August 27, 2017
by Todd Shaver | Aug 27, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
What a week. So much for a quiet end to the summer. Yellen made perhaps her final speech in Jackson Hole. Trump is battling a debt ceiling to fund The Wall. And the markets are partying like it’s 1999!
Federal Reserve Chair Janet Yellen, speaking in Jackson Hole, Wyoming, on Friday, issued her broadest defense so far of the government’s response to the 2008 financial-market meltdown while outlining some areas that regulators could review to improve efficiency in the financial system. “Any adjustments to the regulatory framework should be modest and preserve the increase in resilience at large dealers and banks associated with the reforms put in place in recent years,” Yellen said, in what could be her final speech as Fed chair at the annual gathering of central bankers. Her term expires in February.
President Donald Trump is spoiling for a fight with Congress over funding a border wall with Mexico, but he’ll have a hard time waging that battle because of a looming deadline to avert a U.S. debt default. Some of the president’s advisers consider a tough stand on border wall funding crucial to Trump’s credibility, two White House officials said. Some say that failure to make progress on the border wall -- or at least go to the mat on the issue -- may fracture what has been a solid political base for the president.
In 1999, then-Federal Reserve Chairman Alan Greenspan kicked off the central bank’s annual Jackson Hole symposium by highlighting the impact of rising stock prices on an economy that was then enjoying low inflation and low unemployment. Now today, eerily similar, buoyant asset prices and low unemployment argue for Yellen to press ahead with interest-rate increases -- or even accelerate them. Weak inflation suggests she might even want to consider providing more stimulus, not less. That would mimic the tack Greenspan took 18 years ago, when, faced with a frothy stock market, he continued to hike rates until May 2000. The result was a disaster for the stock market -- the technology-heavy Nasdaq Composite Index plunged by 78% over a 2.5 year period from its peak as the dotcom bubble deflated -- but was not all that bad for the economy. Gross domestic product did contract during 2001, but the fall was so small that former Fed Vice Chairman Alan Blinder has called it a “recessionette.” And inflation remained contained. “There are a lot of similarities,” between the late 1990s and today, said Laurence Meyer, who was a Fed governor from 1996 to 2002.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks/funds where we think you can still make good money, including: high yield equities like Annaly or larger caps like Amazon, Facebook, First Solar, Google, Microsoft, and Netflix, as well as small caps like Nutanix.
BMR Companies & Commentary
Amazon (AMZN: $945, down 1%, (for the week))
Amazon Announces New Online Teaching curriculum TenMarks Writing. TenMarks Writing is a new online curriculum designed for teachers to help their students improve their writing skills by using scaffolding, an instructional technique in which students learn step-by-step how the writing process builds.
TenMarks Writing incorporates natural language processing technology to provide students with automatic, personalized feedback and helps teachers deliver differentiated comments as students work through their compositions. It is available for $4 per student for an entire year.
BMR Take: This is just the latest example of another new innovative effort by Amazon. We call Amazon the innovation machine for a reason. Hardly a week goes by without something new and creative coming out from the company. We all know about their entry into food (Whole Foods is part of Amazon as of Monday) and now education. Will this be a major push by the firm? We shall see.
Facebook (FB: $166, flat)
Facebook Usage Growth May Slip among Teens, Young Adults. According to eMarketer's latest forecasts, usage rates for Facebook, Instagram and Snapchat are running roughly in parallel between the US and UK, with Instagram and Snapchat expected to rise by double digits. However, Facebook will see its user growth continue to slow in both countries as lessening usage among teens and young adults drags down overall user growth. Monthly Instagram usage in the US will grow 24% in 2017 to 85 million, also higher than previously forecast.
BMR Take: Do not be alarmed. We repeat. Do not worry. This news of “lowered estimates” and all the talk on TV of slowing engagement for Facebook means very little. It sounds bad. But the reality is engagement is healthy and the bigger factor is new user growth, which remains robust.
First Solar (FSLR: $47, down 1%)
First Solar Sells California Project. This week First Solar announced it completed the sale of the 280 Megawatt (MW) California Flats Solar Project in Monterey County to global private asset manager Capital Dynamics. Terms of the deal were not disclosed.
Located on approximately 2,900 acres of ranch land within the Jack Ranch owned by the Hearst Corporation near the San Luis Obispo and Monterey County borders, California Flats comprises two phases. The 130 MW first phase is expected to be commissioned in 4Q17, and is fully contracted under a long-term Power Purchase Agreement (PPA). The 150 MW second phase, which is currently under construction, is expected to be commissioned by the end of 2018, and is fully contracted under a long-term PPA.
BMR Take: We like this. We understand the cash is going to be reinvested in part of the business with much greater growth prospects. This is just want we want to see from the management teams running the companies we follow.
Google (GOOG: $915, up 1%)
Google and Walmart partner on Voice Shopping. Now people who own a Google Home will be able to order things by voice from Walmart. Cool! But this is copying Amazon Alexa, to be frank. If you can’t beat them join them.
The companies will also participate in the Google Express shopping marketplace, for which Google will eliminate the $95 annual membership fee. Shipping for orders through Google Home or Google Express will be $5 per order, or free if the order reaches a certain level. Costco, Walgreens, and PetSmart already sell via Google Home.
BMR Take: Good news for Google. Amazon is trailblazing the way forward with new innovations by spending tons of money. But there are competitive factors and various stakeholder conflicts, which creates room for companies like Google to jump in with little upfront capital investment, creating great investment opportunities. This could be the start of something big.
We've noticed that Google is lagging the rest of the market. After hitting $980 a month ago, the stock has faded a bit. It seems like a lot, but it's like a $98 stock dropping to $92, not really a big deal. So what do you do from here. You sit back and realize that the market is giving you a huge buying opportunity. Repeat after us: The market is giving you an opportunity to buy the stock a lot cheaper than its all-time high of $988 in June.
Microsoft (MSFT: $73, flat)
Microsoft Acquires Cycle Computing to Accelerate Big Computing in the Cloud. From finding a cure for cancer to making vehicles safer to fulfilling the promises of artificial intelligence, today’s complex problems require the ability to harness massive amounts of computing power. For too long, Big Computing has been accessible only to the most well-funded organizations. Microsoft believes that access to Big Computing capabilities in the cloud has the power to transform many businesses and will be at the forefront of breakthrough experimentation and innovation in the decades to come. Thus far, Microsoft has made significant investments across infrastructure, services and partner ecosystems to realize this vision.
As a further step in this direction, Microsoft recently acquired Cycle Computing, (no price details given), a startup specializing in helping companies perform heavy-duty computing. That includes crunching data for developing new drugs and analyzing risk in the financial services industry. This will make it easier than ever for customers to use High-Performance Computing and other Big Computing capabilities in the cloud. The cloud is quickly changing the world of Big Compute, giving customers the on-demand power and infrastructure necessary to run massive workloads at scale without the overhead. Your compute power is no longer measured or limited by the square footage of your data center.
BMR Take: We’ve already seen explosive growth on Microsoft Azure in the areas of artificial intelligence, the Internet of Things and deep learning. As customers continue to look for faster, more efficient ways to run their workloads, Cycle Computing’s depth and expertise around massively scalable applications make them a great fit for customers. We expect big growth ahead and see Microsoft’s business in a very healthy place.
Netflix (NFLX: $166, flat)
We are not afraid to tell you the good, bad, and the ugly. We know you count on it. We unfortunately have to report that Netflix will lose Disney content in 2019. Disney will end Netflix's film distribution deal as it launches its own streaming services starting with an ESPN service in 2018 and a Disney/Pixar service in 2019. Netflix had inked a deal with Disney to stream films and content just a year ago.
Netflix's stock traded lower on the news as investors see the premature end of the distribution deal as a loss of popular exclusive content. Some have compared the deal termination to the Starz (another Disney property) refusal to renew with Netflix in 2011 and see the move as another example of increasing license renewal risk and streaming competition.
BMR Take: The future of content creation is the holy grail of the media business. While Netflix can survive this one lost deal, the question is how much more of this will we see in the future. There is a long way to go until it is a big problem. But we are worried. Our Target is and has been $165. The stock was higher in July as it rocketed from $146 to $189 but it has fallen since. With a market cap of $72 billion and a PE of a ridiculous 215, we believe it is time for us to put this one to bed. We hereby remove the stock from our Stocks for Success portfolio with a gain of 65% since early 2016. There are lots of better places for your money at this time.
Have you taken the time to go onto the BullMarket.com website? Check out the six portfolios – you’ll find some interesting ideas here for the profits from Netflix.
Nutanix (NTNX: $22, flat)
Cisco Systems announced its intent to acquire Springpath, a leader in hyperconvergence software, for $320 million in cash, with the transaction expected to close in 1Q18. Springpath has developed a distributed file system purpose-built for hyperconvergence that enables server-based storage systems, and Cisco believes the acquisition will allow it to continue to deliver next-generation data center innovation to its customers.
In terms of Cisco, the acquisition was not a surprise, as the two companies have a relationship that goes back to Springpath's 2012 founding and Cisco previously making an investment in the company with an option to acquire it. That said, it is still a bummer for Nutanix. Analysts believed Cisco was a potential acquirer of Nutanix.
BMR Take: Hyperconvergence software is an exploding market. We expect Nutanix to do great things and generate big growth. The stock is hovering our Sell Price and we have had tons of calls and letters about whether we would “sell” the stock. First of all, we don’t own the stock. We don’t buy any of our recommendations as we want to remain clear of any conflict of interests. Secondly, the Target and Sell Prices are there for YOU to decide what to do with your investment. All of you are different. Some have multiple millions and some of you are just getting started. So you have to weigh every investment as it affects you and your family.
With that said, we believe Nutanix will be a big, big winner. Revenues are strong with last quarter coming in at $192 million vs. $115 million the year before. This is HUGE. But remember, this is a small cap stock – tiny in comparison to a Facebook or Google. The market cap is just $3.3 billion. So watch and wait and make a decision for yourself and your family. We think the company is a potential great one, but the market is stretching our patience.
We found this interesting too:
Firsthand Technology Value Fund, a publicly traded venture capital fund that invests in technology and cleantech companies, disclosed that its top five holdings as of July 31, 2017, included Nutanix. The fund’s investment in Nutanix consisted of 460,000 shares of common stock and represented approximately 7% of the fund’s total.
Upcoming Economic News
Consumer Confidence
Tuesday, August 29th, 10:00 AM ET
Period: August
Consensus: 120.0
Prior: 121.1
ADP Employment Survey
Wednesday, August 30th, 8:15 AM ET
Period: August
Consensus: 180,000
Prior: 177,700
Personal Consumption Expenditure
August 31th, 8:30 AM ET
Period: July
Consensus: 0.40%
Prior: 0.10%
Apple Has Debt Too
A few of you have written us and given us grief because we only report Apple’s cash position and don’t report the debt levels. Our internal excuse has always been that Apple’s debt is at very low interest rates. Here are some examples of Apple’s debt:
Apple 2.4% 5/03/2023 $5.5 billion
Apple 1.0% 5/03/2018 $4.0 billion
Apple 4.65% 2/23/2046 $4.0 billion
Apple 3.25% 2/23/2026 $3.25 billion
Apple 2.85% 5/06/2021 $3.0 billion
Apple 3.85% 5/04/2043 $3.0 billion
Apple 2.25% 2/23/2021 $3.0 billion
Apple 3.45% 5/06/2024 $2.5 billion
Here is some more detail:
From their latest financial reports, the last three yearly balance sheets ended September have shown that debt has risen from $29 million in 2014 to $53 million in 2015 and to $75 billion in 2016. At the same time cash has risen from $154 billion to $206 billion to $236 billion, reaching $260 billion in their last quarterly report on July 1st.
So: Big cash. And big debt. The NET CASH position at year-end September 2016 was approximately $160 billion. (And much higher now.)
We’ll take it.
Opko Health (OPK: $6.13, flat) Two weeks ago, the company reported earnings for 2Q17. Total revenues of $314 million were down 12% year over year from $357 million. Revenues included a $10 million payment associated with the commercial launch of Varuby in Europe in comparison to the $50 million payment related to a Rayaldee license in the same quarter in 2016.
Research and development expenses totaled $33 million, up 4%, while selling, general and administrative expenses amounted to $128 million, up 9% year over year. Consequently, loss from operations came in at $4 million, highlighting a significant decline from an operating income of $55 million in the prior-year quarter. The decline can be attributed to a rise in operating expenses owing to the company’s significant investments associated with the commercial launch of Rayaldee along with consistent investments in the pharmaceutical pipeline.
The company has $130 million in cash, unchanged from the quarter before.
This is a biotech company in an industry that is known for companies with years and years of little or no progress (and revenues) and then a big announcement of great success. Luckily Opko isn’t in the camp of no revenues. Revenues as you know are over $1 billion.
Chairman and CEO Frost On the Impact of Opko’s 4Kscore
Released in 2014, the 4Kscore Test is the only blood test that can accurately identify a patient's risk for aggressive prostate cancer, Opko claims. As calls to reduce health care costs across the United States grow louder, 4KScore is as a cost-effective alternative to biopsies, Frost said.
About 30 million tests are done each year to measure men’s prostate-specific antigens, or PSA. Of those, 4 million identify elevated PSA levels and typically would require biopsies.
“If you do the test after the elevated PSAs, you can avoid 50% of all biopsies,” Frost said. “This is the type of thing that if you wanted to be able to cut healthcare costs in this country, this has to be the easiest thing in the world to do.”
On why he continues to buy thousands of OPKO shares
“I always believe in investing in things that I know about rather than things I don’t,” Frost said.
BMR Take: Opko Health is a relatively small biotech firm with great potential. Many times “great potential” results in “no results.” This $3.4 billion market cap company is poised for success, but remains the most speculative stock in our six portfolios.
Splunk (SPLK: $65, up 10%)
Splunk had a great week. They reported earnings on Thursday after the close and they were stellar. This is what we have been waiting for. Revenue rose to $280 million from $213 million a year ago, for a percentage gain of 31%. Huge quarter. Adjusted earnings were $11 million or 8 cents a share.
Guidance is solid with next quarter revenue of $308 million. Operating margins are projected to be approximately 8%.. Growth in yearly revenues has been spectacular. For the last three years we have seen $450,000,000, $670,000,000 and $950,000,000. For fiscal year 2018, ending this coming January, revenue is now expected around $1.21 billion.
Billings in the quarter grew 32% year over year to $303 million. They again increased full fiscal-year 2018 guidance to call for billings of $1.45 billion.
Splunk has been ranked number one in worldwide IT Operations Analytics (ITOA), as well as Event and Log Management software market shares for 2016 by International Data Corporation. Splunk said that these two markets have witnessed the highest growth rates within the overall IT market, with ITOA seeing an increase of 33%, and Event and Log Management growing 23%. This is the third consecutive year that Splunk took the top spot in the ITOA software market, beating the competition of IBM, Microsoft, Hewlett Packard Enterprise and VMware.
More than 500 new customers were added during the quarter, including Athenahealth, Carnival Cruise Lines, the Department of Homeland Security, Harvard Business School, Shutterfly, Uber, and Verizon.
Splunk appears quite dominant in its machine data analytics niche. And the company's market opportunity is growing as its software, traditionally used for IT operational intelligence, gets adopted for security, fraud-detection, app analytics and other use cases.
BMR Take: Great quarter. Looking for continued growth for years to come. Our Target is $75 and our Sell Price remains $60. Note that Splunk has exceeded guidance for 11 straight quarters.
VMware Has a Strong Quarter
VMware ($103, up 7%) had a great week after reporting $1.9 billion in revenues up from $1.7 billion last year with net income of $335 million up from $265 million, $1.19 a share up from $0.97. Huge. Total cloud management bookings rose by a 13% year over year, and the company closed 10 deals valued at over $10 million. Network Virtualization (NVX) revenues were again strong, at over a 40% increase.
The company guided for the year: Revenue of $7.83 billion, EPS of $5.06, and free cash flow of $2.7 billion. These are big numbers.
VMware raised $4 billion earlier this month in a debt offering, mostly overseas, with coupons of 2.3% to 3.9%. Note that Dell Technologies owns 82% of VMware.
Take a look at this chart:
BMR Take: We think you get the drift!
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
As Alfred E. Neuman might say, "What – me worry?" ……as in why care about things such as 1) When will the Fed hike rates again and how many hikes can we expect? 2) Has the 2nd quarter economic rebound already been priced into stocks? 3) Are tax cuts still possible or has the pro-growth agenda been totally derailed by swamp politics? 4) Will we have a trade war with China? 5) Will we go to war with North Korea? 6) Are we headed into a recession?
Sure, we care and everyone else should care about getting tax relief. We have the worst tax system in the world if you don't count dictatorships. But we've lived in the current system for decades and so, while it would be a whole lot better if we got tax reform, investors and the stock market will survive if we don't. We also admit that of course we would care if we had a war. That is highly unlikely however, because none of the large powers has any desire to start WW III. Otherwise, worrying about all of the above is not a good idea - or, as Mom used to say, "If you worry too much, you'll worry yourself to death." So, we are adding a little bit of Alfred's advice to our medicine cabinet and are just going to go on about our business and not worry too much.
Business as usual with all these worries hanging around (stocks love to climb a wall of worry) generally means an investor should expect more volatility. We expect just that. We know stocks tumble way faster than they go up. Thus, we know not to panic - and that is a huge plus for every investor. Or, we might have a little cash to buy into any sale that may come along. Or, we have dividend stocks that will reinvest into more shares whenever they go on sale. And finally, we aren't going to worry about a recession now because the facts simply don't support it. We've looked at inflation, housing starts, retail sales, industrial production, oil prices -- there just isn't any "big trouble" in the economy today.
Not only that, it wasn't that long ago when the US economy seemed like the only regional power heading in the right direction. Europe had record joblessness and was teetering on the edge of recession. Japan was in its 20th year of malaise and China was headed for a hard landing if not a total crash.
Today, all of these regions are showing signs of renewed strength. European markets are doing better than expected. Japan also recently impressed with a +4% GDP growth rate - well above estimates - and China has emerged from a soft patch with a string of positive economic readings. With 40% of US corporate profits coming from abroad, all of the above is then a simple equation pointing to more earnings growth and share price appreciation ahead.
T. Rowe Price once said, "No one can see ahead three years, let alone five or ten." So, we aren't forecasting that conditions won't change in the immediate or distant future. But for the time being, we still see the glass as half full.
A Little Unsettling News
We follow the trends in cash flows into and out of mutual funds. We remember well, back in the 2004-2007 time frame the cash inflows into the stock market were consistent, month after month as cash poured into the market. But we noticed recently that cash outflows are continuing these past few months. U.S. equity funds suffered their longest streak of outflows in 13 years as growing signs of political deadlock in Washington cast doubt on a rally that has taken the S&P 500 Index to record highs.
Investors pulled $2.6 billion from U.S. stock funds in a 10th consecutive week of outflows. That takes total outflows since late June to $30 billion, which covered the week to Aug. 23.
BMR Take: This is serious stuff in our book. We’ve watched these stats for over 30 years and we have found it to be a strong indicator of future prices. We’re watching this one closely.
The High Yield Report
By Michael Foster
Senior Writer
The Bull Market Report
This week could best be described as dull. High yield investments neither enjoyed the euphoria that some assets enjoyed earlier this year, nor continued the panic that we saw in recent weeks due to political noise.
This is not terribly surprising; as we’ve said repeatedly in this column, the fundamentals are strong and there’s little reason to expect a selloff anytime soon. At the same time, however, there is little reason to believe the strong bull run of previous months is going to continue - a lot of the upside is already priced in. That puts us in the rather boring “hold and collect income” position, but when that income is 8% or more on high yield assets, that dullness is quite enriching.
So let’s get specific on a few of our high yield investments in this dull week. A number of Bull Market Report recommendations moved through the week quietly, including several REITs. Omega Healthcare Investors (OHI: $31, up 1%), Apollo Commercial Real Estate (ARI: $17.84, flat), and Ventas (VTR: $68, up 3%). These REITs suffered some volatility earlier this year but have had a much better long-term performance. Much more importantly for us, their dividends remain safe as ever - the recent market turmoil and even more recent market calm have not impacted the income streams of these funds.
Omega in particular is worth a close look because of its high yield and aggressive dividend growth policy. Its 8.2% dividend yield implies a lot of risk, but its dividend coverage ratio over the last twelve months is 134% - far higher than many comparable REITs, and even higher than a lot of lower-yielding REITs. We’ve pounded the table on Omega several times this year for this reason, and with good reason. There os just too much safety in this dividend relative to its yield; if you don’t already own Omega, ask yourself why you aren’t enjoying a growing 8.2% dividend that is more covered by FFO than several 3-4% yielding REITs? And if you have a good answer to that question, let us know, because we can’t imagine there is one.
Elsewhere, municipal bond funds had a quiet week, with both Nuveen AMT-Free Municipal Credit (NVG: $15.49) and Invesco Municipal Trust (VKQ: $12.94) ending the week flat. To understand this, let’s talk a bit about Treasury yields. A big reason why muni bonds fell so heavily in mid-2016 (which is why we waited to recommend them until the end of the year) is that the market was pricing in steep interest rate increases throughout 2017. While we’ve had two rate hikes so far and a third expected in December, (although the probability of even that is declining), that’s less than the Fed had hinted at in 2016. That’s good for municipal bonds, which is why muni bonds have had a strong showing in 2017. For instance, the Nuveen fund we’ve recommended is up 7.2% year-to-date on price alone - that’s less than 200 basis points less than the S&P 500, despite muni bonds’ much lower risk profile and the fund’s 5.6% dividend yield!
The reason for this strong run up in muni bonds - and their relative quiet last week - has to do with interest rates. The market priced into munis a fast pace of rate hikes in 2017, but the reality is that the rate hike schedule is getting longer and longer - meaning the value of munis isn’t going to go down as much as was previously expected. Since the downside was 100% priced in, the lesser downside means these assets were priced too cheaply. And so they’re going up in 2017. It’s also partly why muni bonds have seen relative volatile price movements both up and down in the last couple of years.
Is it still a good time to buy munis? Maybe - it isn’t as clear of a good buy as, say, Omega Healthcare, but holding these funds and collecting their tax-free income stream right now makes a lot of sense.
And there are other interesting options out there, such as the strong performing Digital Realty Trust (DLR: $118, up 3%) and AstraZeneca (AZN: $29, flat). Both of these names are riding a strong wave of momentum thanks to growth in the companies’ fundamental businesses. AstraZeneca was far underpriced last year due to fears of regulations that obviously are not coming anytime soon. Additionally, the drug pipeline is as strong as ever. Similarly, endless demand for server space has made Digital Realty Trust a no-brainer at almost any price. The only problem is that the price growth has lowered their yields - Digital Realty is yielding 3.2% and AstraZeneca is down to 4.8%. It’s becoming clearer and clearer that these two names really should be considered growth or value investments rather than high yield investments. If your goal is to secure a high rate of current income, these names aren’t exactly for you. However, if you appreciate companies with growth potential that haven’t had their future growth fully priced in, but have decent dividends, both names are definitely worth serious consideration.
In any case, the last few weeks have given us a very clear lesson again: Short-term panics based on political headlines are not reasons to sell investments, while fundamental trends in terms of economic demand and dividend coverage are. Financial considerations tell us there’s really nothing to worry about right now.
Good Investing,
Todd Shaver, CEO, Founder and Editor
The Bull Market Report
Founded 1998
July 30, 2017
by Todd Shaver | Jul 30, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
North Korea test-fired its second intercontinental ballistic missile within a month on Friday, a provocation that heightens pressure on the U.S. and China to find ways to rein in Kim Jong Un’s nuclear ambitions. The U.S. said its top general called his South Korean counterpart to discuss “military response options.” The missile traveled about 620 miles. Trump called the launch a reckless and dangerous action and said "the United States will take all necessary steps to ensure the security of the American homeland and protect our allies in the region.” Why is this so important? It is more than the obvious geopolitical risks. The CBOE Volatility Index (^VIX) touched multi-decade lows earlier this past week at 8.84, but closing Friday at 10.29. It is really hard to see the markets remaining as calm as they are right now. This North Korea news is a fresh reminder that it is highly unlikely the markets remain this placid for long.
However, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks: Amazon, First Solar, Shopify, Square, Facebook, and AstraZeneca.
Highlights From The Past Week
Tech Slide in Week of Upbeat Earnings Underscores Growing Unease. Better earnings equals higher share prices, or so goes the customary thinking. For Technology stocks during this reporting season, it’s the exact opposite. Companies from Google to Microsoft announced quarterly results that beat analyst estimates by a combined 8%, more than any other industry group in the S&P 500 Index. Be reminded, that too much love can prove perilous when momentum reverses. In June, after investors had flocked to Tech stocks anticipating faster earnings growth in a move that pushed the Nasdaq 100 Index to rise twice as fast as the S&P 500, they rushed for the exit all at once, sparking the worst selloff since 2008 relative to the rest of the market.
Focus Turns To The Fed's Balance Sheet. If the Federal Reserve delivers any surprises in the near-future, it will probably come from news on when it plans to start shrinking its balance sheet. Economists don’t foresee an interest-rate hike anytime soon. Yet policy makers might update their language on inflation, because weakness in price data has persisted since they last met, but those changes should be minor.
A larger source of uncertainty stems from the timing of when the Fed will start to shrink its $4.5 trillion holdings of mainly Treasuries and mortgage-related debt. Everyone wants to know how the Fed will cut the bloat after building assets to record levels to help shield the U.S. economy during the financial crisis. Officials expect to begin the process this year and Chair Janet Yellen has said it could get under way “relatively soon.” Her lack of specific guidance has us looking toward the Fed’s meeting in September for an announcement. It sure seems like they would like to get the process started in the Fall. This will undoubtedly be a big shift for markets. But, it is expected and seems to be priced into the markets now. The 10-year Treasury is still very, very low from a historical standpoint at 2.29%. We don’t expect that to change much in the near future.
Howard Marks Sounds Alarm on Tech Stocks. We love to follow what the billionaires say. After all, they have made a lot of money and that is what we are trying to do. Just this week, billionaire Howard Marks, who’s warned of excessive risk in the markets for the past five years, is now sounding the alarm as hazards converge from red-hot Tech stocks, and investor confidence in SoftBank’s $100 billion fund raise. In a 22-page memo -- longer than most of his missives to clients -- the Oaktree Capital Group co-chairman said he sees several phenomena that by themselves seem reasonable but together reveal markets to be heated and risky. “Since we never know when risky behavior will result in a market correction, I’m going to issue a warning today rather than wait until one is upon us,” Marks said. “This warning is likely to feel premature, and perhaps it is, but I think it’s better to turn cautious too soon rather than wait until it’s too late.”
We’re not saying we are in this camp. To the contrary, we remain bullish on America and the stocks in our portfolio. But we want to let you know that there is another side to the bullishness and Marks above is just one of them. But this is nothing new. There are always two sides to every market and guess what? No one knows what the market is going to do in the future. So as we have said many times, if you find yourself with too much worry at night, move out of those stocks that make you nervous and move into the High Yield stocks in our High Yield and REIT portfolios. They are sleep-well stocks that are paying nice 5-10% dividends.
BMR Companies & Commentary
Amazon (AMZN: $1,020, down 1/2% - all changes are for the week)
Amazon traded lower after the company forecast a potential quarterly loss for the first time in two years, a reminder to investors that its reshaping of the worlds of Retailing and Cloud-computing industries doesn’t come without a cost. The company indicated the investment cycle is likely to continue, as it gave third quarter operating income guidance in the range of a $400 million loss to a $300 million profit. Amazon CFO Brian Olsavsky said the third quarter typically sees lower operating income because it has to prepare for the holiday peak season. Revenue guidance came in between $39 billion and $42 billion.
Amazon Web Services remains the company's main growth driver, growing 42% year-over-year, and generating $915 million in operating income. That's more than double the Amazon’s North American business's $435 million in operating income. Its international business continues to lose money with an operating loss of $725 million.
To accommodate exploding growth, the online giant has gone on a hiring spree, pledging to hire more than 100,000 people earlier this year.
The company blew away revenues but came up short on earnings. Revenues were $38 billion in the quarter, up from $30 billion a year ago. Earnings were 40 cents a share, vs. $1.78 last year.
Cash levels remain strong with over $21 billion on the balance sheet vs. just $8 billion in debt.
The company on Thursday said it is boosting spending on new warehouses to meet growing eCommerce demand, data centers for its Amazon Web Services division, video programming to keep customers engaged, and gadgets like the Echo line of voice-activated speakers to stay on the cutting edge of the emerging smart-home market. This comes after shares hit all-time highs Thursday, briefly making Jeff Bezos the richest man in the world. But Gates has staying power after Microsoft reported solid earnings, while Amazon missed estimates and the stock fell a bit.
While analysts remain optimistic about the future of Amazon and their growing revenue, the 2nd quarter earnings report from the company underscored the high cost of its business model. We at The Bull Market Report believe we are in the early stages of the shift of compute to the cloud and the transition of traditional retail online, and that the market is underestimating the long-term financial impact of both to Amazon. That said, Amazon continues to generate high returns on cash invested despite the growing scale of its investments, with significant value in early stage efforts in AI, voice, and robotics. The top line growth acceleration like that we saw in the second quarter is likely to continue in the long term
BMR Take: While EPS estimates are getting knocked around, don’t take your eye off the long term picture. Some analyst models are calling for EPS potential of near $25 in 2020. This could send the stock a lot higher. At the same time, there are many who believe Amazon is a bubble and that Bezos will never allow the company to report sizeable earnings. This is a tough one for us. We believe that Amazon will eventually turn the spigot on and report strong earnings. We aren’t sure when this will happen but we believe it will happen. But others say that he never will.
Oh my – the bulls and the bears fight it out in the end. We are sticking with our bullish stance as we believe revenues ultimately win out (as earnings are destined to follow.)
First Solar (FSLR: $49, up 8%)
First Solar raised this year’s profit forecast on improving terms for power plant sales and unexpectedly strong demand for technology that’s being phased out. This year’s EPS is now seen as up to $2.20, up from earlier guidance of 40 cents. Wow. Gross margins and sales will also come in higher after they shipped a record of 900 megawatts of its Series 4 panel in the second quarter. Big.
First Solar is benefiting from higher module prices in the U.S. as developers and distributors stock up ahead of a potential tariff on U.S. imports. First Solar’s thin-film technology has also seen gains. The sale of its 180-megawatt Switch Station solar farm also came in higher than expected, and management was optimistic for higher margins on two more plant sales later this year. They’re doing a better job of extracting cash out of their sales of plants and modules.
First Solar has begun installing equipment for its larger, more efficient Series 6 panel at its factory in Ohio and plans to ramp up production next year. Analysts estimate that panels can be produced for about 25 cents per watt, less than the 72 cents per watt floor price that may be imposed on imported panels by President Trump under a trade dispute later this year. Chief Executive Officer Mark Widmar said that he may extend production of the Series 4 module even as initial output of series 6 starts this year in Ohio and next year in Malaysia and Vietnam. Stable pricing globally and U.S. tariffs on competing suppliers will factor in that decision. The outlook sure looks good.
BMR Take: First Solar is a top player in a sweet market niche. Better energy efficiency is so important to our future. First Solar’s earnings are re-setting and returning to growth. The stock has almost doubled in the last three months.
Shopify (SHOP: $93, up 4%)
Shopify, the rising e-commerce platform dominated by small business owners, is teaming up with eBay to allow its merchants to sell directly through the online marketplace. The move adds another outlet for Shopify’s roughly 400,000 users. When Shopify signed a similar deal with Amazon in January, its stock surged as investors predicted a boost to revenue.
The company’s strategy has been to integrate with as many online channels as possible, letting its customers diversify away from their personal websites and sell on Twitter, Pinterest, Facebook, BuzzFeed and Amazon. Shopify also provides payment tools, shipping and small loans to help its users build their businesses.
Shopify is a growing player in the battle for turf in the rapidly growing world of online shopping. Instead of building a centralized marketplace such as Amazon and eBay, it provides tools for independent merchants, both large and small to sell online in various ways. It also provides point-of-sale software and hardware for physical stores, similar to Square.
Customers have been asking for Shopify to integrate with eBay for a while. We think a lot of merchants will gravitate toward this new announcement.
BMR Take: Like Amazon? Then you’ll like Shopify. It’s the same big picture story of massive eCommerce growth with a twist of being less widely known. With EPS on track to reach profitability next year, there is a big turn in the stock happening and now is an opportune time to be involved.
Square (SQ: $26, down 2%)
After building a unique payment solution that caters to micro and small merchants, Square is now in the process of rolling out more services (financing, payroll, capital) that accommodates a wider array of merchants and has been successfully moving up-market with a strengthening platform-based approach.
The company has entered a stretch where it’s investing to consolidate its services onto a singular platform with access to services, which should help improve already solid retention, and increase engagement with the company’s services driving robust volume growth. In addition, the company has successfully expanded into four countries outside the US (latest launch in the U.K.)
The company is complementing robust growth with a planned annual margin expansion from operational efficiencies utilizing machine learning and other artificial intelligence techniques.
BMR Take: Given the aforementioned factors, we believe Square is well-positioned to continue solid top-line momentum in 2017, continuing to capture the +$60 billion US market opportunity and beyond (6x opportunity globally) while driving leverage in the business. The company reports EPS on August 2nd. We see compelling upside ahead over the longer term.
Facebook (FB: $172, up 5%) Reported Earnings Last Week
For its second quarter, revenues spiked 45% year-over-year to $9.3 billion, and earnings per share came to $1.32, up 69%. Wall Street’s pros were looking for $1.13 per share in profits. They killed. The stock was up big last week in response, on top of a 44% year-to-date gain.
A few other highlights from the report:
• Daily active users (DAUs) reached 1.32 billion, while monthly active users (MAUs) hit 2.01 billion. Both were up a huge 17%.
• Mobile advertising revenues represented 87% of the total, compared to 84% in the same period a year ago. (We are amazed. 87% of revenues is astounding. We had to double-check what we read.) Remember when they went public and the world thought they had no mobile strategy? What a switch.
• During the past year, Facebook increased global headcount by 43% to 20,700.
• Facebook has $35 billion in the bank and no debt.
Here are the numbers for advertising:
Mobile ad revenue accounted for 87% of the company's total advertising revenue of $9.15 billion in the latest quarter, up from 84% a year earlier. Net income rose to $3.9 billion, or $1.32 per share, from $2.3 billion, or 78 cents per share, a year earlier.
Facebook's CFO once again warned the Street the company's revenue growth is being slowed down by a lower rate of advertisements on its properties, but the Street hardly cared, pushing price targets as high as $210, and the stock zoomed to half a trillion dollars in market capitalization, joining the exclusive club of Google, Microsoft and Apple.
The company noted that there are opportunities for incremental ad load on Instagram, increased engagement from Instagram stories, and potential for new monetization levers through Messenger and WhatsApp.
BMR Take: Facebook is an ad machine like the world has never seen. There is still so much potential ahead. With EPS pushing towards $10 over the next few years, we love this stock.
AstraZeneca (AZN: $30, down 11%)
AstraZeneca plunged after the U.K. drugmaker suffered a blow to its next-generation cancer therapy, with a new drug combination failing to do better than chemotherapy in checking the growth of lung tumors. This has posed a major setback to Chief Executive Officer Pascal Soriot’s ambitions. Imfinzi, used in combination with tremelimumab, didn’t meet a primary endpoint for progression-free survival in the study dubbed Mystic. The drugs were poised to generate more than $7 billion in sales by 2022, according to analysts’ estimates.
The failure calls into question Soriot’s ability to deliver on his growth strategy, put in place to keep the company independent when he rebuffed Pfizer Inc.’s $117 billion-takeover bid in 2014, and may make the firm vulnerable again. Imfinzi, which was poised to become Astra’s biggest medicine by sales, is the cornerstone of its cancer portfolio and key for meeting Soriot’s goal, set in 2014, of boosting revenue to $45 billion by 2023. Sales were $23 billion for 2016, so he has some serious work to do.
“Despite the outcome of the initial readout, we must be patient as the Mystic trial continues as planned to evaluate overall survival,” Soriot said in the statement. The study will continue to assess whether imfinzi or the combination of drugs can help improve life expectancy, with the results expected in the first half of next year.
The Mystic study was a crucial test for Astra’s two immuno- therapies -- a new class of drugs that activate the body’s defense system to attack tumors -- in a race with rivals including Merck, Roche Holding and Bristol-Myers Squibb to dominate the market for cancer treatments.
BMR Take: This is tough news to hear. We will keep a close eye on the situation and consider what to do about it after more careful analysis in the weeks ahead. We don’t like to panic. The stock dropped below our Sell Price of $32, so if you wish to get out you can do so on Monday. The stock came back over $1 on Friday and we are going to stick with it for a little bit more, watching the price closely.
Upcoming Economic News
Pending Home Sales Index
Monday, July 31st, 10:00 AM
Period: June
Consensus: 109.6
Prior: 108.5
Personal Consumption Expenditure
Tuesday, August 1st, 8:30 AM
Period: June
Consensus: 0.20%
Prior: 0.10%
Note: Monthly Personal Income and Outlays data are published by the U.S. Bureau of Economic Analysis. Personal consumption expenditures include consumer spending for all goods and services. These data are published on a quarterly basis in the GDP data release.
Total Light Vehicle Sales
Wednesday, August 2nd, 8:00 AM
Period: July
Consensus: 16.7 million
Prior: 16.4 million
Source: U.S. Bureau of Economic Analysis.
Average Workweek
Friday, August 4th, 8:30 AM
Period: July
Consensus: 34.5
Prior: 34.5
Note: Establishment survey data measuring the average workweek for production or nonsupervisory workers on private nonfarm payrolls.
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
It looks like it's a pretty done deal for the S&P 500 to hit 2500 based on a very good earnings trend reported so far. One exception was Google - it went down even though its gross revenues and underlying ad metrics were good. It also beat its earnings per share estimates, but the investment community figured out this beat was driven by taxes and that for the first time in 5 years, traffic acquisition spending outpaced revenue growth. This reminds us of the typical slaughter of a stock because its earnings missed by a penny.
When you think about investing to grow your money into the future, an investor has to be more of a longer-term investor than one single quarter. Big trends don't come and go on a single quarter's earnings. And, speaking of big trends, what giant long-term trends come to mind first? The "no-brainer" is of course Technology – everything from mobile, the cloud, augmented reality, artificial intelligence, alternative energy and autonomous cars. But there is a sector that is bigger than Technology and has beaten it by 300% since 1999.
Healthcare. In a way, it is comprised of a great deal of "technology" on its own – think biotechnology and all of the remarkable medical devices being created. Healthcare also offers just as much innovation and diversification as technology – there are 800 companies and 12 industries to choose from. And today, there is not one but four "mega-trends" fueling the long-term trend behind Healthcare.
The first and most important is of course the once-in-a-lifetime baby boomer demographic tsunami which will drive it for another decade. Secondly, there is a new age of genetics and medical technology which has ushered in unprecedented advances in scientific and medical research. Companies, investors and charities are pouring billions of dollars yearly into R&D, and this is a trend with no end in sight as they seek to find cures for every disease on earth. Thirdly, earnings have been a classic example of what a mega-trend looks like. In 2016, the Healthcare sector was responsible for nearly 20% of the earnings in the S&P 500, bigger than the Financial, Energy, and Telecom sectors combined.
Yes, we are aware there are concerns that the government will try and hold down drug prices. These are, we believe, going to be overcome by the simple concept that everyone can agree they do not want companies to stop trying to find a cure because they no longer can make a profit.
The last trend is that of mergers and acquisitions. The big Pharma companies need to keep their pipelines full and avoid the revenue drops created when patents expire. During this bull market, over $500 billion in deals have been done, mostly by big drug companies buying emerging Giotechs. While the pace of M&A may slow down, we believe it will always be a positive force driving values in the Healthcare sector - especially if any tax reform policy unleashes a tidal wave of overseas corporate cash onto US shores.
Thus, the moral of this story is: If you own a "mega-trend" such as Healthcare, don't let a bad quarter in the stock market make you react like the investor who bails out of a stock because it missed that quarter's expected numbers. Markets go up and down, but Healthcare is a mega- trend we believe won't stop this decade and probably not in the next one either. We think we are right in the middle of this one.
Tesla Update
Tesla (TSLA: $335, up 2%) announced the first deliveries of Its Model 3 on Friday. There was big fanfare and discussion of the 500,000 orders they have for the car and how they are going to ramp up production from 90,000 cars this year to 500,000 next year. We see a coming let-down on this number and we are sure Elon is working on the language now that he will use to tell us that he is not going to make the numbers. But with that said, the company is amazing. The cars are spectacular. Customers rave about their cars like never before. And in the next five years this firm will become one of the greatest firms in the world. (You heard that here first at The Bull Market Report!)
Here are a few tidbits of things the Elon Musk is talking about:
Musk said that by 2020 Tesla will likely be able to make its cars go as far as 745 miles per charge.
The current record for hypermiling in a Tesla is about 560 miles. What is hypermiling? By taking it easy on the gas pedal and brakes, hypermilers achieve gas mileage feats far beyond the fuel economy ratings given to cars by the Environmental Protection Agency. They coast to stop signs, accelerate slowly, and sometimes raise the ire of other drivers.
The official range for Tesla's Model S is about 315 miles per charge, and note that the Model 3 was announced Friday with a range of 310 miles, up from 220 miles that most thought. Do you think Tesla will NOT continue to enhance the batteries over time? If you don’t, you are delusional. There is no question about this in our mind.
Here is some of the Press Release from Tesla on Friday, paraphrased by Bloomberg.
“Three hundred ten.
“That’s the electric range of a $44,000 version of Tesla’s Model 3, unveiled in its final form Friday night. It’s a jaw-dropping new benchmark for cheap range in an electric car, and it’s just one of several surprises Tesla had in store as it handed over the keys to its first 30 customers.
“Tesla has taken in more than 500,000 deposits at $1,000 a piece, Chief Executive Officer Elon Musk told reporters ahead of the event. This has created a daunting backlog that could take more than a year to fulfill - and that was before Musk took the stage in front of thousands of employees, owners, and reservation-holders to lift the curtain on the company’s most monumental achievement yet.
“We finally have a great, affordable, electric car - that’s what this day means,” Musk said. “I’m really confident this will be the best car in this price range, hands down. Judge for yourself.”
Here’s some of what Tesla disclosed at its plant in Fremont, California:
Two Battery Versions
Tesla has simplified the manufacturing process “dramatically,” Musk said. In the same factory space where Tesla can build 50,000 Model S or Model X cars, it will soon be able to produce 200,000 Model 3s. Part of that is due to a simplified package of options.
The car comes in two battery types: standard and extended range. Here’s how they break down:
Standard Battery:
Price: $35,000
Range: 220 miles (EPA estimated)
Supercharging rate: 130 miles in 30 minutes
Zero to 60 mph time: 5.6 seconds
Long Range Battery:
Price: $44,000
Range: 310 miles
Supercharging rate: 170 miles in 30 minutes (Same as Tesla’s Model S)
Zero to 60 mph time: 5.1 seconds
Only one other electric car in the world has broken the 300-mile range barrier: The most expensive versions of Tesla’s Model S, an ultra-luxury car that costs $97,500 or more. The new Model 3 has cheaper range availability than the current record holder, the $37,500 Chevy Bolt, which is outclassed in nearly every way by the Model 3.
Take a look at this video of the introduction of the Model 3:
https://www.bloomberg.com/news/articles/2017-07-29/tesla-s-model-3-arrives-with-a-surprise-310-mile-range
The High Yield Report
By Michael Foster
Special to The Bull Market Report
One of the biggest stories this week in high yield was Welltower’s (HCN: $73) earnings report, which was a very slight disappointment. Revenue fell 2%, slightly short of expectations, to $1.06 billion. FFO of $1.06 was a one-cent beat, again demonstrating Welltower’s continued acumen at financial discipline. The stock was offer a minor 1% for the week.
What about the dividend? Well, the company’s annual dividends are currently $3.48, with an annualized dividend coverage of 122%. That’s good, but admittedly not fantastic - our general rule of thumb is 130% or more dividend coverage should be every REIT’s target. Yet the company’s massive scale - we’re talking about a $27 billion market capitalization company with $30 billion in assets on the balance sheet - indicates that the income stream is extremely well insulated from a sudden market shock. Welltower also reported some interesting developments both in this quarter and in the future, including two properties spanning over 100,000 square feet that are 100% fully occupied. Partly because of this, the company raised its guidance.
Also significantly, Welltower’s borrowing costs went down. The company has lowered its net debt and improved its debt ratio in the quarter - a wise move considering the higher borrowing costs that are impacting the entire high yield universe. This is another indication that Welltower’s dividend coverage, while slightly soft now, will improve over the coming quarters. For this reason, there is a good reason to hold firm and keep buying this stock.
Also this week, we saw Omega Healthcare Investors (OHI: $31) report results quite similar to Welltower, and it too fell over 1% following the news on that day. The company saw revenue rise 4% a touch short of expectations at $194 million with EPS of 87 cents, which was a 2 cent beat. Again financial discipline was at play for the dynamic. Adjusted FFO rose over 3% from a year ago and the company raised its guidance, now expecting full year FFO to be between $3.42 and $3.44. The company also raised its dividend by a penny, continuing its history of raising dividends every quarter.
How did it do this? A big part of the REIT’s results center around its financing strategy. The company retired some unsecured credit and borrowed with new senior lines of credit, helping to lower overall borrowing costs for the firm. Omega also spent $8 million in new investments in the first quarter while spending another $30 million to renovate existing and build new facilities. The new investments include $180 million worth of property - $115 million in the U. K. and the rest in America.
Omega is doing what it does best: expanding its footprint, finding new opportunities, and improving rent potential with existing properties while increasing its dividend. If the REIT reaches its FFO guidance, the dividend coverage ratio will stay over 130%. Yet the stock is down 3% for the week (after the 64 cent dividend Friday) and is yielding a monstrous 8.2%. This is clear irrationality, and tells us that Omega isn’t just a hold - it’s a strong buy. Investors long this stock should continue to appreciate the dividends and expect their growth to continue. Now is a good time to buy more.
Elsewhere in REIT earnings, Ventas (VTR: $67) reported a revenue beat with 5.6% year-over-year growth to $895 million and EPS of $1.06, a penny above expectations. The company also re-affirmed full-year guidance of $4.15 FFO per share, giving it a dividend coverage ratio of about 133%, around the same as Omega Healthcare. Ventas’s long history means that its yield is quite a bit lower as the market trusts this bigger company. Its $24 billion market cap shows strength and diversification. But 4.6% is a very strong income stream in today’s reality of low interest rates, so this stock continues to be a buy for investors who are looking for income.
What about their future? The company spent $110 million on investments in the second quarter to expand its footprint and provide greater dividend growth for investors in the future. There’s just one snag - Ventas funded this with common stock instead of debt, as Omega did. That’s a trifle concerning. Does the Ventas management believe their company’s stock is overpriced? Total liabilities of $13 billion are 56% of the company’s total assets, giving it a pretty decent debt-to-asset ratio that would justify more lending activity. So why is the company issuing shares, thus diluting investors’ positions in the firm?
A large part of it has to do with the relatively low yield on common shares right now - that 4.6% is lower than the rising borrowing costs that floating-rate loans would cost Ventas in the future. So there’s some logic to the move, whereas Omega’s 8% yield is far too costly to issue too many shares versus the 5% or less borrowing costs on debt that Omega can get through bonds and loans. Thus the financial activities of both REITs, while different, make a lot of sense in their own context.
It seems pretty clear that, in a busy week for Healthcare REITs, the recent earnings releases give renewed confidence to stay long these companies and to continue to collect their dividends. Omega seems to be the strongest buy right now, and it makes sense to buy the company at any point when the dividend is more than 8%. We suspect that won’t last long, so it makes sense to add on to your Omega positions now.
Good Investing,
Todd Shaver, CEO, Editor in Chief, Founder
The Bull Market Report
Since 1998
July 26, 2017
by Todd Shaver | Jul 26, 2017 | Earnings Preview 6 AM
We are a shade late this week. We had computer and internet issues. Sorry.
Alphabet (GOOG: $954)
Bull Market Report Target Price: $1000
Bull Market Report Sell Price: We would not sell Alphabet
Earnings Date: Monday, 4:00 PM ET
Consensus: 2Q17
Revenues: $26 billion
EPS: $5.01
Alphabet reported a heavy drop in 2Q17 EPS due to the $2.7 billion fine from the European antitrust regulators. Shares currently trade down about 3% as the company missed expectations on its cost per click which rose by 23%. We are still bullish on Alphabet as they continue to innovate and bring to market new technologies like their most recent Google Home.
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Eli Lilly (LLY: $82)
Bull Market Report Target Price: $88
Bull Market Report Sell Price: $76
Earnings Date: Tuesday, 8:00 AM ET
Consensus: 2Q17
Revenues: $5.4 B
EPS: $1.05
Year Ago Quarter Results
Revenues: $5.5 B
EPS: $0.86
Lilly reported yesterday with revenues up 8% and earnings up a powerful 22% to $1.11. Despite having missed estimates in two of the past four quarters, the stock is up 3% since this time last year and is currently trading 28% above its 52-week-low. Like other companies in our portfolios, Eli Lilly is also trading relatively cheap in comparison to the overall industry. Eli’s PE is 40 while Healthcare industry PE is around 60.
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Equity Residential (EQR: $66)
Bull Market Report Target Price: $85
Bull Market Report Sell Price: $55
Earnings Date: Tuesday, 4:00 PM ET
Consensus: 2Q17
Revenues: $610 M
EPS: $0.35
Year Ago Quarter Results
Revenues: $595 M
EPS: $0.59
Key Things to Watch For in the Quarter
The company reported yesterday that it had net income of $195 million, or 53 cents per share, well above the Street estimate. Revenues came in at $613 million. Although Equity Residential has beaten estimates in the past four quarters, the stock still trades down 5% from this time last year. However, EQR is trading 13% above its 52-week low indicating positive investor sentiment within the Real Estate industry. The stock currently trades at a PE ratio of 20, relatively low compared to the industry’s PE of 40.
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PayPal (PYPL: $58)
Bull Market Report Target Price: $56
Bull Market Report Sell Price: We would not sell PayPal
Earnings Date: Wednesday, 11:00 AM ET
Consensus: 2Q17
Revenues: $3.1 B
EPS: $0.43
Year Ago Quarter Results
Revenues: $2.7 B
EPS: $0.36
Key Things to Watch For in the Quarter
Analysts across Wall Street expect that PayPal will report a healthy 16% growth in EPS to $0.36 and a 14% increase in revenue to $3.1 billion. PayPal has either met or beaten estimates in each of the past four quarters. This success has contributed to the 55% appreciation in the stock since this same time last year. We expect PayPal to continue its top line growth as more transactions shift away from cash and onto digital platforms.
PayPal has hit our Target of $56. We still love the company and expect big things in the future. We hereby raise our Price Target to $66, and maintain our Sell Price as “We would not sell PayPal.”
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Facebook (FB: $165)
Bull Market Report Target Price: $165
Bull Market Report Sell Price: $140
Earnings Date: Wednesday, 4:00 PM ET
Consensus: 2Q17
Revenues: $9.2 B
EPS: $1.12
Year Ago Quarter Results
Revenues: $6.4 B
EPS: $0.97
Key Things to Watch For in the Quarter
Analysts across Wall Street expect that Facebook will report strong EPS growth of 15% growth to $0.97 and a 30% increase in revenue to $9.2 billion. Despite having missed estimates last quarter, Facebook’s stock has climbed 36% since this time last year. In addition to the flagship Facebook.com, Zuckerberg has been innovating through his various offerings which include WhatsApp, Instagram, and Oculus Virtual Reality. We expect Facebook will continue to thrive as it tries to connect people throughout the world.
Facebook has hit our Target of $165. We added the stock at $97 a year and half ago and have been beating the drums every chance we get. We are still beating the drums. This company is amazing and is changing the world. We hereby raise our Target Price to $178 and raise the Sell Price from $140 to $155.
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Omega Healthcare Investors (OHI: $33)
Bull Market Report Target Price: $45
Bull Market Report Sell Price: $28
Earnings Date: Wednesday, 4:00 PM ET
Consensus: 2Q17
Revenues: $235 M
EPS: $0.49
Year Ago Quarter Results
Revenues: $185 M
EPS: $0.57
Key Things to Watch For in the Quarter
Analysts estimate that Omega will report a 20% increase in revenue to $235 million and a 14% decrease in EPS to $0.49. Although Omega beat estimates in three of the past four quarters, the stock is down 6% this past year. This price depreciation has provided investors with an opportunity for entry especially as the stock only trades at a PE of 16 compared to the industry average of 60.
The stock hasn’t gone anywhere in a year, but that’s OK as we love the almost 8% dividend it pays.
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CBRE (CBG: $38)
Bull Market Report Target Price: $40
Bull Market Report Sell Price: $32
Earnings Date: Thursday, 8:00 AM ET
Consensus: 2Q17
Revenues: $3.4 B
EPS: $0.53
Year Ago Quarter Results
Revenues: $3.2 B
EPS: $0.52
Key Things to Watch For in the Quarter
CBRE is expected to report moderate revenue and EPS growth for 1Q17. Analysts estimate that CBRE will report a 6% increase in revenue to $3.4 billion and a 2% increase in EPS to $0.53. The firm reported earnings that beat estimates in 3 of the last 4 quarters and provided investors with a 31% return year-over-year. CBRE’s stock currently trades at a PE ratio of 20, which is extremely cheap compared to the industry’s average PE of 91.
We love this one and can’t wait for it to hit $40 so we can raise the Target. The company is doing amazing things in real estate, saving companies money and manpower, and they are so low-key very few investors know about the firm. The market cap is a shade under $13 billion now, and this coming weekend we will give you some examples of what they do for their customers and why $38 for this stock will seem cheap in a year. We hereby raise the Sell Price from $32 to $35. We don’t want to lose the 48% gains we have in the stock since we added it at $26 last year.
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United Parcel Service (UPS: $113)
Bull Market Report Target Price: $125
Bull Market Report Sell Price: $106
Earnings Date: Thursday, 8:00 AM ET
Consensus: 2Q17
Revenues: $15.5 B
EPS: $1.47
Year Ago Quarter Results
Revenues: $14.6 B
EPS: $1.43
Key Things to Watch For in the Quarter
UPS is expected to report moderate revenue and EPS growth for 2Q17. Analysts estimate that UPS will report a 5% increase in revenue to $15.5 billion and a 3% increase in EPS to $1.47. The firm reported mixed earnings in the last four quarters. Having only beat estimates once, the stock has underperformed the market at a mere 2% increase. It currently trades at a PE ratio of 28, which is slightly high compared to its competitors in the 25 range.
We still like the company a lot, as they have to deliver all those packages from Amazon! We are maintaining our Price Target of $125.
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Bristol Myers Squibb (BMY: $56)
Bull Market Report Target Price: $77
Bull Market Report Sell Price: $51
Earnings Date: Thursday, 8:00 AM ET
Consensus: 2Q17
Revenues: $5.1 B
EPS: $0.73
Year Ago Quarter Results
Revenues: $4.9 B
EPS: $0.69
Key Things to Watch For in the Quarter
Bristol Myers is expected to report moderate revenue and EPS growth for 2Q17. Analysts estimate that Bristol will report a 4% increase in revenue to $5.1 billion and a 6% increase in EPS to $0.73. Although Bristol Myer beat estimates in three of the past four quarters, the stock is down over 25% this past year. This price depreciation has provided investors with cheaper opportunities for entry especially as the stock only trades at a PE of 20 compared to the industry average of 60.
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Celgene (CELG: $137)
Bull Market Report Target Price: $135
Bull Market Report Sell Price: $115
Earnings Date: Thursday, 8:00 AM ET
Consensus: 1Q17
Revenues: $3.2 B
EPS: $1.78
Year Ago Quarter Results
Revenues: $2.8 B
EPS: $1.44
Key Things to Watch For in the Quarter
Analysts across Wall Street expect that Celgene will report both strong revenue and EPS growth of 15% and 24% to $3.2 billion and $1.44 respectively. while Amazon will increase its revenues by 19% to $37 billion, it will decrease its EPS nearly 20% to $1.42. Amazon has beat estimates in all of the past 4 quarters and has helped return investors 27% since this time last year. Celgene still only trades at a PE ratio of 50, making it relatively cheap compared to the industry’s PE of 60.
Since June at $114, the stock has gone straight up. It has reached our Target of $135, but we still love this huge company ($107 billion market cap,) so we hereby raise our Price Target to $150 and raise our Sell Price from $115 to $125. We added the stock at $95 a year ago and are now up 44% as it just set a new all-time high last week. Lovin’ it.
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Amazon (AMZN: $1,040 – a new all-time high)
Bull Market Report Target Price: $1,100
Bull Market Report Sell Price: $875
Earnings Date: Thursday, 4:00 PM ET
Consensus: 1Q17
Revenues: $37 B
EPS: $1.42
Year Ago Quarter Results
Revenues: $30 B
EPS: $1.78
Key Things to Watch For in the Quarter
Wall Street expects that while Amazon will increase its revenues by 19% to $37 billion, it will show a decrease in EPS of nearly 20% to $1.42. Amazon has beat estimates in three the past four quarters and has helped carry many tech heavy indices. Amazon traded at $765 this time last year and has since climbed over 35% to its current levels. This past Prime Day, Amazon’s version of Black Friday, the company broke its own record for the largest online shopping day in history.
We are keeping the Target Price at $1100, but raise our Sell Price to $970 from $875.
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First Solar (FSLR: $45)
Bull Market Report Target Price: $55
Bull Market Report Sell Price: $28
Earnings Date: Thursday, 4:00 PM ET
Consensus: 2Q17
Revenues: $540 M
EPS: $0.10
Year Ago Quarter Results
Revenues: $935 M
EPS: $0.87
Key Things to Watch For in the Quarter
This company is regrouping, as we know, and the comparisons are not pretty. Analysts estimate that First Solar will report a decrease in revenues by 43% to $540 million and an 88% decrease in EPS to $0.10. Although First Solar has beat estimates in the past four quarters, the stock is down 5% this year.
The stock is inching its way back, little by little. We certainly had bad timing on the addition of the stock to our Special Opportunities portfolio last year in February, but we are believers in the business and the company and have had amazing patience with this one. We hereby raise the Sell Price from $28 to $39.
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Ventas (VTR: $68)
Bull Market Report Target Price: $82
Bull Market Report Sell Price: $43
Earnings Date: Friday, 8:00 AM ET
Consensus: 2Q17
Revenues: $880 M
EPS: $0.44
Year Ago Quarter Results
Revenues: $850 M
EPS: $0.42
Key Things to Watch For in the Quarter
Wall Street expects that Ventas will report moderate EPS growth of 7% to $0.45 and a 4% increase in revenue to $880 million. Although the firm has beat estimates in the past four quarters, its stock is down 8% over the past year. The company’s 5% dividend and relatively cheap PE of 35 make it an attractive stock in today’s markets. This is not a small company, as the market cap of $25 billion tells us.
We hereby raise our Sell Price from $43 to $61.
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Welltower (HCN: $73)
Bull Market Report Target Price: $84
Bull Market Report Sell Price: $60
Earnings Date: Friday, 8:00 AM ET
Consensus: 2Q17
Revenues: $1 B
EPS: $0.44
Year Ago Quarter Results
Revenues: $1 B
EPS: $0.54
Key Things to Watch For in the Quarter
Analysts estimate that Welltower will report no change in revenues at $1 billion and a 18% decrease in EPS to $0.44. Although Welltower has beat estimates in the past 4 quarters, its stock is down 7% this past year. This move has provided investors with cheaper opportunities for entry especially as the stock continues to pay a 5% dividend and trades at a PE that is 25% lower than its industry’s.
We hereby raise the Sell Price from $60 to $68.
July 9, 2017
by Todd Shaver | Jul 9, 2017 | Weekly Newsletter 7pm Sunday
Climbing A Wall Of Worry
At the moment, everyone’s focus is on Trump’s G20 meeting as well as his first sit down with Vladimir Putin. Why care? Well… The G20 is comprised of the world’s wealthiest nations, so it is quite a powerful platform for business discussion. The big takeaway from the meeting was leaders like China’s Xi Jinping promoting an open world economy that contrasts Trump’s nationalist push. Trump believes in fair trade as opposed to free trade. Global trade policy has a huge potential impact on the bull market so watch closely.
Trump also sat down with Putin for their first face to face meeting. The two confronted issues over election meddling in addition to a variety of topics. Everybody is on guard about Russia and North Korea starting another war, so again this is really important stuff, in terms of watching out for the next Recession. But for now, the outlook is bright and the bull market continues to climb a wall of worry, which it has done for 100 years. In fact, there are no good old days. The market wakes up every day and worries about something. And the market generally goes higher, decade after decade.
There is always a bull market here at The Bull Market Report! This week we highlight the following stocks: Tesla, Shopify, Apple, Facebook, Square, and PayPal.
Highlights From The Past Week
Concerns over falling oil prices just won’t go away. After rig count falling for the first time this year last week, Baker Hughes reports US oil rig count rose once again for the 23rd week in the last 24. To support prices in the mid-$50s, OPEC would need to lower production by another 200,000-300,000 barrels a day and extend the output agreement to the end of 2018. We find this unlikely. OPEC cuts have had a tough impact on the oil market, driving prices much lower. Based on current trends, the oil market will be oversupplied again in 2018. Accordingly, we are likely to see the U.S. rig count steady to lower to keep oil output from flooding the market in the next 12-18 months. Ouch! More pain for oil ahead!
Second quarter numbers are in. The Nasdaq was up 4%, the Dow was up 3%, and the S&P 500 was up 2.6%. Not a bad quarter. So despite the Tech falloff since June 9th, the Nasdaq outshone the overall market. What will the third quarter bring? Well wouldn’t you like to know! We are not telling. We know, but aren’t telling. Well – not really. No one knows of course, but we think the Tech selloff will blow over as the FAAMG* stocks report fabulous earnings and the buying resumes.
* FAAMG – Facebook, Apple, Amazon, Microsoft and Google. Over $2.8 trillion in market cap.
Are central banks blowing bubbles? Wall Street strategists are calling attention to how central banks policies around the world are promoting inequality through Wall Street inflation coupled with Main Street deflation. In other words, the rich get richer from low interest rates spurring asset price bubbles, and the poor struggle against lackluster real economic growth. Now central banks need to quickly and painlessly undo their error. There are only two ways to cure inequality - you can make the poor richer or you can make the rich poorer. What a mess. They need to get GDP growth actually going again and normalize interest rates. So far not much progress to report.
This week we observed that the Swiss government could have issued a 50-year bond at a negative yield. Does this make any sense? If so, feel free to send us your money here at The Bull Market Report along with some interest and we are sure to be happy to hold onto it for you and return it in 50 years!
Tech titans could trigger rewrite of antitrust rules. Investors have spotted a vulnerability in the giant companies like Alphabet, Facebook, and Amazon. Since June 26 - the day before European regulators fined Google a record $2.7 billion in an antitrust case - the search giant’s stock has fallen 5%, versus a flat performance for the S&P 500. That works out to more than $30 billion in market value erased. Europe regulators have challenged the monopolistic business models Silicon Valley is printing money with. Well, stay tuned. There is a bunch of talk these tech titans will soon fight back. This may be the beginning of a big buying opportunity in Tech.
BMR Companies & Commentary
Tesla (TSLA: $313, down 11%)
After a week full of abysmal news for Tesla, the weekend couldn't come fast enough for Elon Musk. Tesla registrations in the country fell 10% in April from a year ago, based on IHS Markit data. The latest report showing a plateau for Tesla's products comes amid both investor concerns that demand for Tesla's luxury Model S sedan is waning ahead of the mass market Model 3 launch. With the sales of its Model X actually declining. Tesla may likely have to kiss its aggressive growth forecasts goodbye. Then again, they may not. There is lot going on here at the company and the future is wide open.
Tesla said that second-quarter global deliveries rose 53% from a year earlier, to just over 12,000 of the Model S and over 10,000 of the Model X. Musk blamed battery pack production problems for holding back vehicle output in the second quarter until early June, even though Tesla produced 2,000 more cars than it sold.
BMR Take: Things don’t always go right. That’s life. That’s business. But Elon Musk has been here before. This is what he does best. He solves problems. He innovates. He overcomes. It’s a controversial mood in the stock market for Tesla. But that creates a buying opportunity. While the company is losing money now, the Street consensus is for $12 in 2020, making this situation very interesting. As we have said many a time, this stock is not for the faint of heart. It could go to $250 or $200 before it goes to $400 or $500. But if you can handle the volatility, we believe it can get to $500 and beyond in the years ahead.
We saw a pretty good article from Bloomberg recently. The headline was “Tesla Projected to Win U.S. Electric-Car Race.” More than a dozen automakers are jostling to lead the U.S. electric-car race, but Bloomberg New Energy Finance (BNEF) sees a clear winner separating from the pack: Tesla.
BNEF expects Toyota’s Prius Prime plug-in hybrid to be the exception and hold the title of best-selling electrified vehicle in the U.S. this year. Tesla will get off to too late of a start with its Model 3 to catch up, with Musk planning to hold a handover party for its first 30 sedan customers on July 28. The company is aiming to ramp-up production to a rate of 20,000 cars per month in December.
“In the long term, we see battery electric vehicles winning because of the battery cost curve,” Bloomberg said.
Shopify (SHOP: $89, up 2%)
This past week, as you logged in to Shopify to check your sales or fulfill orders, you noticed a change: Shopify has had a makeover. The new look and feel is part of a broader effort to build the future of Shopify and supporting apps with one design mind, using the same set of guidelines. The improved design is now live in every Shopify store.
Why does it matter? Change can be hard sometimes, but these changes were actually designed to simplify the day-to-day navigation. The fresh look brings consistency across Shopify products, helps pages load faster, and makes content and menus easier to find and read.
BMR Take: Shopify is among the most exciting growth stories in the market today. EPS is expected to go from negative this year to $1.25 by 2020 starting what is expected to be a long term trail of sustainable EPS growth.
Apple (AAPL: $144, flat)
Apple has declined 7% from its all-time closing high of $156.10 in May, but the recent selloff represents yet another buying opportunity as investors turn their focus to the iPhone 8 launching this fall. Apple's quarterly results will be less important this summer as investors focus on the iPhone 8 this fall, along with the company's increased dividends and stock buybacks, lower valuation and new innovations as showcased at Apple’s Worldwide Developers Conference.
The upcoming iPhone cycle is setting up Apple to reach fresh all-time highs in the next 12 months, which would value the iPhone maker at over a trillion dollars. Apple's current market capitalization is around $750 billion. Wow!
There has long been an expectation that the next high-end version of the iPhone would have a new type of screen called an OLED (organic light-emitting diode). OLED screens boast more vivid colors and improved battery life. But they are also more difficult to produce, particularly at the levels that Apple requires for the iPhone. We believe that Apple will introduce this screen in the iPhone 8.
BMR Take: Apple remains among the most underappreciated stocks in the world. We looking at about $9 of EPS this year heading toward $11 in the next 1-2 years, giving it a forward PE of 13. Very low in our opinion.
Facebook (FB: $151, flat)
Facebook is building a village that will include housing, a grocery store and a hotel. Billions of people spend a lot of time living their lives on Facebook's social network. Now Facebook wants to try its hand at creating a community in the real world. In short, Facebook wants to build its own town.
Facebook unveiled plans on Thursday for the massive new construction project at its Menlo Park, California corporate campus, which is part of Facebook's plans to expand its home base. The 56-acre site, which Facebook bought in 2015 for $400 million, is located directly across the street from Facebook's headquarters. It will offer 1.6 million square feet of housing, or 1,500 units.
In a blog post announcing the plans, Facebook described the future development as a "mixed-use village" that will provide residents, many of which will be Facebook employees, with housing, transportation services and other amenities.
It will take roughly a decade to build. The initial phase of the project, which will include the housing and a grocery store, will be wrapped up in the first half of 2021. The subsequent phases will be completed every two years.
BMR Take: What can we take from this? The company is pretty confident in their 10-year plan and the outlook for their business to be making these kinds of internal investments. This year’s EPS of $5 is expected to double by 2020. With 2 billion users now, don’t miss being involved in this adverting giant’s success.
Mark Zuckerberg was quoted in the past week: “Give people the power to build community and bring the world closer together." Zuckerberg called the statement an extension of the company's original mission of making the world "more open and connected."
Facebook's unprecedented reach can be a powerful tool for tackling global problems and democratizing access to people and knowledge. "We feel like our responsibility is expanding, especially around passing this milestone of 2 billion people in the community," he said. "We’ve been thinking about what our responsibility is in the world and what we need to do."
We’re with you, Zuck!
PayPal (PYPL: $54, flat)
PayPal launched a campaign to reward freelancers in India. PayPal India has launched two new campaigns - Shopping Buddy and Go Global. The new campaigns will encourage Indian consumers and freelancers to buy and sell across outside of the country. Both campaigns will work on the concept of referrals. Available in more than 200 markets around the world, the PayPal platform, including Braintree, Venmo and Xoom, enables its over 200 million users to receive money in more than 100 currencies, withdraw funds and hold balances in their PayPal accounts.
Why did PayPal design the campaigns specially for the Indian market? India is the 2nd largest freelancer market outside of the US. India is also a hub for software exports, hence software and web related services constitute a significant portion of the freelancing business. Additionally, skilled women who have taken a break from their careers to manage the household, and retired professionals also contribute to this growing number in India.
BMR Take: PayPal is quietly emerging as a global payments power. India is so important to winning this battle and the above news is a great step in the right direction and a demonstration of the company being locked in on what needs to be done. With greater than 20% EPS growth as far as the eye can see, how can you not be involved here?
Square (SQ: $24, up 1%)
Payment-processing stocks had a hot week after a $10 billion deal between two industry players was announced. The news that Vantiv was buying London-based Worldpay for $10 billion has investors suddenly thinking about other combinations. Square shares rose 4% on Wednesday as result and finished the week strong.
For Square investors, consolidation in the payments industry is encouraging, because it means the fast-growing company could also be thought of as an acquisition target. PayPal is a much larger company than Square, with a market value of $66 billion, compared to $9 billion for Square, and it’s less likely a target. In fact, it’s a company that likes to acquire.
However, you look at it, the market is quickly realizing that the world is migrating to eCommerce and Square is as best-positioned as anybody.
BMR Take: Square is currently growing revenue at a 30% clip. Takeout valuations could be anywhere over a 20% premium to the current stock price. A compelling opportunity.
Upcoming Economic News
Consumer Credit SA
Monday, July 10, 3:00 PM
Period: MAY
Actual: N/A
Consensus: $13.3B
Prior: $8.2B
Note: Federal Reserve Statistical Release G. 19, Consumer Credit, reports most short- and intermediate-term credit extended to individuals, excluding loans secured by real estate.
JOLTS Job Openings
Tuesday, July 11, 10:00 AM
Period: MAY
Actual: N/A
Consensus: 5,975K
Prior: 6,044K
Note: Part of the US Bureau of Labor Statistics, the Job Openings and Labor Turnover Survey (JOLTS) program produces a monthly study that has been developed to address the need for data on job openings, hires, and separations. With the release of May 2003 data, the JOLTS program began publishing industry estimates based on the North American Industry Classification System (NAICS).
PPI ex-Food & Energy
Thursday, July 13, 8:30 AM
Period: JUN
Actual: N/A
Consensus: 0.10%
Prior: 0.30%
Note: The Producer Price Index (PPI) for all items less food and energy, often referred to as Core PPI, excludes the two most volatile components of the overall PPI for Finished Goods.
Manufacturing Production M/M
Friday, July 14, 9:15 AM
Period: JUN
Actual: N/A
Consensus: 0.10%
Prior: -0.39%
Note: Manufacturing production index measures real output in manufacturing. According to the NAICS, manufacturing relates to the mechanical, physical, or chemical transformation of materials, substances, or components into new products. Data is percentage change in relation to the last month.
An Update on Government Properties Income Trust (GOV: $17.90, down 2%)
This is what we said a week ago Wednesday, June 28th:
“First Potomac Realty Trust (FPO) is being acquired in a $1.4 billion deal announced today. The stock of Government Properties (GOV) is down 7% this morning to $20.25. First Potomac is a REIT with 11 million square feet of office space in and around Washington, DC. Government Properties, at a market cap of $1.4 billion, will now have an opportunity to prove its worth and assimilate the properties. This is creating a buying opportunity if you believe that management can turn around this company We believe they can and would be buyers of the stock here at the $20 level.”
Then last week we wrote this:
“Government Properties Income Trust (GOV: $18, down 19%)
“Don’t fall over in your chair! The stock got crushed this week, but it was because of an acquisition. Let us explain.
“First Potomac Realty Trust (FPO) will be acquired by Government Properties. To finance the deal, the company sold 25 million shares in a secondary at $18.50, raising over $450 million. They had to knock the stock lower to get the funds they needed. This is typical. We believe the deal will work out well, and that we will see a full recovery and then some.
“And the underwriters have been granted a 30-day option to purchase up to an additional 3,750,000 common shares. Two things: These overallotments are exercised about 99% of the time so expect to see another $65 million of cash in the bank. And expect to see the stock stay around this level for a month. Then there is a great likelihood that the stock will move back into the low 20s.
“You should be excited. The acquisition of First Potomac Realty Trust enables Government Properties to expand its business strategy to include the acquisition, ownership and operation of office properties leased to both government and private sector tenants in the metropolitan Washington, D.C. market area. The metropolitan Washington market area is one of the largest office markets in the U.S. and the nation’s largest beneficiary of spending by the U.S. government. Outside of the metropolitan Washington market area, Government Properties will continue to focus on acquiring, owning and operating office properties that are majority leased to government tenants.
“In addition to this transaction providing Government Properties with new potential growth opportunities, management expects to realize approximately $11 million of annual general and administrative expense savings compared to First Potomac Realty Trust on a standalone basis.
“Management is very pleased that they were able to achieve an attractive per share purchase price. Their preliminary estimates call for meaningful accretion and more detail will be forthcoming.
“BMR Take: NAV was $20.90 prior to raising some equity at $18.50. We don’t see any reason for the stock to trade at a discount to the lower level of $18.50. This is a buying opportunity for sure. Why do you think institutional investors just took down 25 million shares at $18.50? Get on board and put new money to work at a 9.4% yield right here in this name!”
Here’s our Take this week:
There have been no changes in the situation since the announcement. The stock is down 2% this past week, which is just noise, but we see that the stock has stabilized here at the $18 level, and in our opinion the only move the stock can make from here is up. The stock is paying a 9.6% dividend which is a bit too high historically, and thus a higher stock price will lower the dividend to the 8-9% ranges which we believe is quite sustainable. We are holding here and await the move back to the $20 level in the next few months.
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc
An old stock market adage is "Calling a market top is a fool's errand." A Wall Street research firm wrote last week that calling a market top in today's market is just such a fool's errand because there is simply too much empirical evidence against it. First, the employment picture is pretty good from the standpoint of new jobs creation. (Of course, "if" new job numbers begin to substantially decline, it would be a red flag). Secondly, the latest Consumer Confidence Board report topped expectations. This indicates that consumers (70% of our economy is consumerism) are going to continue to consume. This is the engine that drives earnings. Lastly, the usual red flags that signal a major top just aren't visible – things like an inverted yield curve, a major technical breakdown (Nasdaq plunging below its 50 or 100-day moving averages), or, on a global basis, a major event such as a default by Italy or an economic collapse in China.
This is by no means to say that the market won't have a "top" in the sense of a "10% correction". It can happen even when nothing has really changed the fundamentals of the corporate earnings picture or for no real reason except media-hyped panic. There are many things happening in the market today that historically signal the possibility of a pullback in the 3-7% range. But long-term investors don't sweat the small stuff. It just isn't worth the aggravation and mental stress to try to time market corrections other than to possibly raise a little cash or to have some ready cash available to buy the dip. This is because it is nearly impossible to exit a stock, watch it drop 10% and then get back in before it jumps back up 5% before the opening bell one morning. It is literally impossible for anyone to successfully employ this kind of strategy.
The greatest risk ahead now seems to be what happens in Washington over the next few months, which is unfortunate. These events could either cause a market melt-up or a worse than average pullback – neither of which is predictable. Regardless of current conditions, in 90% of any market environment it makes sense to dollar-cost average large cash positions over several months as opposed to going all-in. That's because (quoting Ben Bernanke), "…….the 'market' is a very difficult subject. I've compared it to trying to learn how to repair a car when the engine is running…." It is difficult, but a long-term investor who is diversified and in quality assets will be just fine.
The High Yield Corner
By Michael Foster
Special to The Bull Market Report
The week was a bit harsh to many high yield investments, but a quick glance at The Bull Market Report picks shows that this is the result of a weak and temporarily frightened market The fundamentals, however, remain as strong as ever.
Starting with REITs, we saw Welltower (HCN: $73) fall 2% for the week, with those losses occurring almost entirely on Thursday. The marketwide weakness we saw did not leave REITs alone, so the decline was particularly pronounced here. However, Welltower shareholders should not despair; they’re up 9% year-to-date including the current near 5% dividend yield thanks to a dividend increase earlier this year. And dividend increases are very likely to continue. Over the last 12 months, Welltower has earned Funds from Operations (FFO) of $4.45, which gives the company a 130% dividend coverage ratio. As a rule of thumb, anything over 120% in REITs is healthy and anything over 125% indicates that the current schedule of dividend increases is likely to continue. For Welltower, that means a once-yearly pay raise is likely to continue.
This is a pretty big relief because higher borrowing costs in recent months have not been offset by higher rents for many REITs. That’s caused a lot of panicked selloffs throughout the sector, and Omega Healthcare Investors (OHI: $32) is no exception. The stock has been pretty heavily range bound after falling significantly in late 2016 - it's down 5% from a year ago - as it has been several times in 2017. Fortunately, the stock is up 3% from the start of the year so the bearish trend is clearly over even if we haven’t seen a breakout.
The interesting thing with Omega Healthcare is that investors frequently fret over the company’s dividend coverage. Omega’s management increases the dividend by a penny per share every quarter - and that is attractive to shareholders while also threatening the dividend coverage ratio. The only way Omega can cover those higher payouts is to aggressively expand. That causes frequent panics and a lot of anxiety, but a quick look at the numbers shows how silly those worries are. For the last four quarters, Omega’s FFO of $3.45 is far above the $2.50 annualized payouts at the current dividend rate and still higher if we assume penny-per-quarter payouts for the next four quarters. Either way, we’re talking about a dividend coverage ratio in excess of 130%, indicating that the dividend is absurdly safe despite the 8% yield that the stock currently offers.
In addition to the dividend payout growth fears, Omega has suffered from worries about uncertainty in Healthcare and the future funding of Medicare. Of course, Omega isn’t the only REIT suffering from this concern. Sabra Health Care REIT (SBRA: $23) fell 4% in the last week at a much higher rate than the marketwide decline in REITs. Fortunately, however, Sabra has been doing extremely well for a long time, meaning this selloff has little significant for long term shareholders. The stock is up over 12% from a year ago excluding its 7% dividend payout. And, as with Omega, the dividend is being covered by strong FFO - over the last 12 months the dividend coverage ratio for Sabra has been 130%, which is extremely solid, as with Omega. But investors fret over politics more often than they should, meaning Sabra isn’t getting the buy-in from investors that it deserves. That will change when the market goes back into risk-on mode*.
* When the market goes back to having an appetite for things like growth stocks, junk bonds, and REITs, instead of plowing into Treasuries.
Finally, Ventas (VTR: $67) is The Bull Market Report’s third Healthcare REIT pick that is known for its longer history and reliable dividend payments. As such, its yield is 4.6% following the near 3% price decline for the week. But as with our other Healthcare picks, Ventas is up for 2017 - up a solid 7% since the start of the year. The panicked Healthcare REIT selloff of late 2016 has been correcting itself in recent weeks and that is likely to restart again in the future as soon as this week’s hysterical fear ceases. No one knows when that will come, but it surely will; we’ve seen the market freak out suddenly several times since President Trump’s election, but the selloffs tend to be very brief and very shallow.
An interesting question to ponder is how this selloff and fear-based selling impacts municipal bonds, a safe haven for risk-averse investors. So far, 2017 has been pretty good for the asset class after a brutal 2016 selloff thanks to risk-hungry investors shifting to stocks. So far for the year, Invesco Municipal Trust (VKQ: $12.69) is up 4% - but the stock is still down 10% from a year ago. That gives the fund plenty of room to run in 2017, especially when we consider the fact that the fund is trading at a 6% discount to its net asset value. Similarly, Nuveen Municipal (NVG: $15.15) is up 5% for the year but is down 7% from a year ago. Like the Invesco fund, this is trading at a 6% discount to its NAV, providing another opportunity for gains as the market gets more excited about municipal bonds as a viable and lower-risk alternative to stocks and Treasuries, especially given the extra value that late 2016’s selloff provided. We are at the beginning of a trend in that direction, and it is likely to continue for quite some time.
Good Investing,
Todd Shaver
Founder, CEO and Editor
The Bull Market Report
July 2, 2017
by Todd Shaver | Jul 2, 2017 | Weekly Newsletter 7pm Sunday
Get ready for some fireworks! The Tech sector pullback is raising eyebrows. It all started Friday June 9th mid-day and followed through on Monday the 12th. Up until this point, mega cap tech names had been leading the market higher all year. In fact, if you excluded them, the market has been sideways. But the softness that started in the first half of June continued in the later weeks of the month.
What’s going on? Profit taking? Too far too fast? Buybacks on pause because of the earnings season quiet period? We think the market is just catching its breath, taking a quick break, sort of like half-time. After all we just finished the first half of the year. We are sticking with the outlook that the bull market will continue and that the stocks that got us here – FAAMG* - will continue to lead the charge higher.
*Facebook, Apple, Amazon, Microsoft, Google.
There is always a bull market here at The Bull Market Report! This week we highlight the following stocks: Microsoft, Tesoro, Facebook, Google, and Government Properties Trust.
Highlights From The Past Week
Searching for the Bottom as Taps Plays on the Best Nasdaq Run Since 2009. All good things must come to an end. Or is it a pause? Either way, recent convulsions in Tech shares saddled the Nasdaq 100 Stock Index with a loss in June, snapping the longest streak of monthly gains since 2009 at 7.
The gauge is down 2.2% since May 31st, poised for the biggest retreat in a year. Now the question to investors is whether the weakness is a natural reversion from higher prices or a sign of broader drawdowns to come. One savvy observation to highlight is that we’re getting to a point where the biggest buyers of Tech shares are the companies themselves, but we’re about to go into a black-out period for that due to earnings. This buying will not stop, and in fact should increase with these lower prices, and we will see Tech stocks snap back to the upside after earnings season.
Technology Selloff Couldn’t Come at a Worse Time for These Funds. U.S. investors who entrusted $40 billion to stock-picking computers are having some pretty lousy luck. Several multi-billion-dollar exchange-traded funds that are billed for their low volatility have been anything but in recent days, after rebalancing into a record amount of Technology shares. Suddenly, they’re cauldrons of turbulence after a three-week span in which computer and Internet stocks went from the market’s standard-bearers to its worst performers. Tech shares led the S&P 500 Index to its worst drop in six weeks on Thursday. The weakness in Tech comes after the $7 billion PowerShares (SPLV) and $14 billion iShares (USMV) products, two of the most popular low volatility ETFs, both rebalanced last month pumping up Technology to 11% of Powershare’s holdings and 18% for iShares, the most since their inception in 2011. Now, there are hints of turbulence creeping back into the market, which is unfortunate for these low-volatility strategies now concentrated in technology mega caps. We shall see if they stay the course or sell, but if they sell, look for more downward pressure in the weeks ahead.
Banks Add $40 Billion in Value as Fed Unlocks ‘Treasure Chest. The biggest U.S. banks added more than $40 billion in market value after the Federal Reserve’s annual stress tests opened the way to surprisingly big increases in dividends and share buybacks. The results came in well ahead of both our estimates and consensus estimates as the Fed allowed for a large step-up in payouts to shareholders. Lofty payouts made banks hot stocks until the financial crisis exposed many of them as too thinly capitalized. The companies unveiled plans Wednesday showing how they’re trying to generate investor interest -- even as many still struggle to meet profitability targets and a few languish below book value. The sun is setting on the post-crisis balance sheet rehab. These payouts and an improved earnings outlook reflecting higher rates should alleviate calls for breaking up the banks. The Financial sector outlook is bright.
Big Tech Deals Take a Holiday. Enjoy It While It Lasts. Rest In Peace big technology deals. It was fun while it lasted. But also good riddance, even if they won't stay dead for long. This year through Thursday, there have been about 6% fewer takeovers of U.S. technology companies than there were in the same period of 2016. That's not bad, but the value of those deals is a stunner. Acquisitions of U.S. Tech companies this year have a combined announced price tag of $35 billion, about one-third of the $105 billion in collective takeover value at this point in 2016. The big change is the number of large acquisitions. In the first half of last year and in 2015, there had been on average of more than 15 U.S. Tech takeovers at more than $1 billion each. So far this year there have been just seven.
Outside the U.S., megadeals have also been scarce compared with prior years. It's inevitable there would be a bit of a breather after two banner years for corporate acquisitions. That doesn't explain the decline entirely, especially given how many people predicted an M&A bounty when the man behind "The Art of the Deal" moved into the White House. But who knows? Maybe with the pullback in Tech recently we will see some M&A heat up.
America’s Pension Bomb: Illinois Is Just the Start. We’ve been hearing it for years: America’s public pensions are a ticking time bomb. Well, at long last, the state of Illinois is about to expose just how big this blowup could be. As of the 2015, Illinois had promised its employees $200 billion in retirement benefits. Right now, it’s $120 billion short. That gap lies at the center of a years-in-the-making fiscal mess that’s threatening* to drop the state’s credit rating to junk-bond status. But Illinois is hardly alone. Connecticut and New Jersey - states that, to most of the world seem like oases of prosperity - are under growing financial strain, too. Illinois is just the tip of the iceberg.
* Threatening? Why is it not already rated junk? Some things just don't make sense.
BMR Companies & Commentary
Microsoft (MSFT: $69, down 3% - all price changes in the newsletter are for the week)
Microsoft has some exciting things happening. A re-focus on engaging clients, particularly within the cloud business, is likely to improve the company's EPS outlook. The company is making a big shift to focus on selling cloud solutions across industry verticals. In fact, the company is re-organizing its internal management structure to do so.
Microsoft is expected to unveil a business reorganization plan in the week ahead that will support its shift towards a cloud-first organization. It’s been several years since Microsoft introduced its “mobile first, cloud first” mantra, but the catchphrase continues to guide the company even as it invests in emerging areas like machine learning and artificial intelligence, gaining ground on Amazon Web Services (AWS) market share. (This whole restructuring reminds us of how Bill Gates in the mid-90s changed the whole structure of the company to embrace the internet.)
Size in the channel matters. Microsoft wants to leverage its massive distribution partner ecosystem as a differentiator in the market. Microsoft will emphasize their size and channel relative to Amazon Web Services (AWS) and Google, to explain to partners why they should align with Microsoft. Look out: Here comes the Microsoft Machine!
BMR Take: The bull case on Microsoft remains 20x $4.00 of EPS that is coming into view sometime in 2019. If you are good at math, that equates to an $80 stock. That leaves a nice chunk of upside still. Plus the current dividend yield of 2.3% is attractive in this low rate environment.
Facebook (FB: $151, down 3%)
What is happening? Facebook now doing TV? They did it again. They found a way to increase interest in the platform and generate more ad revenue.
Facebook is looking to produce original scripted TV shows by late summer. The company is telling studios and agencies it is willing to spend up to $3 million per episode on production, though it's also interested in shows that would cost in the range of $5-$8 million.
Without getting specific, Facebook executives have confirmed that the company is working with partners and creators on episodic shows ranging from sports to comedy to reality to gaming. This is really happening!
Facebook is focusing on viewers in the 17-to-30 age range and benchmarking against shows like Pretty Little Liars, Scandal, and The Bachelor. Facebook is willing to take shows that other networks have passed on.
This is all great stuff, but to cap it off, CEO Mark Zuckerberg dropped news this week that Facebook now has 2 billion monthly users. Wow! How many people are on planet earth again? (7.4 billion) Zuckerberg is closing in on global domination. (Some say he is already there.)
BMR Take: The EPS outlook for Facebook calls for greater than 20% growth for the foreseeable future, which would put EPS near $10 by 2020. The stock is up a lot this year, but EPS is there to support it, and in fact offers plenty of room for more gains ahead.
Tesoro (TSO: $94, up 1%)
Did you see oil get crushed in recent weeks? Did you notice that rig count fell by 1 this week declining for the first time in a long while? With so many Energy stocks getting hammered in this tough operating environment, how is Tesoro doing so well?
The answer is why we picked the name for you. Tesoro is a refiner. It makes money off the spread between the price it pays to buy a barrel of oil and the price it receives after refining it into usable gasoline for your car. The dynamics of the all-important spread work like this: When oil prices fall, the price Tesoro can buy barrels of oil for falls faster than the retail price of gasoline. When oil prices rise, the opposite occurs. In other words, right now is the best environment for Tesoro as oil prices are falling. Profit margins at the business are exploding and so is the stock.
Adding fuel to the fire, Goldman Sachs came out just recently and added Tesoro to its conviction buy list and the CFO bought shares.
Tesoro is firing on all cylinders. Recall that the company also recently achieved an investment grade credit rating from S&P. And the big Western Refinery acquisition is on track for closing and integration.
BMR Take: We like to look at Tesoro’s value based on net asset value. NAV is $106 right now. So we are still at a big discount to NAV. In contrast, Warrant Buffet’s beloved Phillips 66 trades for a 20% premium to NAV. So we just see a ton of upside ahead still for Tesoro.
Google (GOOG: $909, down 6%)
It was a tough week to be a Google fan. The European Commission levied a huge fine on the company. The size of the fine the tech giant will have to pay for abusing its monopoly in online search, $2.7 billion, sets a record for European antitrust penalties. Yet more important than the amount is that the regulator provided a rough guide to how the European Commission plans to deal with Google and other online firms which not only dominate a market, but essentially are the market.
Google has $92 billion in cash, so $2.7 billion is just is 3% of its cash. The company made $6.8 billion last quarter before taxes, so $2.7 billion is just 40% of this, or 36 days’ worth of earnings. A pittance really. But there is much more to the story – keep reading.
In the 2000s Microsoft got into trouble because it had expanded its Windows monopoly by bundling it with its web browser. By comparison, Google’s infraction seems minor. In 2002 it launched a price-comparison service called Froogle, later renamed Google Shopping. In 2008 it changed how this service works. According to the commission, the new version systematically favored Google’s own comparison-shopping results by giving them prominent placement at the top of its generic search results and demoting links to rival offerings to pages further down in its results, where users hardly venture.
The prevailing wisdom, particularly in America, used to be that “super-platforms”, despite their size, do not unfairly use their market power and thrive because of their unceasing innovation.
But as digital platforms have grown ever bigger, that thinking has started to change, even in America. A growing number of antitrust experts now accept the European Commission’s view, that network effects create high barriers to entry in online markets. This means that Google, for instance, can in fact degrade its search results selectively (and disadvantageously to its direct competitors) without having to fear that its users will defect. But we need these super-platforms to adhere to a principle of neutrality for a fair marketplace to exist.
BMR Take: We at Bull Market Report always will tell it to you like it is. Google is in some trouble here and you could argue the antitrust issues probably extend to many other large cap tech names as well. We are going to monitor the situation for now as it would take a whole lot of things to happen for this regulatory risk to seriously impact the company and others in Tech. With the stock now trading at 27x this year’s EPS outlook of $34, the stock is cheaper here than last week. But if the US Government gets involved and starts investigating the company here in the US, things could get dicey. Search is 87% of Google’s profits. If outside influences affect this cash machine, there just might be trouble ahead for the stock. It is certainly a lot cheaper than its all-time high of $988 on June 6th, just three weeks ago, but as noted, there is risk here, like all stocks.
Government Properties Income Trust (GOV: $18, down 19%)
Don’t fall over in your chair! The stock got crushed this week, but it was because of an acquisition. Let us explain.
First Potomac Realty Trust (FPO) will be acquired by Government Properties. To finance the deal, the company sold 25 million shares in a secondary at $18.50, raising over $450 million. They had to knock the stock lower to get the funds they needed. This is typical. We believe the deal will work out well, and that we will see a full recovery and then some.
And the underwriters have been granted a 30-day option to purchase up to an additional 3,750,000 common shares. Two things: These overallotments are exercised about 99% of the time so expect to see another $65 million of cash in the bank. And expect to see the stock stay around this level for a month. Then there is a great likelihood that the stock will move back into the low 20s.
You should be excited. The acquisition of First Potomac Realty Trust enables Government Properties to expand its business strategy to include the acquisition, ownership and operation of office properties leased to both government and private sector tenants in the metropolitan Washington, D.C. market area. The metropolitan Washington market area is one of the largest office markets in the U.S. and the nation’s largest beneficiary of spending by the U.S. government. Outside of the metropolitan Washington market area, Government Properties will continue to focus on acquiring, owning and operating office properties that are majority leased to government tenants.
In addition to this transaction providing Government Properties with new potential growth opportunities, management expects to realize approximately $11 million of annual general and administrative expense savings compared to First Potomac Realty Trust on a standalone basis.
Management is very pleased that they were able to achieve an attractive per share purchase price. Their preliminary estimates call for meaningful accretion and more detail will be forthcoming.
BMR Take: NAV was $20.90 prior to raising some equity at $18.50. We don’t see any reason for the stock to trade at a discount to the lower level of $18.50. This is a buying opportunity for sure. Why do you think institutional investors just took down 25 million shares at $18.50? Get on board and put new money to work at a 9.4% yield right here in this name!
Upcoming Economic News
ISM Manufacturing
Monday, July 3, 10:00 AM
Period: June
Consensus: 55.1
Prior: 54.9
Note: The Manufacturing ISM Report on Business is based on data compiled from monthly replies to questions asked of purchasing and supply executives in over 400 industrial companies. An index reading above 50% indicates that economic activity is generally expanding; below 50%, that it is generally declining.
Factory Orders
Wednesday, July 5, 10:00 AM
Period: May
Consensus: -0.40%
Prior: -0.20%
Note: The Manufacturers' Shipments, Inventories, and Orders (M3) survey provides broad-based, monthly statistical data on economic conditions in the domestic manufacturing sector. The survey measures current industrial activity and provides an indication of future business trends.
Trade Balance
Thursday, July 6, 8:30 AM
Period: May
Consensus: -$46.1B
Prior: -$47.6B
Note: The monthly goods and services deficit is published by the U.S. Census Bureau and the U.S. Bureau of Economic Analysis. Trade statistics are estimates of transactions between foreign countries and the 50 states and our territories.
Nonfarm Payrolls
Friday, July 07, 8:30 AM
Period: June
Consensus: 175,000
Prior: 138,000
Note: Measures nonfarm payroll employment.
Twilio (TWLO: $29, down 2%) Makes the List
Oppenheimer is a leading investment bank and full-service investment firm that provides financial services and advice to high net worth investors, individuals, businesses and institutions, for over 130 years. They just came out with the “28 Best Ideas List” and we are glad to see that Twilio was on the list. They said: The cloud communications platform provider is poised to generate strong revenue growth for the foreseeable future and report upside metrics versus consensus estimates.
So there you have it. Short and sweet and another firm backing up what we have been saying here at The Bull Market Report. We were early, but we are going to be right in the long haul. This company is a factor in the growth of commerce on the internet. If revenues keep growing like they have been, the stock price will follow. Be patient.
Tesla Sales in China Are Big
Here are some snippets of what Tesla (TSLA: $381, down 6%) is doing in China. The sold 10,000 last year, which was triple what they sold in 2015. The produced $1.1 billion in revenues. For the first quarter of 2017, they are on pace to more than double 2016.
The Chinese love their SUVs and with taxes and fees, the prices are 25% higher in China. The love the Model X SUV.
BMR Take: We expect big things from Tesla in China.
An Update on Nutanix (NTNX: $20, Up 4%)
The stock had a good week, despite the nasty Nasdaq selloff. The company went public on September 30, 2016. It opened at $26.50 and hit $39 that day. The next trading day, October 3rdm it hit $46.78. A month later, by Nov 4th, the stock was at $24. On May 3, 2017 - $15.
Now, on May 24th of this year, we added Nutanix to our Special Opportunities portfolio at $17.45. We said at the time we thought the stock had great potential. Well, we did and we do still feel the same way. Revenues are the key. Last quarter they did $192 million, up from $115 million. We call that growth. Can they continue at this pace? We believe so.
We have a price target of $30 on the stock. Aggressive yes. We believe they can hit this later this year.
And Update on PayPal
PayPal (PYPL: $54, flat) has been strong and steady these past 2-3 months. Since April at $42, the stock is up almost 30%. We call that a nice return. Stick with us on this one. It is going places.
Venmo is a subsidiary of the company. It allows people to send money to friends and businesses at the touch of a button on their cell phone. Growth is off the charts. In 2015 they handled $7.5 billion in transactions. In 2016 the hit $18 billion. Wow. In the first quarter of 2017 they did $7 billion. As we said above for Nutanix, now that is growth.
At the moment Venmo is a small piece of the pie for PayPal, kind of like the iPhone for Apple 10 years ago. Tiny. But if they keep up this growth, in five years, they will be hitting $150 to $200 billion in transactions.
One forecast shows that volume of money transfers will reach $75 billion this year in the US. Volume is expected to pick up significantly by 2020, reaching $500 billion. This reflects a compound annual growth rate (CAGR) of 80% between 2015 and 2020.
PayPal itself is not a small company. The market cap is $65 billion and due to its potential, the PE is not small. It is listed at 45 and we feel it is worth every penny. As the world continues to move to mobile, PayPal is at the forefront on how to handle financial transactions simply and easily.
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services
In ancient Roman religion and myth, Janus is the god of "duality". He is usually depicted as having two faces, since he looks to the future and to the past. What we are seeing today is a "Janus" market: One face is looking at a new era of higher earnings and economic growth while the other face is forecasting a dire end to the market based on past actions.
Two weeks ago, JP Morgan went on the record warning investors of an equity market collapse. The bank thinks that a number of factors will undermine stocks such as Fed rate hikes coupled with decreased easing from the European Central Bank and Bank of Japan. The bank further said it thinks the coming plunge in stocks will be steep, citing the possible emergence of “tail risks”, or seemingly unlikely scenarios which could have big negative effects on stocks. Bank of America also weighed in on the possibility of a coming fall, saying that “peak liquidity and peak profits mean a big top in autumn.” These warnings tie in to the core belief of this side of the Janus face which is forecasting imminent danger to the market; i.e., these experts, analysts and investors believe that the entire 2009-2017 stock rally is nothing more than the result of a historic, globally coordinated credit creation program from the world's major central banks, and this credit expansion is now unwinding.
While it is a fact that every major central bank in the world has done some qualitative easing over the past eight years, pumping the world full of cash, the other side of the Janus face is telling us that there is no hard proof that this global credit expansion is the sole reason behind stock prices moving higher.
We believe the Janus side which sees that market moves and valuations still come down to one single word – earnings, and which sees that future earning prospects are now rising, not falling. What we haven't heard from any of the doomsters is how far earnings are going to fall, or even that they are going to fall at all. Nor do we see a dotcom bubble with 100 PE multiples or a real estate bubble financed by NINJA loans*. A 10% correction is considered a "normal" market occurrence, so that possibility exists at any given point in any market's history. But a major crash is typically accompanied by a bubble or recession which collapses earnings, and we don't see clear cut warnings signs of either.
* A NINJA loan is a slang term for a loan extended to a borrower with "no income, no job and no assets"
All of which brings us to this point: the market has always loved "to climb a wall of worry".
[BMR thoughts: This dichotomy of half the folks thinking things will get worse while half the people think things will get better is nothing new. In fact, virtually every day for the past 100 years people have felt that way. That’s what makes a market. And we at The Bull Market Report are optimists and bullish on America. We along with Warren Buffett believe values will be higher a year from now and five years from now and we will continue to invest accordingly.
[With that said, if it’s too hot, get out of the kitchen and get into any or all of the stocks in the High Yield and REIT portfolios and sit back and collect the 6%, 8% and 10% dividends these stocks offer.]
More on Facebook and This Big Number: 2 Billion
Despite Facebook’s size and age, at 17% its user count is growing as fast or faster than any year since 2012. And people aren’t using it less either. In fact, 66% of Facebook’s monthly users return each day now compared to 55% when it hit 1 billion.
Two billion makes Facebook the largest social app. YouTube has 1.5 billion, WeChat’s has 900 million, Twitter’s has 330 million and Snapchat’s is around 250 million.
Facebook’s growth the last five years has been fueled by the developing world. It’s added 750 million users in Asia since hitting 1 billion users total. It’s only added 40 million in the U.S. and Canada. Facebook has set a goal to help 1 billion users become part of what Zuckerberg calls "meaningful groups," in a push to reverse what has become a pronounced decline in community membership around the world. Stronger community engagement on and offline will be key to solving critical global problems like climate change and public health issues, Zuckerberg said.
“A more connected world is going to be necessary to take on the greatest opportunities and challenges for the next generation, everything from stopping climate change, to stopping pandemics, to funding research,” Zuckerberg said. “These are not fundamentally national problems anymore. In order to get there, you need to build a world where every person has a sense of support and purpose in their life so they don’t just focus narrowly on what’s going on in their lives, but can think about these broader issues as well.”
Facebook now has 27% of the people on the planet on their platform. In August, 2015, the firm hit 1 billion users. It took the firm less than two years to double in size, adding another one billion users. Wow. That’s an average of 1.4 million users a day. Do you think this growth is going to stop? We say NO WAY. And with this young genius at the helm, we will follow him anywhere. $200 a share? Certainly a possibility. Any bets on WHEN this will happen?
Thoughts on UPS (UPS: $111, flat)
UPS has a $10 billion pension deficit. We are not happy they let themselves get into this predicament. They have said they will freeze its pension plan for nonunion workers and replace it with a 401k plan. The switch will affect 70,000 employees over five years.
BMR Take: We are not happy about this. The stock market has had no reaction to this news, as the stock was flat all last week. But we are here to look into the unknown future. Could it affect the stock? It sure could. It just might be time to take profits. We added the stock at $105 in April last year. It sure hasn’t done much these past 15 months. Yes, it pays a 3% dividend, but that’s really not much. Yes, we are up 5% plus the dividend, but that’s really not terribly exciting. It certainly is a solid company and stock. Amazon is changing the world and UPS is right there to deliver that change. But it may just be time to move on out and into something much more interesting. This $96 billion market cap company has some problems. So, if the stock drops to $106, we are out.
The High Yield Corner
By Michael Foster
We saw the market turn ugly on Thursday in the kind of selloff that investors should actually appreciate. This was largely concentrated in Tech stocks, with the Nasdaq falling a lot more than the S&P or Dow Jones, which meant that the more stable and less speculative asset classes were spared significant declines. Some, like a few high yield assets, actually went up as the Tech stocks went down. Is this a rotation from growth into value and income? One day does not a trend make, so we can’t say for sure. But it’s definitely something to look more closely at as we drill down into the most important moves in the high yield world for the week.
Bull Market Report pick the AllianzGI Equity and Convertible Income Fund (NIE: $19.75) was able to withstand Thursday’s selloff with marginal damage, closing the week flat. The fund’s net asset value also closed on a relatively strong point, resulting in the fund’s discount to remain at a solid 10%. We have seen that discount rapidly fall from the start of 2017. We’re now at one of the highest discounts to the fund’s NAV since 2014, which might encourage some investors to sell. And, indeed, if one wanted to take profits on this fund, now would be one of the better times to do so. However, investors should also consider that the fund is in a better position to cover its dividend than it has been in a long, long time. The fund’s NAV, at $21.88, has gotten to a point where the fund’s managers need to only get a 7% net rate of return to cover the fund’s dividend. Considering the fund’s holdings and its use of convertible bonds, as well as the broader trend towards higher interest rates thanks to the Federal Reserve, there’s a lot of justification for the view that the fund will continue to cover its dividend. That makes this as good of an income producing fund to hold than ever, so income-focused investors should consider holding the fund to continue to collect those dividends.
Of course, the biggest news of the week for the Bull Market Report’s High Yield portfolio was Government Properties Trust (GOV: $18.31), which announced its intention to purchase First Potomac (FPO: $11.10) for $11.15 per share in cash. The deal, announced on Wednesday, immediately caused Government Properties to fall. The selloff continued shortly thereafter when the REIT announced it would sell 25 million shares in a secondary offering, with shares priced at $18.50 - $1 below the stock’s price at the time of the announcement, but $4 below the price on Monday. All of this has hit the stock very hard, and it’s down 19% in a week’s time.
That also means Government Properties Trust is now just 2% higher than it was when we recommended the stock, erasing a year’s worth of solid capital gains overnight. While these kinds of moves are unfortunate, it’s important to remember that investors have earned about 12% in cash dividends over that period, so while the capital gains are gone, the income stream has already made this a positive-returning investment. The issue now is how investors should act given the recent acquisition.
Let’s take a look at the figures. First Potomac has 11 million square feet of office space in the Washington, D.C. area, which fits nicely with Government Properties’ own 95-building portfolio across 73 properties. While Government Properties has invested in D.C., it is much more widely diversified, which in the past was seen as a risk factor because the firm was seen as intensely exposed to cash-strapped municipalities and local governments who were cutting jobs and thus had a lower need for physical office space. Now that President Trump is in office and has promised budget cuts, does this mean that the D.C.-focused First Potomac is similarly at risk?
We say no. Since Trump’s election, the First Potomac has risen 26%. Part of the reason for this may indeed be Trump himself. Non-profit organizations, think tanks, lobby groups, and media companies have put more attention and focus on D.C. than we have seen for years, arguably decades; that means they need to rent offices. And that is a natural tailwind for First Potomac Realty because it drives demand for real estate in and around the Beltway.
Government Properties’ decision to buy into this newfound demand makes sense. Nonetheless, the deal is done and First Potomac has rising rents and high occupancy rates on its books when the deal closes. This is going to make Government Properties Trust’s dividend theoretically safer than it has been before.
For this reason, there is no reason to sell Government Properties stock right now - and perhaps more reason to buy as this temporary selloff due to the acquisition will not last forever.
Elsewhere in REITs, Bull Market Report’s recent pick Apollo Commercial Real Estate Finance (ARI: $18.55) was up 1% this week after the dividend payout on Wednesday of a 46 cent distribution in-line with the previous payout in March. Apollo Commercial continues to show incredible strength and remains one of the more reliable income generators in the mortgage REIT marketplace. The stock is up 15% from a year ago and we see more room for it to rise even further, bringing its current near-10% yield down a notch. Investors should consider buying now following the dividend payout and slight stock price decline to capture this great income payer at a low price.
Quote of the Day
Listen more than you talk. Nobody learned anything by hearing themselves speak.
Richard Branson,
Founder of Virgin Atlantic Airways and Virgin Group
Good Investing,
Todd Shaver
Founder, CEO and Editor in Chief
The Bull Market Report
Since 1998
