short-term irrationality has surprised us before.
Another Healthcare REIT handpicked by The Bull Market Report did a bit better, but still didn’t do great: Ventas (VTR: $64, down 1%) dipped again slightly for a simple and silly reason: contagion. The worries about Omega Healthcare Investors is spreading to other REITs in the sector, because Omega’s problem stems from the fact that skilled nursing facilities (SNFs) are struggling to generate revenue and thus pay their rent. We’ve already discussed how Omega has positioned themselves to weather that storm, so let us discuss Ventas. Long ago, Ventas saw the dangers in the SNF sector and slowly but steadily worked to get out. They did so by diversifying into life science research facilities and medical office buildings. These buildings have a higher rent tolerance threshold, which is good for Ventas.
What we mean is that they can easily push rent hikes over time, because their revenues are significant thanks to growing demand and the deep pockets of the tenants. Universities have big endowments, and doctors have large profit margins from expensive short-term visits from patients. Both put Ventas in a very financially healthy position. In fact, the company’s dividend coverage ratio is 134%, which is above our 130% threshold. This remains a solid hold, and we dismiss the slight downturn this week as noise due to an irrational fear of the SNF market, which affects Ventas less and less over time.
Another REIT with a bit of a bad week was Digital Realty Trust (DLR: $118, down 2%), which has been a fascinating stock to track over the year. Almost all of those losses happened on Friday on little news, but we suspect the sell-off is a result of the continued fear that server space demand is going to decline over time as servers themselves get smaller, which in theory should mean less square footage will be necessary to hold those smaller servers. We discussed this weeks ago when the controversy first came up over a Silicon Valley investor’s vague prognostications, but let us reiterate the most important point: demand for server space is growing at a breakneck pace. All those Millennials uploading selfies to Instagram, sending short videos on Snapchat, and having political debates on Twitter increase the demand for server space. So we are not worried in the slightest.
We’ve also seen a growing trend in social media away from deleting previous data to lower storage space. Instead, these companies realize that more data gives them advantages they cannot ignore. Hence more demand for server space. Can this growth outstrip the technological advancements that make servers smaller? So far it has, and there’s no semiconductor or other tech development lately to suggest this trend will end anytime soon. For that reason, Digital Realty is a great buy on weakness, although we want to see dividend hikes increase radically next year.
Finally, let’s discuss AstraZeneca (AZN: $33, up 2%). A ton of news has hit the company since it beat revenue and earnings expectations on November 9th. This week, the FDA approved expanded use of the company’s new breast cancer medicine Faslodex and approved its asthma medicine Benralizumab. The company is also presenting to medical experts on clinical trials for its cancer drugs at a conference in Singapore this weekend. Little news has come out about those presentations so far, but if they are strong enough we could see the market react on today, Monday. Holding this stock remains advisable considering its tremendous and improving track record when it comes to research and development. We’re already sitting on 23% price gains in the last year. More is likely to come.
Good Investing,
Todd Shaver, CEO, Founder and Editor
The Bull Market Report
Since 1998
