October 1, 2017
by Todd Shaver | Oct 1, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
Welcome to October! Boo! October can be a scary time in more ways than just Halloween. October has a special place in finance, known as the October effect, and is one of the most feared months in the financial calendar. Why? Check the history. There was The Panic of 1907 (October), where multiple bank runs and heavy panic selling occurred on the stock exchange. There was The Crash of 1929 (October), where stock market slides set records. There was Black Monday in 1987 (October), when automatic stop-loss orders and financial contagion gave the market a thorough throttling as a domino effect echoed across the world in a quick 22% drop. In summary, keep a close eye on what’s around the next corner, and don’t get surprisingly spooked by market volatility.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks where you can still make good money, including: Celgene, BlackRock, Facebook, UPS, Home Depot, PayPal, and Government Properties Income Trust.
BMR Companies & Commentary
BlackRock (BLK: $447, up 3% - all prices are for the week)
BlackRock was upgraded to buy this week by Goldman Sachs and placed on the conviction buy list. We love to see Goldman following The Bull Market Report into the stocks we like. This demonstrates the quality of our research and the sincere value we price it at to you our dear subscriber. In other words, it’s not $10,000 a year!
So why all the love for BlackRock right now? It really is as simple as this. The world of ETF investing is dominating the investment management business and BlackRock is the leading provider of ETF products.
BlackRock has $5.1 trillion of assets under management as of December 31, 2016. With employees in more than 30 countries who serve clients in over 100 countries across the globe, BlackRock provides a broad range of investment and risk management services to institutional and retail clients worldwide. The company’s flagship product line-up is the popular iShares exchange-traded funds (“ETFs”). These ETFs are used by everyone from tax-exempt institutions; to charities, foundations and endowments; official institutions such as central banks, sovereign wealth funds, supranationals and other government entities; taxable institutions, including insurance companies, financial institutions, corporations and third-party fund sponsors, and retail investors.
BMR Take: We think BlackRock is a compelling value trading at 17x next year’s consensus EPS estimate of $25. But don’t take it from just us. One of the world’s best hedge funds, Third Point, just bought the stock and believes BlackRock is a “misunderstood franchise” with a massive 38% market share of exchange-traded funds. Third Point’s CEO said he thinks this acceleration in ETFs is just getting started and BlackRock is valued like a traditional asset manager, but it has much greater potential for structural revenue growth and operating margin expansion. We stand by our $510 price target and have already made some good ground on the path here since our initiation to the stock in late August at $415.
Price too high for you? Just buy 20 shares. Just buy 50 shares. Buy 11 shares – but get some BlackRock. Remember, the “price” is irrelevant. What if BlackRock split their stock 10-1 next week? Would that change your thinking because you now have 10 times as many shares at $44 a share? You answered correctly if you said – NO. Of course. The price of the stock would change nothing.
Celgene (CELG: $146, up 1%)
Celgene recently announced that the FDA has placed a partial clinical hold on five trials and a full clinical hold on one trial of the FUSION program for Imfinzi (durvalumab). This is not the best outcome for Celgene, but remember the company’s portfolio is broadly diversified so we view the development as a minor set-back not a game-changer. In fact, most analysts had not yet even been considering the financial impact of these drugs into their estimates. The trials subject to the hold are studying drugs for leukemia and lymphoma. We emphasize that the decision by the FDA was based on safety data derived from other trials involving drugs in patients with multiple myeloma in combination with immunomodulatory agents.
BMR Take: We expect Celgene’s four blockbuster drugs (Revlimid, Abraxane, Otezla, and Pomalyst) to drive revenues of over $13 billion in 2017, and over $21 billion in 2020, while the recent acquisitions of Receptos and Delinia as well as investments in collaborators like Acceleron, Epizyme, Agios, and others will likely ensure growth in 2018 and beyond. We continue to view Celgene as a top large-cap pick in Healthcare. We continue to see our $150 price target as fair for right now, but admit there is upside to our target as the business executes on the revenue path we anticipate.
This is no small company, with a market cap of $115 billion, setting a new all-time high this week. Check out this 5-year chart:
Facebook (FB: $171, flat, after dropping like a stone on Monday to $162)
Instagram recently disclosed that it's added another 100 million monthly users. That brings the photo-sharing app to 800 million monthly active users, up from 700 million in April. This is the fastest 100 million the firm has ever added – five months. When do you think they will hit a billion? Let's see... August 2018?
Five hundred million of those are daily active users, or consistently engaged using the service. That means that Instagram is still far, far ahead of rival Snap in terms of users. Snap said in August that it had 173 million daily active users. The announcement from Facebook-owned Instagram further solidifies Facebook as one of the most dominant companies in online advertising.
Why does all this matter so much? Viewing photos on Facebook used to be very clunky. It was a muddled, buggy experience, yet it’s what most people use Facebook for the most. Over 250 million images are uploaded to Facebook each day, making it the most popular photo-sharing site on the internet. Facebook is without a doubt the YouTube of photos. So Instagram is a critical piece of technology, ensuring the health of the Facebook platform and the future growth and engagement activity of users.
BMR Take: Facebook is an advertising machine and the business is nowhere near mature. EPS is expected to grow more than 20% per year into 2020 bringing EPS close to $10. We hereby raise our target price from $178 to $190 and strongly recommend you get this stock into your portfolio. The Sell Price remains at $155.
UPS (UPS: $120, up 2%)
UPS has been doing all the right things for a long, long time. The latest out of the company this week is a new JV in China.
UPS and SF Express announced approval of their planned joint venture by China’s Ministry of Commerce. The JV enables UPS and SF to collaborate on development and provision of international delivery services from China to the U.S. and, in the future, to other trade lanes. The JV approval is a positive development for international trade and allows the two leading companies to leverage their complementary networks, service portfolios, technologies and logistics expertise.
UPS is the world’s largest express delivery company and a leading global supply chain integrator. SF is a market leader in express delivery in China, with extensive China-wide network coverage, comprehensive service capabilities, and the highest brand recognition in the Chinese small package industry. The newly approved joint venture is a continuation of UPS and SF’s collaboration that began in 2015, when UPS Worldwide Express service was made available at SF’s retail stores in Shanghai and Shenzhen.
BMR Take: This JV is highly symbolic of UPS’s confidence in long-term growth opportunities in China. With EPS growing high-single-digits on its way to $8/share by 2020, we think this stock is a reliable performer for any stock portfolio and stand by our $125 price target for the time being. We’d love to raise it when it hits that magic number.
Home Depot (HD: $164, up 2%)
The story here at Home Depot is that growth is soaring right now. Why? The underlying fundamentals show us one of the best housing markets seen on record. Imagine that after the sub-prime crisis not all that long ago!
Indicators of the housing market were strong in the first half of 2017. Construction starts were healthy for both single-family and multifamily housing. Home purchases were solid while the supply of homes for sale rose for both new single-family homes and previously owned housing. The Federal Housing Finance Agency’s and the CoreLogic Case-Shiller repeat-sales house price indices showed home values rising, with annual price appreciation stable in a reasonable 5-6% range. Based on its National Delinquency Survey, the Mortgage Bankers Association reported that measures of delinquency declined, so people are paying their bills!
BMR Take: A resilient housing market means great things for Home Depot and we sure are seeing that effect take hold. With EPS growing around 10% per year and heading to $10, we raise our price target from $170 to $180 and see even more upside ahead. How’s this for a 5-year chart:
Government Properties Income Trust (GOV: $18.77, up 2%)
Government Properties Income Trust is a real estate investment trust (REIT) focused on owning and operating properties mostly leased to government tenants. Government Properties is the U.S. Government’s largest landlord and owns 74 properties located in 31 states and Washington D.C. containing approximately 11.5 million square feet. Historically, government tenants remain in place significantly longer than private sector tenants, with U.S. Government tenants occupying the same space for more than 20 years.
Properties are 95% leased and occupancy has remained well above 90% since inception. The company is rated investment grade by Moody’s (Baa3) and S&P (BBB-). 88% of rental income is paid by the U.S. Government (on behalf of 37 agencies.)
BMR Take: Look, Government Properties is a niche REIT serving government clients unlike anybody else in the business. They own and rent some of the best properties to clients like the Department of Justice and the IRS. Yes, we need to keep an eye on Trump cutting out all of the fat from the government budget and reducing the size of government. But in reality he can’t vacate signed leases, so there is not much he can do. For right now, however, the outlook looks just fine, and the juicy dividend yield of 9.25% is very attractive.
Moreover, in June, GOV agreed to acquire First Potomac Realty Trust for approximately $1.4 billion. Upon completion, this acquisition will increase exposure to the metro Washington, D.C. market, and expand GOV’s acquisition strategy in that area. We like this catalyst to spur excitement for the stock and for the positive impact it will have on the business. We trim our price target to $24 ($27 previously) out of conservatism.
Update on PayPal Holdings (PYPL: $64, down 1%)
PayPal Holdings is likely to make a strategic acquisition in coming months, according to Bernstein Research and Loop Capital. Last week, the firm put out a note to its customers wherein they believe a purchase of a European payments asset is most probable, with top targets Adyen (private), Klarna (private), Square (SQ) and Stripe (private.) The have an outperform rating on the stock.
“Acquiring Square (SQ: $29) would help PayPal increase its offerings at brick-and-mortar retailers and bring in more customers for PayPal’s Venmo service, as the small business customers on Square could accept Venmo transactions as payment,” they said. “By having both consumers and retailers on its platform, the combined entity would have significantly increased strategic positioning and optionality,” they wrote.
BMR Take: Both PayPal and Square are within a whisker of all-time highs. Square is on a roll and as we have said many times, could be a takeout prospect, and we are only at the beginning stages of Square’s future as a disruptive company in payments. With a market cap of just $11 billion we see big times ahead for this innovative company. And they could be bought out for $15-18 billion in a whisker by one of the big boys. PayPal? We see no top to this amazing success story.
Note this about Jack Dorsey of Twitter and Square:
Dorsey has bought over 1 million shares of Twitter in 2017, while selling much of his position in Square. Dorsey has sold more than $31 million worth of Square stock in that time. After Friday’s purchase, Dorsey owns more than 16 million shares in Twitter. He still owns a big stake in Square, but he is obviously moving to up his investment in Twitter at this time.
Upcoming Economic News
ISM Manufacturing
Monday, October 2nd, 10:00 AM
Period: September
Consensus: 58.0
Prior: 58.0
Total Light Vehicle Sales
Tuesday, October 3rd, 8:00 AM
Period: September
Consensus: 16.3M
Prior: 16.0M
Trade Balance SA
Thursday, October 5th, 8:30 AM
Period: August
Consensus: -$42.9B
Prior: -$43.7B
What follows is not a recommendation, but an information piece on a Nasdaq stock that invests in bitcoin.
Bitcoin Investment Trust (GBTC: $702, market cap - $1.2 billion)
Bitcoin Investment Trust, the only exchange-traded product that offers Bitcoin exposure, is an exchange-traded note, backed by Bitcoin, and it trades at an astonishing 95% premium that has been as high as 125%. That means investors are paying twice as much, plus fees, to own Bitcoin - a premium that will probably disappear as the Bitcoin market matures and access becomes less of an issue.
That’s already happening. In July, the U.S. Commodity Futures Trading Commission unanimously approved LedgerX’s cryptocurrency-trading platform for clearing derivatives; it will start with Bitcoin options. CBOE Holdings and Gemini Trust, the digital currency exchange founded by the Winklevoss twins, announced a partnership to offer Bitcoin futures as early as this year. VanEck has filed to bring products holding Bitcoin “instruments” to market. Exchange-traded fund provider REX is planning two Bitcoin-based derivatives ETFs.
The SEC has rejected Bitcoin exchange-traded funds, citing a lack of regulation of the Bitcoin spot market; a derivatives market in Bitcoin would remedy that. It also doesn’t hurt that Dalia Blass, who hails from the law firm that represented the Winklevoss twins’ ETF, has been named director of the SEC’s Division of Investment Management.
Bitcoin, the cryptocurrency polarizing governments, banks, and investors alike, is currently trading at $4,330, down from its peak of $4,980 in early September, but up from its lows of $3,000 in the middle of September. The sell-off was largely driven by Chinese regulators formally shutting major Bitcoin exchanges. As you can see, it is quite volatile, rising from $600 a year ago.
It didn’t help that JP Morgan Chase CEO Jamie Dimon called Bitcoin a “fraud” and “worthless” and that Bridgewater’s Ray Dalio called it “a bubble” in the days following China’s crackdown. Fundstrat Global Advisors’ Thomas Lee disagrees, saying that China’s recent moves are a short-term head wind, given that the region represents just 20% to 25% of global trading volume. Lee, in a recent note to clients, wrote that Bitcoin was “increasingly representing the gold investment” for millennials and will ultimately displace the precious metal in portfolios. He contends that Bitcoin could reach $25,000 by 2022, given that it accounts for 5% of the $7.5 trillion alternative currency market, which is growing by 6% annually. By early 2018, he sees it hitting $6,000, a whopping upside of 60%.
Here’s an interesting commentary on the bitcoin world, and an interview with John McAfee, the founder of McAfee Associates, the anti-virus software company that was eventually sold to Intel. McAfee is a bitcoin miner now, and appears to be "all-in" on bitcoin.
https://www.cnbc.com/2017/09/13/john-mcafee-challenges-jamie-dimon-bitcoin-skepticism.html
McAfee has stated that bitcoin could go to $500,000. Wow.
Teva Pharmaceuticals Names New CEO
Seven months after Erez Vigodman stepped down, Teva Pharmaceuticals (TEVA: $17.60, up 2%) has appointed a new CEO - Kare Schultz. Schultz, who has served as CEO of Danish pharmaceutical company H. Lundbeck since 2015, will be tasked with reviving sales and reducing debt for the world’s largest generics manufacturer. According to Bloomberg, Schultz will likely face pressure to split the company - with one focusing on “patented specialty medicines and the other on cheap copycat drugs.”
Twilio Shares Drop after Amazon Text Messaging Announcement
Twilio (TWLO: $30, down 3%) is a communications company that uses a cloud-based software to help businesses insert "real-time" communication into their apps. Amazon announced this past week that its Pinpoint system now allows users to trigger 2-way SMS messaging.
Some on the Street think this is bad for Twilio, but Twilio management thinks this is a good thing. "This is a continuation of our technology partnership with Amazon. Two-way texting is another capability being utilized by Amazon Pinpoint as part of our existing relationship," said a Twilio spokesperson.
Twilio CEO Jeff Lawson, who used to work at Amazon, said in a tweet that he's "excited that Twilio is now helping to power engagement on Amazon Web Services Pinpoint."
BMR Take: We believe in this company. Watch revenues – revenues rule all. And revenues have been spectacular as you know, since we have reported on this company continually. The stock is way off its highs of course, but we feel the stock is putting in a strong base here at this level.
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
What's going on with the Fed and why should we care? Today, the Fed is sitting tight with rates of 1.0-1.25%. Two weeks it announced it would start reducing their balance sheet in October. So, what does that mean? For years the Fed has been buying trillions of dollars' worth of US Treasuries and mortgage backed bonds, and reinvesting all the earnings back into more of the same. Next month it will start "shrinking" its balance sheet by not buying (reinvesting, or as some call it, "normalizing") tens of billion worth of Treasury's and mortgage bonds. Going forward, the Fed will ramp up the amount "normalized" every three months, hoping that this stair-step approach will not create turmoil in the markets. However, everyone knows the US government has to issue bonds to raise the money needed to pay its debts, so who is going to step in and buy these bonds now that the Fed is gone? That is something that no one knows because it's never happened before.
Our take is that the Fed will continue to monitor the economy and if it senses trouble – either from rising interest rates or the shrinking of their balance sheets – they will back down by either leaving rates alone or even halting the balance sheet reduction strategy. Thus, if the Fed continues to raise and shrink, it means the economy remains on solid footing. If things begin to slow, the Fed will most likely keep rates low and start buying again, both of which should benefit the market. An optimist will see this as a win-win scenario for keeping the market's prospects of continued growth intact.
We tend to be optimists at this point even though we don't like the fact that there seems to be so much dependence upon the Fed. We are optimistic because the market seems to have been able to shrug off not one, but several things that normally would have had some sort of consequential impact upon it. When one considers that Hurricanes Harvey, Irma and Maria slammed into the United States and Puerto Rico, North Korea tested another missile (and have threatened more), President Trump upset the establishment at the United Nations, and London was hit by another terrorist attack – it is remarkable that the market didn't suffer a significant correction. All this tells us that the earnings growth story for the market is for real and, if we can actually get a tax reform bill from D.C. – well, that would conjure up images of Gene Autry back in the saddle singing "Happy Days Are Here Again".
The High Yield Corner
By Michael Foster
The week saw a small bit of volatility for high yield investments in a surprising divergence from the stock market, which has virtually no volatility, and which had yet another strong week.
Is this a cause for concern? To answer that question, let’s take a look at where the biggest weakness was, determine what was the cause of that weakness, and try to extrapolate the probability of that weakness continuing.
Several of The Bull Market Report's high yield picks saw a 1% drop in the last week, such as Omega Healthcare Investors, Inc (OHI: $32, down 1%). For those of you who have followed this Healthcare REIT for a while, you know that a one-week 1% decline isn’t really terribly unusual, so it isn’t something that should inspire any alarm. On top of that, the decline happened without any unusual spike in volume and without any significant news, so we can’t conclude that there’s any material public information driving this decline. Short-term volatility caused by random inflows and outflows of investor capital seem the driver of the 1% fall here.
Not the same could be said for Apollo Commercial Real Estate Fund (ARI: $18.15, up 4%), which announced a 46 cent dividend just two weeks ago - a payout in-line with its previous payouts. It was paid out Thursday, and as per usual, the stock opened up 46 cents lower. So with the stock closing the week up 21 cents, plus the dividend, the stock was up a huge 4% for the week. Remember that the Apollo Fund isn’t a Property REIT but a Mortgage REIT, meaning that the way it earns income and its structure are more like a loan fund than a company like Omega. As a result, Apollo Commercial Real Estate Fund is sensitive to interest rate changes and default rate trends more than on the market’s perception of the value of its holdings, its property cap rates and occupancy rates, and other real-estate specific metrics. And we are in fact seeing an increase in long-term interest rates as we get nearer the December rate hike that the Federal Reserve has strongly hinted is inevitable.
While that’s bad for the Apollo Fund and a justifiable reason for caution, it’s offset by the fact that commercial real estate defaults are extremely low and are not going up. Thanks in part to improving profitability for companies, rising sales, and a stronger GDP growth rate, companies’ ability to pay their mortgages is as strong as could reasonably be expected. That, at the end of the day, is an arguably more important factor in determining the safety of Apollo’s future cash flow.
Is Apollo’s 10% dividend worth investing in? We think so. Risks of a cut are far lower than a double-digit yield would suggest, so investors should consider holding this even if we see some more volatility in the next couple of months before the drama from the Fed plays out in December.
Municipal bonds, which started the week in solid recovery mode, are taking a bit of a break. We’ve seen the sector weaken slightly in the last couple of weeks, and that trend has continued this week. As a result, Nuveen AMT-Free Municipal Credit (NVG: $15.39, down 1%) and Invesco Municipal Trust (VKQ: $12.77, down 1%) both had a bit of softness. While a 1% decline isn’t a lot when compared to just about any other asset class, it is a lot for the typically sleepy muni market. These bonds rarely see big price moves, so a 1% decline is something to consider. We’re still in positive territory for 2017, but that may not last long. The Fed’s interest rate hikes spook muni investors more than perhaps any other group of investors - even if interest rate hikes don’t hurt munis all that much. For that reason, we can’t promise these funds won’t fall later in the year, and even fall into red territory. Looking further, however, there will be a recovery when the market realizes the mistake they made and they start buying back in. After all, that’s what we saw after the hike in December 2015 and the hike in December 2016.
Interestingly enough, the taxable bond world is shrugging off the upcoming Fed rate hikes in the most contemptuous way. Let’s start with AllianzGI Equity & Convertible Fund (NIE: $21, up 1%), which announced its quarterly results that didn’t yield any major surprises. NAV growth and investment income are more than sufficient to yield a strong total return for investors, and the dividend of 7.3% remains very sustainable.
The convertible bond part of the portfolio is rising in value despite the clear message of an interest rate hike. Why? Again, it goes back to the fundamentals. Economic growth is strong enough for companies to pay their bills, which helps bonds rise in value. A similar tailwind has also helped PIMCO Dynamic Income Fund (PDI: $31, up 1%) enjoy a NAV boost for a long time now, so its last week of strength is no surprise. This fund remains priced at a premium to NAV, albeit just 6.5%, which is admittedly a cause for concern.
Additionally, Pimco Dynamic is under-earning its payouts, which means the year-end special dividend is likely to be smaller than it’s been in previous years - if there’s one at all. Still, on a total return basis there is just too much upside still in PDI because of its focus on mortgage-backed securities and corporate bonds.
Good Investing,
Todd Shaver, Founder, CEO and Editor
The Bull Market Report
Since 1998
September 4, 2017
by Todd Shaver | Sep 4, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
We sadly observed Hurricane Harvey devastate Texas this past week. 52,000 people are in shelters as thousands of homes are flooded. The state of Texas ranks as the 2nd largest contributor to GDP in the US trailing only California and ahead of New York. So the economic impact has yet to be fully seen. Real estate portfolios caught without flood and business disruption insurance may be seriously in trouble. Auto sales are already seeing a sizeable dip. Chemical plants are shut down. We could go on and on. What an unfortunately troublesome situation to watch and one with the potential for lingering negative impacts for months to come.
In other news, lawmakers decide to give bipartisanship a shot on healthcare. The Senate Health Committee will turn its attention to bipartisan legislation aimed at shoring up Obamacare markets for 2018. The drift toward compromise follows high profile repeal failures, but still faces an uphill battle as many Republicans have spent years railing against the health law. Staff has been working on it over the summer break and there is general agreement that insurer payments will continue, though specifics are sparse.
Separately, we have yet to see formal action following Trump’s opioid emergency declaration. No formal paperwork has been filed and no new policies have been announced. This appears to be new territory for the government as the national emergency designation is typically used for relief of temporary issues like natural disasters rather than chronic problems like opioid abuse. In addition, administration officials seem to have been caught off guard by Trump's statement. The White House has indicated that it is considering all options for action. Why should we care? This is a big deal for labor force participation, which is at historical lows. If we can get everybody back to work contributing to our economy and off drugs, that is the path to 3.0% GDP growth versus where we are now at 1-2%.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks where we think you can still make good money, including: Apple, Gilead, Bristol-Myers, Amazon, and PayPal.
BMR Companies and Commentary
Apple (AAPL: $164, up 1.5%, all prices are for the week)
Apple has officially scheduled its first-ever event in the company's Steve Jobs Theater, a September 12th invitation-only press conference expected to reveal the latest iPhones and possibly a revamped Watch and Apple TV. The company emailed invitations Thursday that read "Let's meet at our place," with an picture of an Apple logo in red, white and blue. The event, hosted at the company's new spaceship-style Apple Park headquarters is scheduled to start at 1 PM ET. For several years, Apple has revealed its latest iPhones in September, in time to promote them for the holiday season. This year, 10 years after the first iPhone hit the market, Apple is widely expected to reveal the iPhone 8, and the rumor mill has already churned out reports that the device will have a larger OLED* screen and a virtual home button. There are also reports Apple will reveal a Watch that has its own cellular connection and an Apple TV that adds 4K UHD. This is likely it—the big event for Apple’s new iPhone launch! We will all be watching closely.
* Organic light-emitting diode. An OLED display works without a backlight; thus, it can display deep black levels and can be thinner and lighter than a liquid crystal display (LCD). In low ambient light conditions (such as a dark room), an OLED screen can achieve a higher contrast ratio than an LCD.
The main risk to keep an eye on is prices. The argument is that costs are getting so high on new smartphones that customers will not be willing to keep paying up to get them. If this is so, we will see margin compression and perhaps fewer sales by Apple.
Apple Consensus on the Street
Apple was upgraded by analysts at Cleveland Research from a “neutral” rating to a “buy” rating in a report released on Tuesday, and they raised their price target to $197.
On the Street there are 10 Hold Ratings, 39 Buy Ratings, 1 Strong Buy Rating
9/1/2017 Royal Bank Of Canada Target: $180
8/29/2017 Cleveland Research Target: $197
8/24/2017 Bank of America Target: $180
8/24/2017 Drexel Hamilton Target: $208
8/22/2017 Canaccord Genuity Target: $180
8/14/2017 Sanford C. Bernstein Target: $175
BMR Take: Remember the big story for Apple is their services business. They have all these iPhones out there in use by a huge customer base. Can they now get more money from these customers through services? The iPhone 8 is a key part of the strategy. We note that Apple has $260 billion in cash now, which is the equivalent of $50 a share, and greater than 30% of the stock price. This is UNPRECEDENTED in the history of Wall Street. Apple remains an exciting investment opportunity. The services business is projected to double in revenue to $50 billion over the next several years. The Services business is much more profitable than hardware so the impact to earnings is even better. Don’t sell a share. We believe Apple has a lot more room to go on the upside.
Gilead Sciences (GILD: $84)
We removed Gilead from our Healthcare portfolio in February after holding them for a year with poor results. Things have changed dramatically since that time as management has tackled various issues head-on, so we give you an update as things have changed even more this past week.
Gilead announced a big acquisition. Gilead will acquire Kite Pharma for about $12 billion in cash; it was unanimously approved by both the Gilead and Kite Boards of Directors and is anticipated to close in the fourth quarter of 2017. The transaction will provide opportunities for diversification of revenues, and is expected to be neutral to earnings by year three and accretive thereafter.
The acquisition of Kite establishes Gilead as a leader in cellular therapy and provides a foundation from which to drive continued innovation for people with advanced cancers. We are greatly impressed with the Kite team and what they have accomplished, and believe they are on the cutting edge of cell therapy that will be the cornerstone of treating cancer. The field of cell therapy has advanced very quickly, to the point where the science and technology have opened a clear path toward a potential cure for patients. The two company’s similar cultures and histories of driving rapid innovation in order to bring more effective and safer products to as many patients as possible make this an excellent strategic fit.
BMR Take: Gilead is losing two major drugs this year with big revenues due to the expiration of their patents and was the reason we removed the stock earlier this year . Over the past several years they were among the largest sellers in the history of Healthcare so replacing them will be a tough uphill climb. Could Kite provide a way to do it? We will see.
Bristol-Myers Squibb (BMY: $60, up 3%)
This week Bristol-Myers will announce more than 60 presentations, including seven late-breaking abstracts, from its Oncology portfolio featured at the European Society for Medical Oncology 2017 Congress in Spain. Presentations of data from company-sponsored studies, clinical collaborations and research will explore the potential role of Opdivo (nivolumab) as monotherapy and in combination with Yervoy (ipilimumab) and with relatlimab, a fully human monoclonal antibody that targets lymphocyte activation gene-3 (LAG-3); or with chemotherapy in 13 types of cancer.
All this news matters a lot because healthcare investors love new data! We are seeing the stock pick up some momentum getting ready for what is likely to be a wave of good news.
BMR Take: We are still optimistic Bristol-Myers could be a take-out candidate. Activist investor Carl Icahn is in the stock and pushing for change. We believe we could see a 25-50% premium from today’s price if a sale gets done. Further supporting our view, we note Jana Partners is now also building a position in the stock. Jana had a big stake in Whole Foods, and was taken out by Amazon this past week as you know.
Amazon (AMZN: $978, up 4%)
Amazon announced 3,000 more jobs coming to Ohio. This follows news a few weeks ago about doing a major facility in New Jersey. We continue to highlight the Amazon machine because this single company alone is now a major driving force behind the economy.
The internet retailer received approval on Wednesday for state tax incentives for two distribution operations in Ohio. The project approved by the Ohio Tax Credit Authority will create 2,000 jobs. The company said it will invest $100 million at the site, which eventually will result in a 855,000 square-foot facility. The second distribution-center project, will result in an estimated 1,000 jobs if the company goes ahead with the project. Amazon had no presence in the state until recently.
BMR Take: The Amazon powerhouse is steamrolling the real economy and the stock market. With over $20 of EPS potential by 2020 according to analyst consensus estimates, we see a lot of potential ahead.
We noticed that the stock is on a little roll lately. The stock hit a closing high of $1052 a month ago in late July and then proceeded to drop over $140 to the low 900s. But this week the stock was up a little bit every day until Friday when it took a breather. We have watched these high-priced stocks for years and many times it is human nature to not be able to bring yourself to buy a stock that is almost $1000 a share. But we always mentally build in a stock split. Say 10-1 in Amazon’s case. If the stock were a $98 stock, would you buy 100 shares? Sure you would. So we just look to buy 10 shares for $980. Same difference. If you think the stock is going to $2000 a share in the future like we do, 10 shares here, 20 shares there, and 30 shares beyond, adds up to real money.
PayPal (PYPL: $61, up 2.5%)
PayPal customers in the U.S. can now earn cash back on every purchase online and in stores with the recent launch of the new PayPal Cashback Mastercard issued by Synchrony Bank. The PayPal Cashback Mastercard, designed exclusively for PayPal members, offers cardholders 2% cash back every day, on every purchase – everywhere Mastercard is accepted.
Unlike other rewards credit cards, there is no annual cash back limit, no minimum redemption amount, no restriction on how to spend cash rewards and no expiration. The PayPal Cashback Mastercard offers all the security and convenience expected from PayPal, plus all the traditional benefits of a Mastercard. All accounts are automatically added to the member’s PayPal wallet to simplify checkout and provide peace of mind.
The introduction of the PayPal Cashback Mastercard with Synchrony Bank continues PayPal’s commitment to provide customers with rewarding product experiences and a range of innovative credit options. By providing a simple way for people to earn cash rewards for the shopping they’re already doing, the PayPal Cashback Mastercard will give consumers yet another reason to shop with PayPal.
BMR Take: PayPal has 200 million customers on the way to over 1 billion longer-term (after all, Facebook has over 2 billion, showing the possibilities for a global internet-based business model). With EPS closing in on $3 by 2020, and EPS growth moving along in the mid-teens, we see growth at a reasonable price here in the stock and like it a lot!
Nutanix (NTNX: $22, flat)
We reported via News Flash on Friday on the stellar earnings report the company issued on Thursday. The stock shot higher on Friday, hitting $24, but settled at $22, flat for the week. We’re not traders as you know, but long term investors, and we have seen this many times in our career. We are going out on a limb here and will say that the stock will move higher from here over the coming weeks and months.
We mentioned the high level of sales that were booked but not reported as revenues – the backlog. Management indicated that billings growth was 40% year over year and that the company continued to build up a significant backlog of deals that booked but did not ship in the quarter. The sales transition toward large enterprise is progressing nicely. Management's next quarter guidance implies billings growth of 25% YoY compared to consensus of 17%, due to the significant backlog build.
To recap:
Fiscal 4Q 2017 Financials
Revenue: $226 million, up 62% year-over-year from $140 million in 4Q16
Net Loss: $50 million, compared to a net loss of $47 million in 4Q16
Operating Cash Flow: $6 million, compared to $2.5 million in 4Q16
Cash and Short-term Investments: $350 million, up 90% from 4Q16
Deferred Revenue: $525 million, up 77% from 4Q16*
Free Cash Flow: $(6.5) million, compared to $(6.5) million in the fourth quarter of fiscal 2016
Billings: $289 million, growing 40% year-over-year from $207 million in 4Q16
BMR Take: We added the stock in May at $17.45 and have a Target of $30. Our Sell Price at $14 is way too low, so we hereby raise it to $19. This was a great quarter and if Wall Street doesn’t wake up to the potential of this company, we would be very surprised.
Upcoming Economic News
Domestic Auto Sales
Monday, September 4th, 8:00 AM ET
Period: August
Consensus: 4.6 Million
Prior: 4.5 Million
Trade Balance
Wednesday, September 6th, 8:30 AM
Period: July
Consensus: -$44.5 billion
Prior: -$43.6 billion
Initial Claims
Thursday, September 7th, 8:30 AM
Period: 09/02
Consensus: 240,000
Prior: 236,000
Consumer Credit
Friday, September 8th, 3:00 PM
Period: July
Consensus: $15.0 billion
Prior: $12.4 billion
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
Over the previous weekend, these were the economic headlines:
--- Robust Retail Sales
--- Disappointing Durable Goods
--- Strong Business Inventories
--- Uneven Industrial Activity
--- Mixed Housing Data
Economic data suggests that things are good, but not great.
Fed Chair Janet Yellen's signaling of continued restraint on monetary policy at Jackson Hole triggered another rally in US stocks last week. This extends the current bull market to 102 months, surpassed in length only by the 113-month run leading up to the dotcom crash. Skepticism over valuations is even higher now with a record 46% of investors believing equities are overvalued.
While the bull market may be entering the later stages of the cycle, UBS strategists believe it can run further based on these observations:
--- The earnings yield on the S&P 500 is 4.8% compared with a yield of 2.17% for 10-year Treasuries.
--- At 18x, current market PE ratio is near long-term averages. Historically when valuations have been in an 18x to 23x range, the MSCI AC World Index has returned 6% over the subsequent six months (versus an overall average of 5%). And relative valuations of equities also suggest long-term outperformance versus bonds.
--- Corporate earnings growth remains robust, at 12% in the US and around 10% in the Eurozone in the last quarter. Synchronized global growth should continue to support this, with all 45 OECD economies on track to expand this year.
There are, however, some caution flags appearing here and there. We prefer to look at price-to-sales ratios rather than PE's, and they haven't been this high since the peak of the dotcom bubble in 1999. This means that new investors are paying more for every dollar of sales than at almost any time since the dotcom bust. However, if sales continue to grow as expected this ratio will normalize to some degree. Put another way, stocks are priced almost to perfection and if the earnings growth story were to falter, it could cause some real volatility.
VMware (VMW: $107, up 5%) Has 500,000 Customers
BMR Take: Think about this. Half a million customers. Can you imagine? We think this is just fabulous. We’re up 30% since we added them in January at $83. What a great company. Our Target is $108 which it hit Friday, an all-time high (not counting the euphoria 10 years ago when they went public). With a market cap of $44 billion, and Dell Technologies being the principal owner (80%+) we think very highly of this company. So we hereby raise our Target to $120 and raise the Sell Price from $90 to $100.
The Blackstone Group (BX: $33, up 4%) had its Target Price set at Credit Suisse Group at $45
A Few Wall Street research firm targets
8/30/2017 Credit Suisse Group $45
7/25/2017 Morgan Stanley $40
7/21/2017 Deutsche Bank $33
7/14/2017 Keefe, Bruyette & Woods $37
7/14/2017 Oppenheimer Holdings $38
5/28/2017 Citigroup $41
Blackstone Considers IPO of Gates Corp.
Blackstone Group is considering an initial public offering of Gates Corp. that could value the auto-parts maker at as much as $9 billion. Its products include belts, hoses, industrial power transmission, fluid power, and automotive. The company was founded by Charles Gates in 1911 and is headquartered in Denver. In 2014, the company was acquired by Blackstone in a deal worth $5.4 billion.
The private-equity giant is in the early stages of laying the groundwork for the possible offering, according to people familiar with the matter. The business could be worth $8 billion to $9 billion, one of the people said. It isn't clear whether that includes debt.
BMR Take: We can’t tell you how good this company is. Well, maybe we can: This company is great! Look at the wealth being created by this firm. In 3-4 years in this one deal alone, they have created $3-4 billion of equity. Absolutely amazing. Our Target is $35 but we are dying for the stock to hit this price so we can raise it to $42. This is a value stock like no other.
The High Yield Corner
By Michael Foster
Significant news came this week from AstraZeneca (AZN: $30, up 3%), helping the shares rise solidly by the end of the week. The biggest news is the company’s presentations at a conference in Spain that will demonstrate the company’s phase-3 study of imfinzi for non-small cell lung cancer and tagrisso for. EGFR cancers.* The science is complex and far for non-specialists to understand without a lot of deep reading, but the market is a great place because it prices in that knowledge instantaneously, which is why AstraZeneca shares rose 2% on the news.
* EGFR is short for estimated glomerular filtration rate. The EGFR is a number based on your blood test for creatinine, a waste product in your blood. It tells how well your kidneys are working.
Another intriguing tidbit from AstraZeneca: the company announced on Tuesday that it was recruiting Takeda Pharmaceutical to work on an antibody for Parkinson’s disease treatment. Again, more exciting developments that prove the mega-pharma company’s pipeline is very healthy. Remember a year ago when this was a primary concern on the company and thus the stock? Those concerns are gone now; instead, investors have finally realized that there is tremendous value in this company and it is still innovating; thus it’s no surprise shares are up 10% in 2017 so far. Paying a solid 3.1% dividend, we can see some dividend increases in the months and years ahead. We’ve got a $42 Price Target on the stock and would hope to see this level sometime next year.
Elsewhere in The Bull Market Report High Yield portfolio we see green across the board. There’s only one exception: Invesco Municipal Trust (VKQ: $12.93), which ended the week flat. No surprise; municipal bonds are a low volatility asset class, and there’s not really any news in the municipal bond market to warrant a massive jump. That includes the latest tragedy in Texas. While large storms and ecological disaster might intuitively seem like they will hurt municipal bond markets (lower economic activity should mean lower government revenue and thus higher default risks), it’s important to remember that this “common sense” is actually false. (Often, the common sense view doesn’t quite work in finance.) In reality, credit agencies do not downgrade bond issuers faced with economic disasters; furthermore, the lower revenue may make the state’s budget tighter in the short term, but the risk of that hurting municipal bonds is negligible. Additionally, natural disasters rarely result in massive new bond issuances to fund repairs, so it’s not like existing bonds will get priced out by new issues.
We saw Nuveen AMT-Free Municipal Credit Fund (NVG: $15. 64, up 1%) have a solid showing. Also a nice surprise from Nuveen this week: the company announced dividends for all of its closed-end funds, but did not lower dividends on NVG - although many other funds did see their distributions decline slightly. Again, good news for municipal bond investors long this fund.
The Bull Market Report’s other closed-end fund picks also ended the week in the green and announced distributions that were in-line with previous dividends. AllianzGI Equity & Convertible Fund (NIE: $20, up 1%) announced that its 38 cent quarterly dividend would continue at the same level, and PIMCO Dynamic Income Fund (PDI: $30, up 1%) also announced its monthly dividend would stay at the same level. These funds are paying 8% in income, year-in and year-out, while also seeing their share prices rise. Closed-end funds are typically income vehicles that aren’t often traded for short-term capital gains, but both funds have given investors that opportunity this year. AllianzGI is up 10% year-to-date and Pimco Dynamic is up 14% year-to-date - extremely impressive returns for such diversified funds. And the income does not look to be threatened anytime soon, so investors can continue to hold them with confidence.
Now, let’s turn to REITs. Digital Realty Trust (DLR: $118, flat) announced that its COO was leaving the company in September. Markets shrugged; while he obviously has done well for the company in the past, there’s no reason to assume he’s irreplaceable. We’re sure that his replacement will be skillful.
Despite little news elsewhere affecting REITs, we saw price gains for Omega Healthcare Investors (OHI: $32, up 3%), Government Properties Income Trust (GOV: $18.50, up 1%), Apollo Commercial Real Estate (ARI: $18.18, up 2%), Ventas (VTR: $69, up 1%), and Welltower (HCN: $74, up 2%).
Also, there wasn’t any real news on Kimco Realty (KIM: $20, flat), but it’s interesting to note that this retail-focused REIT has had a bit of a resurgence lately thanks to the surprising strength in retail. (Note that we removed Kimco from our portfolio in May, but we wanted to give you an update.) If you remember, several weeks ago in this column we wrote at length at how the “death of retail” cliché was really more about shock financial journalism trying to get clicks from disaster-starved readers and had little to do with the reality of our economy. Well, we were right. In addition to beats from Macy’s, Dollar General, Target, Wal-Mart, and several other retailers, even the near-death dogs like Sears Holdings and Abercrombie & Fitch impressed the market with their quarterly results, beating expectations. Retail is not the healthiest sector on Earth, but it isn’t dead or dying. But Kimco was priced for a dying retail sector. So what does that mean? Kimco shares are up 11% in the last three months.
We want to go on record with another prediction that drives bullishness on retail REITs like Kimco. Amazon’s recent acquisition of Whole Foods and their price drop at the supermarket is going to drive retail sales for two reasons. Firstly, Amazon Prime members will be incentivized to leave their computers and shop in person more. Secondly, more people can now afford Whole Foods and will shop there. That also means people are going to spend more time shopping at auxiliary stores adjacent to Whole Foods. This is a rising tide that is going to lift many boats, which is why buying retail REITs right now makes a lot of sense. Check back in after about six months and see if we’re right.
Good investing,
Todd Shaver, CEO, Founder and Editor
The Bull Market Report
Since 1998
August 13, 2017
by Todd Shaver | Aug 13, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
Talk of “fire and fury, the likes of which the world has never seen” aimed at North Korea spooked anybody listening. The markets have been calm for so long and then BOOM, the VIX (^VIX: 15.45) spiked 44% in one day and 60% in two days of trading this week. Our take is that we had been in an unsustainable lull of inactivity. These things happen and you have to be prepared for them. But in the long run, they work themselves out and things get better. Stay the course. If you are worried, consider dialing back your exposure to some of the more aggressive equities out there in favor of looking toward our REIT and High Yield portfolios, where the income stream of dividends offers greater downside protection.
But 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: Shopify, Apple, The Carlyle Group, Sabra, AstraZeneca, AllianzGI Equity & Convertible Income Fund, Twilio and Amazon.
BMR Companies & Commentary
Apple (AAPL: $158, up 1% - all prices are for the week)
Apple is hard at work sublet shifting its brand. Everybody knows Apple. But Apple isn’t the name of its products. Apple's greatest hits over the past 30 years don't have "Apple" in their name: Macintosh, PowerBook, iTunes, iPod, iPad, iPhone, Siri. The newer stuff that does carry the Apple moniker -- Apple Watch, Apple Music, Apple TV-- have been either outright disappointments or solid but not wildly popular businesses.
But Apple is as good a brand as any. Think Proctor & Gamble, Ford, General Electric - you get the point. It's hard to transition from a corporate brand to additional brand franchises, but if you can do it, the future is bright!
CEO Tim Cook is working hard to make it happen. The Apple brand speaks to the firm's culture and reputation to employees, shareholders and governments. A product brand communicates a specific message about the item's quality, design, or function to consumers. There is so much potential.
BMR Take: Apple is just one of the companies that always figures it out - just as we are seeing them do now with the focus on services revenue and rethinking the brand.
We remain very bullish. The stock is trading at 17x this year’s consensus EPS of $9.00. The Services business is on pace to double over the next few years. Our Target of $155 has now been breached. Yea! We hereby raise our Target Price to $170. This will bring the company close to a $900 billion valuation, now at $813 billion. Our Sell Price remains the same: “We would not sell Apple.”
The Carlyle Group (CG, $21, flat*)
Carlyle is really a master of the universe. The company’s private equity investments are behind so much of the world’s underlining economic activity it’s ridiculous. The latest example is with McDonald's.
This week McDonald's announced the successful completion of a strategic partnership with CITIC Capital Partners and The Carlyle Group. Ramping up a new era of growth and innovation, the partnership will operate and manage McDonald's businesses in mainland China and Hong Kong, leveraging combined expertise and strength to drive an expansion strategy.
The transaction has obtained China's regulatory approval and was completed on July 31st, creating the largest McDonald's franchisee outside of the United States. The sale to the new McDonald's China franchisee includes McDonald's existing businesses in Mainland China (2,500 restaurants) and Hong Kong (240 restaurants).
The new partnership announced a series of development initiatives for mainland China. Termed "Vision 2022," this strategy aims to drive double-digit sales growth in each of the next five years by increasing the number of restaurants from 2,500 to 4,500 by the end of 2022, bringing unparalleled convenience to Chinese customers. The opening pace of new McDonald's restaurants in mainland China is expected to progressively ramp up from approximately 250 per year in 2017 to 500 per year in 2022 under the new partnership. Vision 2022 also includes an increase of "Experience of the Future" restaurants to over 90%, which will enable the brand to offer a digitalized and personalized dining experience to more customers.
BMR Take: We believe Carlyle is heading to $30. Consensus is looking for a solid dividend of $1.80 next year and $2.15 the following. EPS is running closer to $3. Few institutional investors can buy the stock because the K1 tax structure creates issues. But that will change and when it does, look out on the upside.
* The stock was down 40 cents this week, but CG paid a 42 cent dividend on Thursday and when a stock pays a dividend the stock always opens that day down the amount of the dividend. Thus Carlyle was flat this past week.
Shopify (SHOP: $92, down 5%)
Shopify’s plan is to let half a million merchants run their business via Alexa and bots. Shopify wants its 500,000 merchants to be able to run their businesses almost entirely through the use of bots or voice apps like Alexa.
At F8, Facebook’s annual developer conference, Shopify announced plans to launch a Facebook Messenger bot, named “Kit”, the first commerce platform to do so. Through conversations on Facebook Messenger or SMS, Kit can do things like place a Facebook ad or start an email marketing campaign.
The development roadmaps of voice apps like the Shopify Alexa* skillset and text bots like Kit will begin to converge, so that the same merchant analytics available today by voice will become available in a text interface, and the same actions to run your business available today through text will someday be available with your voice.
* Shopify Alexa is a partnership with Amazon to use Alexa.
The Shopify Alexa skill first became available in January, but was launched with no marketing or promotion in order listen to the queries put forward by merchants to better understand the kinds of questions they want the skill to be able to answer. Before merchants are given the ability to run business operations in a conversational interface, a few other features will be added first.
Based on merchant feedback, more long-term business performance insights are on the way, and work will continue with engineers to ensure the bot can handle the range of questions a merchant has and understands the variety of ways a merchant may ask a question.
BMR Take: When we look at the core building blocks of how this company is advancing its growth potential of Total Addressable Market (TAM) is expanding. In addition, we see opportunities in international, in new merchant solutions and apps, and building scale with Shopify Plus, the company’s enterprise-focused solution. In our view, the valuation is supported by the long runway and expanding TAM given Shopify’s lower relative market share, still less than 5%. We reiterate our bullishness on the stock. The stock is currently trading at about 9 times the estimate of next year’s sales. This valuation is rich but justified.
Sabra Health Care REIT (SBRA: $21.45, down 7%)
We have decided to take our chips off the table in Sabra. Two reasons. First, the core senior housing portfolio growth is essentially flat so it’s hard to see any organic upside from the business. Second, the pending merger with Care Capital is being fought creating noise and possibly more risk.
Regarding the latter, two activist investors are urging Sabra to drop the Care Capital deal. They say shareholders of the healthcare-focused real estate investment trust should reject the merger at a shareholder meeting next month. Why? Sabra was overpaying for Care Capital's assets by up to 30%, the hedge fund said in a presentation. Ouch.
Consensus for Sabra Healthcare REIT:
1 Sell Rating, 6 Hold Ratings, 1 Buy Rating
BMR Take: We like to listen to the market and to other shareholders invested in the stocks we own. Especially when the other shareholders do great research and make objective points. We added the stock at $24 in May and are down a bit, but with the dividend, it wasn’t a great loss. Let’s move on to the next one.
AllianzGI Equity & Convertible Income Fund (NIE: $19.79, down 2%)
This fund seeks total return with capital appreciation and high current income through investment in convertible equity, income producing securities and through utilizing an options strategy. It’s top holdings are Microsoft, Apple, Amazon, Facebook, and Google. It does not use leverage. It does not hold fixed income.
60% of the stocks it holds are in the largest giant companies, and 37% in large cap companies. The Funds PE ratio is 19 versus the 17.2 benchmark, but sales, EPS, book value, and cash flow growth is all better than the benchmark.
See more discussion in The High Yield Report later in this newsletter.
BMR Take: Sometimes it is nice to own a fund and have some help picking all the right places to be. We like AllianzGI with its 7.7% yield. You can buy right now at a discount to the net asset value of $21.75, a very opportune entry point.
AstraZeneca (AZN: $29, flat*)
Fierce pharma rivals collaborating on cancer treatments are increasing the competitive landscape, hurting AstraZeneca. But we believe we must stay the course. AstraZeneca reported disappointing results for its clinical trials examining Tremelimumab combined with Imfinzi for the treatment of lung cancer. The market has become crowded with checkpoint inhibitors and immunotherapy drugs, which means that the number of such potential combinations of treatments is growing. Pharma rivals are now cooperating -- last week Merck bought half the rights to AstraZeneca's Lynparza, and in July Eli Lilly said it would out-license or co-develop one-third of its oncology pipeline.
BMR Take: Healthcare has been a minefield for months now. AstraZeneca has been beaten down. Analysts have been upgrading the stock on valuation. It is very cheap versus expectations for around $2 of EPS for next few years. Consider the 3% dividend yield on top of that. It’s a classic value here as the stock is truly undervalued. Our Target remains $42, and our Sell Price of $32 has been breached, so please make a decision with your own portfolio as to whether you personally wish to stay the course. We are trying to be patient here to give the company more time to perform.
*A dividend was paid on Wednesday of 45 cents.
Upcoming Economic News
Retail Sales
August 15th , 8:30 AM
Period: July
Consensus: 0.40%
Prior: -0.20%
Housing Starts
August 16th, 8:30 AM
Period: June
Consensus: 1,220,000
Prior: 1,215,000
Initial Claims
August 17th, 8:30 AM
Period: Through August 12
Consensus: 240,000
Prior: 244,000
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
Stocks finished mostly higher again the week before last, mainly because of good corporate earnings, a stronger-than-expected Jobs report, solid GDP performance, healthy Consumer Confidence and a little better than expected Export & Import numbers. Is it all "too good to be true?" [Well, indeed it was!]
According to the latest American Association of Individual Investors survey, individual investors are now holding their lowest cash allocation since 2000. They are now among the most invested in financial markets since 1988. The three other time periods with the lowest cash allocations were in 1998, 2000, and 2015, and all of these preceded times when investors probably wished they had more of a cushion.
We certainly do not think we're on the brink of another 1999 dotcom bubble or a 2008 financial crisis crater. But one thing's for sure, stocks don't always go straight up forever. There will be volatility and pullbacks as Fed-tightening continues. According to recent news reports, there is now a 50/50 chance the Fed will raise rates again in December. Whenever a pullback occurs, it is not going to be unexpected. It's overdue and as natural to the market as hot dogs are to ball games. With a backdrop of really solid earnings, we expect any pullback to be fairly brief in duration. If earnings keep growing and the job numbers keep getting stronger, pullbacks will just be setting up the next move higher. If Congress grows up and we get tax relief and corporate tax reform, investors will be saying, "Laissez les bon temps roulez".
Note what UBS has to say in their latest report on the Equity Markets: The bottom line: stocks are not cheap, BUT ARE NOT in "bubble" territory.
Amazon Update (AMZN: $968, down 2%)
The stock got hit last week as the rest of the market had some tough times as you know. There is an ongoing discussion over valuation with this company. We had a heated argument with a very astute investor who thinks the stock is overvalued saying that the company will NEVER report substantial earnings; that Bezos will ALWAYS have a new project in mind that will cause him to spend, spend, spend on new infrastructure.
We agree to a certain extent, but disagree with the profit story. As you know, we have said many times revenues are the key to all success in the market. Amazon had revenues of $89 billion, $107 billion and $136 billion in the last three calendar years. This year? Hard to say, but it looks like at least $175 billion? This is just huge of course. We remain bullish for as far as we can see forward.
We hereby raise our Price Target from $1000 to $1100 and leave the Sell Price at $900.
Twilio (TWLO: $31, up 7%)
Twilio had a huge week after reporting blowout revenues as we reported via News Flash on Tuesday. Total revenue – $96 million, up 49% from the second quarter of 2016 and 10% sequentially from the first quarter of 2017.
Loss from operations – $7 million, compared with a loss of $11 million for 2Q16.
And we love this stat: 43,000 Active Customer Accounts as of June 30, 2017, compared to 31,000 Active Customer Accounts as of June 30, 2016.
Profits are still at slightly below breakeven, but as you know, we are banking on the huge revenue gain.
Here is the consensus on the Street:
2 Hold Ratings, 15 Buy Ratings
Price Targets:
8/8/2017 Canaccord Genuity $38
8/8/2017 Robert W. Baird $39
8/8/2017 J P Morgan Chase $40
8/8/2017 Mitsubishi UFJ Financial Group $35
7/17/2017 Summit Redstone $36
BMR Take: We love this company and think it can be a monster. An Apple? A Microsoft? Hard to predict the next 10-15 years, but watch this one closely.
Wall Street Consensus for United Parcel Service (UPS: $111, up 1% in a very tough week, and after an 83 cent dividend on Thursday)
Consensus: 10 Hold Ratings, 5 Buy Ratings
Price Targets:
8/8/2017 Citigroup $128
7/3/2017 Sanford C. Bernstein $127
SNAP (SNAP: $11.83, down 13% - still at a $14 billion market cap)
Don’t buy SNAP
Don’t buy SNAP
Don’t buy SNAP
Revenues: $182 million up from $72 million
Loss: $443 million up from a loss of $116 million last year. WOW! (How is this actually possible?)
Don’t Buy SNAP
Don’t Buy SNAP
A Letter from a Subscriber about Netflix (NFLX: $171, down 5%)
From: Stan Makovsky [mailto:stan@stanxxxx.com]
Sent: Wednesday, August 09, 2017 3:11 PM
To: 'Todd at The Bull Market Report'
Subject: Netflix
Hi Todd,
Disney pulling out of Netflix seems to be a big deal for both stocks. Your thoughts please?
Best Regards,
Stan Makovsky
Our Response:
Hi Stan –
I am not really concerned too much. The market is getting slammed today as I write this [Wednesday] and Netflix is down just $4. If it were down $20 I’d be a little concerned. But I believe Disney needs Netflix more than Netflix needs Disney. Netflix is a force now and as you know is spending billions of dollars a year on programming. They will be just fine. The scary thing about Netflix is their profit level – which is tiny. This needs to change.
Todd Shaver
Founder and Editor in Chief
The Bull Market Report
A Powerful Financial Newsletter
Since 1998
@BullMarketRept on Twitter
The High Yield Report
By Michael Foster
Special to The Bull Market Report
It’s been a long time coming, but we finally see a bit of fear entering the market.
For high yield investors, this is a concern because downturns and mini-corrections tend to be amplified in high yield investments. The S&P 500 slid over 1% last week but many high yield investments fell much more, especially closed-end funds (CEF). The AllianzGI Equity and Convertible Income Fund (NIE: $19.80) fell nearly 2% over the last week due to a considerable decline in the fund’s NAV, which fell over 1% in a single day of trading last week. In many cases, a market correction will result in CEFs’ discounts widening as investors sell off the fund. Surprisingly, however, holders of the AGIC fund have been surprisingly calm, resulting in the discount staying less than 10% by the week’s end. Recently, the discount had shrunk to less than 9%, so this is definitely not as good as it has recently been. But it’s surprisingly not as bad as it could be.
Of course, if the selloff continues throughout the coming week, it would be more than reasonable to expect Allianz to see a larger discount as slower and more risk-averse investors finally get around to selling this and other closed-end funds. What does this mean for you? Well, we maintain a bullish outlook for the economy and for stocks, with corporate profits continuing to rise year-over-year and the Allianz fund in particular maintains a strong portfolio of respected and strong-performing stocks. There’s no reason to sell off amongst the fearful, but anyone with extra cash on the sidelines who wants a sustainable near-8% dividend stream could consider picking up some of this fund.
Similarly, The Bull Market Report’s second CEF pick, the Pimco Dynamic Income Fund (PDI: $29), had a rough week during the market’s selloff, falling over 4%, after paying out a 22 cent dividend on Wednesday. This has resulted in PDI’s premium price falling slightly, and now the fund trades at slightly over a 2% premium to NAV.
After the sell-off, investors may be eager to buy more of the Pimco fund and capture that 9% dividend yield plus the potential upside of special dividends at the end of the year. Before rushing to buy, however, there are a few things to consider. The fund’s NAV has risen 10% so far this year even after accounting for dividend payouts, which means the fund’s payout remains sustainable. However, this is a relatively weak performance compared to its past performance. Part of the reason for that is the growing burden of its promised payouts. Because it trades at a premium, it has been significantly harder for the fund to pay out dividends than to earn the comparable income in the open market. Since the fund’s premium rose to as much as 10% earlier this year, those dividend payouts were particularly burdensome for Pimco’s managers. Now that the premium is at its lowest point since November last year, that dividend is going to be slightly easier to pay.
Easier, but not easy. The real problem with this fund is that it has years and years of a solid track record thanks to its contrarian nature. The fund invested heavily in mortgage-backed securities (MBS’s) after 2008, when they were synonymous with financial ruin. In reality, however, many of these assets were extremely undervalued because of investor fear, and Pimco had the chops to find the good ones and buy them. Hence the fund’s massive outperformance.
However, 2008-2009 is becoming a fainter memory, and the market is finally realizing the huge mistake it made in avoiding many quite valuable MBS’s. As a result, more capital is coming into that market and creating more competition for Pimco. Ultimately, that means diminished returns for investors holding this fund.
Unfortunately, this has also happened as more investors have discovered the fund’s tremendous returns. Holding this fund has become a crowded trade. Back in 2013-2015, the fund almost always traded at a discount; in late 2015, shortly before The Bull Market Report recommended it, its discount fell to 11%. But now a flood of capital has come in and driven the fund to a consistent premium, while earning superior returns through MBS’s is getting harder for the fund.
This doesn’t mean you should sell the Pimco Dynamic Income Fund. But it does mean one has to wait before buying more and instead choose other strong dividend payers like the AllianzGI fund.
Finally, let’s briefly discuss REITs. These were a mixed bag, with pretty much all REITs down and some down much more than others. Omega Healthcare Investors (OHI: $30) fell 2% over the week alongside the broader market, with its greater volatility amplifying losses. Yet the similarly volatile Government Properties Trust (GOV: $18.13) fell about 1% over the same period, even beating the market. There are a couple of pretty obvious reasons for this. For one, Government Properties Trust’s big decline earlier this month means it’s found a bottom and can’t plunge much lower. Obviously this means buying now makes sense. Omega, however, hasn’t exactly found its bottom yet and only went negative YTD at the end of last month. There’s no fundamental reason for this – there is sustainable income, the dividend is still rising, and Omega’s expansionary plans are on track. But there is a lot of fear in the market, and that is reflected in the rapidly fluctuating price of this stock.
While buying Omega now is buying a bargain, investors should be prepared for more volatility. Government Properties, while not exactly strong, seems to have found a floor that is limiting further downside, making it a more appealing buy right now. But no matter what you do right now, selling is not a good idea. There is no fundamental reason to fear for the future of equities or high yield assets, so ignore the panic selling. It will be intense but brief-lived, as always.
Good Investing,
Todd Shaver, Editor, CEO and Founder
The Bull Market Report
Since 1998
August 6, 2017
by Todd Shaver | Aug 6, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
Months of boredom broken up by moments of terror. And then quickly back to the boredom. That’s how it’s been for U.S. stocks lately, where vast stretches of tranquility are occasionally interrupted by sudden bouts of selling on headlines trumpeting entanglements of President Donald Trump. It happened again during the last 30 minutes of trading Thursday, when the S&P 500 Index surrendered a quick five points after the Wall Street Journal reported special counsel Robert Mueller was said to have impaneled a grand jury in the Russia probe. More than half the swoon was erased by the close. A similar frenzy occurred July 20th, when Bloomberg News said Mueller was examining a broad range of financial transactions involving Trump’s businesses. The message from professional investors: In a market where the CBOE Volatility Index has consistently hovered just above 10 at historic lows, get used to it. Both the drops and the recoveries.
However, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks: Apple, The Carlyle Group, Athenahealth, PayPal, Teva Pharmaceutical Industries, and Tesla.
BMR Companies & Commentary
Apple (AAPL: $156, up 5%)
Apple delivered solid third quarter results. Let’s break it down for you.
iPhone revenue was $24.9 billion versus the $25.5 billion consensus. Just shy. iPad revenue was $5.0 billion versus the $4.0 billion consensus. Mac revenue was $5.6 billion versus the $5.7 billion consensus. Services (the App Store) – the spot to watch – did $7.3 billion versus the $7.1 billion consensus. All in all, no complaints on the top line.
Average selling prices did trend lower, but who cares. The iPhone sold for an average of $606 versus the $621 consensus. The iPad sold for $435 versus $440 last year. Mac was $1,303 versus the $1,334 consensus. This is minor stuff in the long run. People should be concerned about the long term, big picture vision like we are.
Gross margin of 38.5% beat the Street’s 38.3% and hit the top end of guidance. Operating expenses were $6.7 billion vs. the consensus of $6.6 billion. Profits continue to flood in to the tune of about $800 million per week and now sit at $262 billion.
At the bottom line the company did $8.7 billion in earnings or $1.67 per share vs. $7.8 billion a year ago, $1.42 per share. Fabulous.
An overall great quarter. Apple reported unit and revenue growth in all product categories in the June quarter, driving 17% growth in EPS. The business also returned $11.7 billion to investors during the quarter, bringing total cumulative capital returns to almost $223 billion. Wow!
BMR Take: We remain very bullish. The stock is trading at 17x this year’s consensus EPS of $9.00. The Services business is on pace to double over the next few years supporting growth.
The Carlyle Group (CG: $22, up 6%)
Carlyle reported another strong quarter with EPS of $0.81, beating the $0.41 consensus by a mile. Revenue was $910 million versus the $680 million consensus. The company paid the $0.41 dividend shutting up all the naysayers about the businesses’ ability to consistently return capital.
Part of the big out-performance was admittedly just due to a one-time insurance recovery. But the core business looks great. The company is fundraising hand over fist and continues to generate great investment returns.
Overall, Carlyle produced another strong value creation quarter, with net unrealized gains awaiting to be returned to investors increasing 46% year to date. As a result of the strong performance Carlyle has delivered to fund investors, demand for new funds is high. The company raised over $8 billion of capital in the second quarter with acceleration likely in the second half of 2017.
BMR Take: Carlyle is probably heading to $30. Consensus is looking for a solid dividend of $1.80 next year and $2.15 the following. EPS is running closer to $3. Few institutional investors can buy the stock because the K1 tax structure creates issues. But that will change and when it does, look out on the upside!
Athenahealth (ATHN: $141, up 1%)
Athenahealth announced that the board and management team are conducting a strategic review of the company’s operational and financial strategy, leadership. and governance. Management has commenced a comprehensive review of its operations, cost structure and capital allocation, with the assistance of a globally recognized consulting firm. In conducting its review, the company has identified $100 million in cost-savings opportunities that will drive efficiency and targeted investment in the company's hospital and network services businesses. Athenahealth will provide additional information regarding details of these strategic initiatives by its Q3 earnings release in October. Co-founder Jonathan Bush, a cousin to former U.S. President George W. Bush, will remain as the chief executive of the company.
Athenahealth also intends to augment its senior management structure to establish the role of president. The president will be responsible for the execution of Athenahealth’s business operations and will report to Athenahealth CEO, Jonathan Bush. As previously announced, the company is also working to identify a CFO. The board has retained a search firm to fill the president and CFO roles promptly. Finally, the board plans to separate the roles of chairman and CEO and is working to recruit an independent chairman. In addition, the board has begun a search process to appoint an additional independent director. Recall, all this has been brought about by Elliott Management, a major activist hedge fund that disclosed a 9.2% stake in the company back in May.
"Athena needs a management team and operating plan that can successfully tackle the next stage of growth," said a portfolio manager for T. Rowe Price New Horizons Fund. "This plan is a large step in the right direction."
The company said its bottom line climbed to $20.5 million, or $0.51 per share in 2Q. This was higher than $13 million, or $0.34 per share, in last year's second quarter. Revenue for the quarter rose 15% to $300 million, up from $260 million last year.
The company, said it would invest in its fast-growing hospital and network services businesses.
BMR Take: With Elliott Management in there shaking things up, there is a lot of excitement ahead. We love this company but believe now is the time to take profits. We are up 38% since we added the stock at $103 in November. The PE is still a ridiculous 280 and to get it down to a ridiculous 70, profits will have to quadruple, which will take years. We hereby remove the stock from the portfolio.
What should YOU do? Totally up to you of course. You can sell, or you can stay the course and maybe the stock will continue its big ride. If you stay, you can protect yourself two ways. You can sell calls on the stock, say the December $150 for $10. Or you can put a stop order in place at say $135 or $130, to protect your gains. If the stocks goes higher, fabulous.
PayPal (PYPL: $59, down 1%)
PayPal is on a roll with new partnerships. The latest - Skype!
Skype is all about trying to make your life easier and more efficient. That’s why they recently developed Send Money, a Skype feature that allows you to transfer funds via the Skype mobile app while you’re in the middle of a conversation using PayPal. Sweet!
Skype users wishing to send money from a PayPal balance or a U.S. debit card won’t be charged for transactions, making it similar to how PayPal’s other peer-to-peer payment platforms function.
Potentially more important than this alone is that this is a deal with Skype's parent company, Microsoft, which now establishes a relationship with them. Last month, PayPal inked deals with the likes of Samsung Electronics, Apple, and JPMorgan. Skype has reportedly been downloaded over a billion times and boasts approximately 300 million monthly active users. Wow!
BMR Take: PayPal is at 200 million users in a world where Facebook is running a global internet business model with 2 billion. You see the growth here? !! We are riding PayPal far into the future.
Teva Pharmaceutical Industries (TEVA: $21, down 36%)
Teva announced earnings and got rocked. Revenues of $5.7 billion versus $5.0 billion last year. EPS of $1.02 versus $1.25 a year ago. Dividend of 8.5 cents, down 75% from 34 cents in the first quarter of 2017. The company only lowered EPS guidance from $5.10 to $4.40, which makes the stock very inexpensive relative to where it is trading right now on earnings. However, the problems are big.
Second quarter results were lower than anticipated due to the performance of the U.S. Generics business and the continued deterioration in Venezuela. In the U.S. Generics business, the company experienced accelerated price erosion and decreased volume mainly due to customer consolidation, and greater competition as a result of an increase in generic drug approvals by the FDA, and some new product launches that were either delayed or subjected to more competition. Not good.
In response, Teva must take swift and decisive actions. The company is now focused on executing meaningful cost reductions, rationalizing assets and maximizing value, actively pursuing divestiture opportunities and strengthening the balance sheet.
BMR Take: Life brings adversity. You, dear reader, have been around long enough to know this. This stock has just been rocked as bad as the loser in a UFC title fight. But it is just silly cheap right here. Buy more? Yes, if you are ready to take on some volatility. Sell? Not here. Hold? This seems like the best course of action with intentions to exit once the price gets up off the floor mat.
Tesla (TSLA: $357, up 7%)
Tesla reported Wednesday that its net loss widened in the second quarter as they opened new stores and prepared for the launch of its new lower-cost Model 3 sedan.
The loss grew 15% percent to $335 million from a loss of $290 million in the year ago quarter. But Tesla's adjusted loss of $1.33 per share, handily beat Wall Street's forecast of a $1.88 loss.
Revenue more than doubled to $2.8 billion, also beating Wall Street's forecast of $2.5 billion. Tesla's shares jumped 6% percent after the earnings release. Tesla saw significant growth in its energy generation and storage business, which contributed about 14% of its revenues. It bought solar panel maker SolarCity late last year and said it began taking orders for its new solar roof tiles in the second quarter, and recently began installations.
But most attention was focused on the Model 3, which was delivered to its first 30 customers — all Tesla employees — last week. CEO Elon Musk said the company has 500,000 reservations for a Model 3 and it wants to ramp of production as quickly as possible. But Musk has warned of “production hell” for the next six months or longer as the company goes from building 100 Model 3’s in August to 20,000 Model 3’s by December. He wants Model 3 output to grow to 40,000 cars per month by sometime in 2018.
Musk made a surprise announcement during Wednesday's second-quarter earnings call. Musk said Tesla will no longer use an entirely different vehicle architecture to build the Model Y, the compact SUV due to hit the market by 2020. Tesla will instead borrow from the Model 3's platform. That should make Model Y production a lot easier in the future. "Upon the council of my executive team to reel me back from the cliffs of insanity, the Model Y will, in fact, be using substantial carry over from Model 3 in order to bring it to market faster," Musk said. "I have to thank my executive team from stopping me from being a fool," Musk said. "Model Y will have relatively low technical and production risk as a result."
Tesla is averaging about 1,800 orders per day for its Model 3 since its big event a week ago Friday. Extrapolated, that’s over 50,000 orders a month. It opened 29 new stores and service centers in the second quarter in order to meet Model 3 demand. It's also planning to double the number of fast-charging Supercharger outlets this year to 10,000 worldwide. The company delivered 22,000 Model S and Model X vehicles in the second quarter. That was up 53% from the same quarter a year ago, but down from 25,000 in the first quarter.
Management is expecting positive Model 3 gross margin in Q4 and targeting 25% margin in 2018. Model S and Model X deliveries are expected to increase dramatically in the 2nd half of 2017.
During the initial phase of the Model 3 ramp in Q317, the volume produced will be tiny relative to the installed production capacity. As a result, Model 3 gross margin in Q3 will be impacted by the excessive allocation of labor and overhead costs and depreciation over this tiny volume. In the absence of these one-time elevated cost allocations, Model 3 gross margin in Q3 would already be positive, resulting in a positive cash contribution.
BMR Take: The future of automobiles are electric and Tesla runs the show. We are looking at EPS estimates of $14 in 2020.
Upcoming Economic News
Consumer Credit
August 7th, 3:00 PM
Period: June
Consensus: $16.0 billion
Prior: $18.4 billion
JOLTS Job Openings
Tuesday, August 8th, 10:00 AM
Period: June
Consensus: N/A
Prior: 5,666,000
Wholesale Trade
Wednesday, August 9th, 10:00 AM
Period: June
Consensus: 0.40%
Prior: -0.50%
PPI
Thursday, August 10th, 8:30 AM
Period: July
Consensus: 0.10%
Prior: 0.10%
CPI
Friday, August 11th, 8:30 AM
Period: July
Consensus: 0.15%
Prior: 0.0%
Google Reports Earnings
Google (GOOG: $928, down 1%) continues to reports huge gains in sales and earnings, despite having to pay the European Commission a $2.7 billion fine. EPS of $5.01 beat estimates by $0.60 and revenues of $26.0 billion beating estimates by $400 million. Total revenue was up 20% year over year, and was in fact up 23% when adjusted for currency fluctuations. 87% of Alphabet's $26 billion of revenue during the quarter came from advertising, which was up 18%. Google’s “other” business - everything that’s not advertising, including its cloud business and Google Play app store - grew 40% year over year to $3.1 billion. “Other” now represents 12% of Google’s business, up from 10%. Sales from the Europe and Africa account for about 34% of the company’s overall revenue,
Google's paid clicks were up 52% year over year. The average cost-per-click was down 23% year over year. We are not fretting over the last statistic. But we are salivating over the first. 52% growth. Huge.
Advertising revenue growth was driven by mobile and YouTube. And the cloud business was big. Cloud deals larger than $500,000 tripled year over year.
BMR Take: Buy today. Buy tomorrow. Buy next month. Buy next year.
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
The number one question to us over the past few weeks has been, "When is this bull market going to end?" Run away as fast as you can from anyone who tells you they know. That said, however, it is a very important question to ask because, believe it or not, risk matters. And you can rest assured that Murphy's Law will prove that risk matters most when it appears risk no longer exists. The S&P 500 is up nine straight months and the VIX hit an all-time historical low last week. The media seems to think that, somehow, no one seems nervous. That's not what we see. We see a lot of nervousness and the question we prefer to answer instead of being asked to foresee the future is, "What signs of a bear market do you see today?"
Aside from the always present danger of a global conflict, we do not see the most common indicators used to predict coming recessions such as falling sales, production and earnings. What is happening instead is a real turnaround in earnings growth momentum to the upside. The key ingredients for a typical bull market are still in place:
The economy is expanding.
Earnings growth is accelerating – we've seen three quarters in a row and 2Q17 looks like it will be the best so far. Stocks are not cheap, but with few exceptions they still offer a more attractive value than bonds (The 10-year Treasury is still around 2.3%)
One Wall Street research firm recently said, "Just realize that this bull is eight years old. The easy gains have been made. Now it's a slower grind higher. So stay focused on the key long term trends and be patient waiting for the profits to unfold".
What we read into the words, "a slower grind higher" is a market that has more of a pattern of two steps higher and one or one-and-a-half steps lower, rather than the four or five steps higher to each step backward that we have enjoyed for several years. It is a rare year that the market doesn't experience a 5% pullback at some point – we think that would be not only be normal but also a "healthy" thing to see. Stock Traders Almanac, researching patterns in the market over the past 50 years, reports that strong post-election years typically point to summer selloffs. Looking at the 50-year charts, these seem to range in the 4% or the 9% area with the "average" being somewhere in-between. We don't see anything that would make us disagree with historical norms because "It's different this time". Thus, we expect to see some sort of sell-off over the August-October time frame that's in line with historical averages.
However – Oppenheimer announced last week that it was raising its 2017 earnings estimates for the S&P 500 from $125 to $129 per share, and raising its year-end target for the index from 2450 to 2650. Most resources we follow have a price target between 2500 and 2650. Should we see a decline from 3% to 10%, most experts are saying that there will be a substantial year-end rally from that low point which will propel the market to further all-time highs by next year. But that's the "slower grind higher", and watching the market drop 10% and then going all the way back up to get another 5% or 6% will not be "easy". To that end, patience will be a true friend and we would also keep in mind that, "Without a selloff, there can be no rally".
The High Yield Report
By Michael Foster
Special to The Bull Market Report
Earnings season for REITs continues, and the news for Bull Market Report subscribers has been great.
Government Properties Trust (GOV: $18.35, up 1.5%) saw sales and earnings beat expectations by a healthy margin. Revenues rose 9% year-over-year to $70 million and FFO for the quarter beat expectations by a penny at 60 cents per share. On a trailing 12-month basis, dividend coverage is now 132%, above the 130% cutoff that we prefer and far beyond many more “conservative” REITs.
Government Properties Trust is a really interesting stock, because it is always seen as extremely high risk despite its business model and fundamental results. Quarter after quarter, Government Properties Trust reports high occupancy rates, strong revenue, and a healthy amount of income that is higher than dividend payouts. So why does the market give this stock a 9.5% dividend yield, when some REITs with worse dividend coverage ratios are yielding 5% or even less?
A large part of it has to do with the company’s size. At a $1.8 billion market capitalization, the firm is definitely one of the smaller and less geographically diverse. But that lack of diversification is more than offset by its business model: renting to United States government agencies and offices, usually with long-term lease contracts. Back in 2013-2016, when expectations of a shrinking government were rampant (and actual downsizing was happening a bit), this didn’t seem like a good thing. But we’ve seen this REIT weather that storm, thanks in no small part to its tenant mix and, most recently, its move into more conventional office leasing.
But now that government downsizing is not as sharp of a focus in D.C., Government Properties is quietly driving revenue with strong demand from government agencies, who are also quietly expanding. On the firm’s earnings call, President David Blackman announced that 290,000 square feet of new and renewal leases were completed in the second quarter, with 235,000 square feet being rented to government tenants. The weighted average lease term for those leases is 8 years.
This means 82% of the revenue the company is going to get over the next 8 years is virtually guaranteed by the full faith and credit of the United States. On top of this safety, the REIT reported that 22% of the firm’s rented space is going to face an expiration in the next two years. Let’s dig into that. If that 22% remains vacant, and there’s no growth anywhere else in the firm’s portfolio, that means annualized FFO would drop to about $1.76 just a hair above the company’s $1.72 dividend.
Obviously, this is an extreme scenario that is virtually impossible to occur. Even in the depths of the 2008-2009 recession, REITs simply did not have a 78% occupancy rate. So even in the most absurdly dire, extreme hypothetical scenario, Government Property’s dividend is secure.
This is why the stock is really worth buying even as its yield is over 9% and despite the 24% price drop we have seen over the last year. The stock is volatile because there’s a lack of investor enthusiasm - but as a vehicle for capturing an income stream, it’s a solid choice, especially now after its drop.
Let’s talk about another REIT that released earnings this week - Apollo Commercial Real Estate Finance (ARI: $18.01, up 1%), which reported a slight miss on revenues that rose 33% year-over-year and EPS of 46 cents, in line with expectations.
Looking over the press release and listening to the earnings calendar, there really isn’t much to raise eyebrows - which is why the stock didn’t really change much. In a way, the firm’s results are best summarized by CEO Stuart Rothstein, who said this during the earnings presentation:
"Importantly for Apollo's business, transaction volume remains healthy driven by both a significant amount of capital committed to or targeted for value add real estate equity investment and the availability of various debt financing alternatives. At present, Apollo has a strong pipeline consisting of both new opportunities many of which involve repeat clients, as well as the option and opportunity to participate in the refinancing of some existing transactions.”
There are no surprise new investments, no sudden influx of demand for commercial loans or new borrowers coming to the table. It’s very much business as usual. And that means $800 million in new investments year-to-date for the firm and an extra $150 million in funding on previously closed transactions. This contributed to 46 cents in net interest income, giving the dividend a pretty worrisome coverage ratio on a trailing 12-month basis: 98%.
There are a couple of things to keep in mind. This is a mortgage REIT (mREIT), where dividend coverages tend to be significantly lower than in property REITs. Investors are compensated for this with a higher dividend yield, and Apollo Commercial is giving a 10% yield right now. However, investors need to brace for the possibility that the dividend could get cut in the future - although the cut could be miniscule to bring the company back to a 100% dividend coverage ratio.
Fortunately, that is extremely unlikely for one reason: This company has been growing like a weed, as you can see from revenue jumping by a third from a year ago. This is very much a growth income stock - an odd thing that is hard to find, but needs to be thought about differently. High yield stocks tend to rise in price, and thus have a lower yield, as the company proves the sustainability of its income stream over time.
Of course, there is a risk that the growth will slow or stop, and that’s one of the big risks that this stock’s big yield is compensating investors with. So far, there is no indication that the growth will stop - the healthy pipeline of loans makes it clear that there’s still room for the company to grow into its dividend. But there’s also no indication that growth is on track for a rapid expansion - instead, it’s simply chugging along. That probably means investors can expect its yield to continue and its stock to stay where it is - which means it’s a great hold for now to capture those 10% dividends.
Good Investing,
Todd Shaver, CEO, Editor and Founder
The Bull Market Report
Since 1998
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
