October 22, 2017
by Todd Shaver | Oct 22, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
Earnings-day blowups, leverage warnings in China, Apple’s worst rout since August. Oh, and a sixth straight week of gains for the S&P 500. No matter what happens lately, stocks just keep rising, with record closes piling up in U.S. markets at a rate that is starting to defy precedent. The Nasdaq 100 Index has finished at all-time highs 62 different times this year, on par with the most ever in 1999, while the S&P 500 and Dow Jones Industrial Average are closing in on historic levels, too. For bears, the elongating list of highs bespeaks euphoria, particularly when the market has been spared a 3% pullback for more than a year. Investors have ignored bad news ranging from North Korea to political drama at the White House to what may be the biggest profit slowdown in six years. It has been a great ride this year. We remind you, our dear reader, it certainly will not always be this good.
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: PayPal, Shopify, Celgene, WageWorks, Amazon, and Blackstone.
BMR Companies & Commentary
PayPal (PYPL: $71, up 3%)
PayPal delivered another great quarter for investors. The company not only showed no signs that its platform growth is slowing, it demonstrated that it is actually increasing its rate of growth as the network effects that management has repeatedly cited during the past couple of years continue in earnest. Yet many of its initiatives – the monetization of social peer-to-peer payment app Venmo, the expansion of instant-checkout feature One Touch, customer choice – are still in the very early innings of the game.
Toss in the $7.1 billion in cash that PayPal had on its balance sheet that could be used to fund M&A initiatives and the potential of the company’s worldwide network becomes daunting. We recall that PayPal acquired Braintree – the online and mobile payment platform that has fueled much of the company’s recent growth – in 2013 for just $800 million. And Braintree had spent just $26 million to purchase Venmo, which is a game-changing driver of revenue and earnings for PayPal.
BMR Take: PayPal has been the best way for equity investors to play the global growth of mobile payments. Again we see PayPal deliver an exceptional quarter backing up that point of view. We find nothing to critique about the firm. We raised our Target from $67 to $77 last week. We look forward to raising it again.
Now THERE’s a great chart. What’s next? 75? $80? $100. We think they are all possible.
Shopify (SHOP: $102, up 9%)
Remember that scary short seller, Andrew Left of Citron. Well the short call they were making on Shopify is turning out to be terribly wrong. Ouch! What good news for us and all the other shareholders behind the company.
Since 2014, Shopify, the leading multi-channel commerce platform, has been steadily building its presence in Waterloo, the cornerstone of Canada’s technology Corridor. Just recently, the company announced that it plans to grow its full-time, Waterloo-based workforce by 300-500 new jobs over the next couple of years. Growth continues!
These new positions in Waterloo will focus on growing Shopify Plus, which supports the largest and most complex customers on the Shopify platform. Roles in engineering, product, sales, and merchant services will range from entry-level to senior manager-level, and all will focus on developing innovative solutions capable of scaling for the changing retail landscape.
To accommodate this growth, Shopify also formally announced the opening of their second building in Waterloo. Steps from their current building, the new space will nearly double their physical footprint and further demonstrates Shopify’s dedication to building a strong and sustainable economy. The new space is expected to open in the first quarter of 2018.
BMR Take: It was admittedly a bit nerve-racking to see a short seller like Citron, who nailed Valeant, come out against one of our holdings. But we trust our research and our hard work. Shopify is a remarkable well-positioned technology company for the future of eCommerce.
Celgene (CELG: $121, down 11%)
Rough week for Celgene. Celgene announced the discontinuation of the Phase III REVOLVE trial in GED-0301 for Crohn’s disease (CD). This was unexpected and unfortunate news.
Celgene’s decision comes after recommendation by the independent data monitoring committee upon its review of
the overall benefit/risk during a recent interim futility analysis. The company points to no meaningful safety imbalances identified during this analysis, suggesting a lack of efficacy for the drug.
At this time, Celgene has chosen to not initiate the Phase III DEFINE trial in CD. The company is awaiting review of the full dataset from the Phase II trial of GED-0301 in ulcerative colitis to determine next steps in this situation.
In our opinion, this represents more of a psychological blow than a fundamental one to the company. Recall that Celgene paid $710 million upfront to Nogra Pharma Limited for the rights to this drug in 2014 and has since funded development of the asset.
BMR Take: Sometimes you just have to sift through the headlines to find the real facts. This one drug was only supposed to be a $1 billion revenue contributor. But the company is expected to still do more than $20 billion by 2020. So we see no reason to panic. We added the stock at $95 a little over a year ago so we have a nice 28% return and our Target is still a hefty $150. We continue to believe in Celgene. But if you are worried, then get out of the kitchen. There are lots of other choices for your money.
WageWorks (WAGE: $65, up 1%)
WageWorks a little over a year ago acquired Automatic Data Processing’s Consumer Health Spending Account (CHSA) and Consolidated Omnibus Reconciliation Act (COBRA) businesses. This transaction further strengthened WageWorks' leadership position in the Consumer-Directed Benefits market.
Why do we bring it up? Because WageWorks is eating ADP’s lunch and sometimes it’s good to reflect and remind ourselves why.
ADP’s CHSA and COBRA businesses provide a range of services including HSA, HRA, FSA, commuter benefits, and direct bill administration to approximately 10,000 employer clients in the United States.
Not long after this deal, WageWorks won a contract to service the entire federal government with consumer benefits programs, taking away the business from Automatic Data Processing.
BMR Take: WageWorks is serving a niche in the world of payments running consumer benefits programs for employers. It’s a tricky business. The global opportunity is huge and they are just getting started. We don’t hear a lot out of WageWorks week in and week out, but that doesn’t mean it's not exciting. Remember, the company just raised equity and we could see another acquisition occur in the near future.
Amazon (AMZN: $982, down 2%)
Amazon and Google (GOOG: $988) are at virtually the same price. Who will be first to $1100? Let the race begin. We think Amazon will win.
Why? Just look at the craze around the world competing for Amazon’s new headquarters. You can just see the excitement.
New York City mayor Bill de Blasio said that key landmarks around the city like the Empire State Building, billboards, and Wi-Fi charging stations are going to light up in Amazon’s signature orange color. The four bids that New York is pitching Amazon on - including areas upstate and in the city - just aren’t enough, so New York is also going for frills and extra decorations to pretty up its proposal.
Tucson certainly whipped out the big guns when its economic development group hauled a 21-foot saguaro cactus to Amazon’s main Seattle headquarters via a truck. The plan didn’t turn out the way that Tucson’s economic group had hoped: Amazon refused to accept the gift.
Kansas City mayor Sly James is not one to let the competition outdo him. He wrote 1,000 reviews about Amazon products, giving them all five stars. His reviews had slick one-liners like, “I live in beautiful Kansas City where the average home price is just $122K, so I know luxe living doesn’t have to cost a ton.“ Of course, in every review, he never failed to drop a mention of why Kansas City is great. Then, he posted a trendy “unboxing” video on social media to share his efforts. You gotta love this guy.
On Tuesday, Ottawans were told to cheer for Amazon during intermission for a hockey game between the Vancouver Canucks and the Ottawa Senators. A gauge showed up on screen, with Calgary at the bottom if the audience made the least noise and Ottawa on top. It being Canada, of course, the message to make noise was reiterated in French: “Faites du bruit!”
Pittsburgh has local restaurant Primanti Bros. offering free sandwiches to every Amazon employee who ends up working there. Each Pitts-Burger and Cheese sandwich goes for $7.39 normally, so if each of the 50,000 new employees got a sandwich, that would run for a total of $350,000, the Pittsburgh Post-Gazette hypothesizes.
Birmingham tried wooing Amazon online and in person. The city set up three giant Amazon boxes around town. It also set up giant replicas of Amazon’s Dash Buttons that send pregenerated flirty tweets to the company, according to AP, like “Amazon, we got a 100% match on Bumble. Wanna go on a date?” Another tweet reads, "We are Chipotle and these other cities are Taco Bell.”
Honestly, it’s hard to top this next one: This small, recently formed town, located close to Atlanta, offered to rename itself Amazon, Georgia. Stonecrest’s proposal also includes 345 acres of land if Amazon selects it as the HQ destination.
BMR Take: Amazon is the world’s greatest innovation machine. We think the new headquarters is going to spur even more great things and send the stock much higher.
The Blackstone Group (BX: $34, up 5%)
The U.S. real estate market may have slowed down, but Blackstone Group President Tony James still sees plenty of opportunities for profit. “Real estate is a gargantuan market. There are always undermanaged assets,” he said.
Blackstone has been investing heavily in logistics real estate, hoping to capitalize in the rise of online retail, and more acquisitions are possible.
Blackstone’s real estate assets under management grew to $110 billion in the second quarter, up 9% from $102 billion a year ago. Its core-plus portfolio, which includes Stuyvesant Town-Peter Cooper Village, grew 36% to $18 billion.
In May, Blackstone won a $20 billion commitment from Saudi Arabia’s sovereign wealth fund for a new infrastructure investment fund, but it may be a while before the money gets spent. Saudi Arabia’s commitment depends on Blackstone raising additional cash from other investors, and the firm has only just began marketing the fund.
Real estate continues to fuel gains for Blackstone, which reported a jump in third-quarter profit that exceeded all analysts’ estimates. Economic net income, a measure of earnings that reflects both realized and unrealized investment gains, was $835 million, or 69 cents a share, compared with $690 million a year earlier.
Real estate led the charge for Blackstone’s asset sales in the quarter. The unit, sold $3.1 billion in holdings, including a U.K. office property and a portfolio of French hotels. The firm also continued trimming its stake in Hilton, selling shares it held in both its real estate and private equity funds.
Asset sales helped fuel $625 million of distributable earnings, which reflect profits on those disposals and fund management fees, compared with $590 million a year earlier. The metric is on track for its second-best year ever, President Tony James said on a call with media Thursday. Blackstone plans to draw from that pool to pay stockholders a dividend of 44 cents a share on Nov. 6.
BMR Take: We are really excited about Blackstone, especially real estate. Real estate is a “hard asset” meaning the value is more stable than for instance technology or biotech companies where the value is based on expectations of future growth. This real estate angle to Blackstone should give you less downside risk in a tough market.
Our Target is $36 and we fully expect to see this shortly. We can’t wait to raise the Target to the all-time high set in 2015 at $44. This $42 billion market cap company ought to be in the mid-40s for sure.
Upcoming Economic News
New Home Sales
Wednesday, October 25th, 10:00 AM
Period: September
Consensus: 552,500
Prior: 560,000
Initial Claims
Thursday, October 26th, 8:30 AM
Period: 10/21
Consensus: 231,500
Prior: 222,000
GDP
Friday, October 27th, 8:30 AM
Period: Q3
Consensus: 2.2%
Prior: 2.2%
The Word on the Street about Apple
Street Consensus Ratings for Apple (AAPL: $156, flat)
Ratings Breakdown: 7 Hold, 41 Buy Ratings
Consensus Price Target: $193
Wall Street Targets:
10/16/2017 KeyCorp $187
10/16/2017 Pacific Crest $187
10/15/2017 Rosenblatt Securities $150
10/13/2017 Barclays $161
10/11/2017 Piper Jaffray $196
10/11/2017 Morgan Stanley $199
10/10/2017 Royal Bank Of Canada $180
10/9/2017 Drexel Hamilton $208
Microsoft (MSFT: $79, up 2%) Sets New All-Time High
My Oh My. What shall we do? What shall we do with this stock at its all-time high of $79? Sell, Hold, Buy more?
BMR Take: WE SAY THE LATTER. Why would you sell one of the greatest companies in the history of the world? Yes, revenues are slowing, but profits are increasing and the profitability of software is second to none. For the year ended June 30th the company did $90 billion in revenue and had $21 billion in net income AFTER TAX. That’s 23% after tax. Wow. So for every $1 of software they sell, 23 cents goes to the bottom line, and much of that is in cash. The company has over $130 billion in cash, albeit over $80 billion in debt, much of it taken out at historically low interest rates. With a $607 billion market cap there are only two stocks higher. – Google at $690 billion and Apple at $810 billion.
We hereby raise our Target from $78 to $84. Go M S F T!
The Word on the Street about AstraZeneca
Street Consensus Ratings for AstraZeneca (AZN: $35, flat)
Ratings Breakdown: 2 Sell Ratings, 9 Hold Ratings, 14 Buy Ratings
Consensus Price Target: $37
Wall Street Targets:
10/17/2017 Cowen $37
09/6/2017 BMO Capital Markets $38
09/1/2017 Argus $35
BMR Take: We added the stock just below $30 last year. We are being very patient with this one. We have a 17% gain in over a year and the 2.6% dividend helps, but we would like to see this thing take off to our Target of $42. It’s no small company at a $85 billion market cap. Revenues are solid at $23 billion and profitability is strong at $5 billion but we want to see more in 2018. If you have patience, you will win.
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
We are getting ready to get down to the nitty-gritty of tax-reform. Listening to all the political pundits (which is extremely hard to stomach), it appears that the odds are now slightly favoring the failure of tax reform happening this year. Admittedly, we are talking about a government which is trillions of dollars in debt already, but that number seems to be "just a number". How do we actually comprehend a trillion dollars? One market guru described it as follows:
"Numbers, like billions and trillions tend to numb the mind. They are too large to grasp in any “real” sense. Thirty years ago an older member of the NYSE gave me a graphic and memorable example. “Young man,” he said, “would you like a million dollars?” “I sure would, sir!”, I replied anxiously. “Then just put aside $500 every week for the next 40 years.” I have never forgotten that a million dollars is enough to pay you $500 per week for 40 years (and that’s without benefit of interest). To get a billion dollars you would have to set aside $500,000 dollars per week for 40 years. And a trillion that would require $500 million every week for 40 years. Even with these examples, the enormity is difficult to grasp."
Despite our debt, the market wants and believes that a smaller government (lower taxes) will result in a higher GDP which in turn means higher tax revenues. Thus, the argument that the government has to "pay" for any tax cuts - by raising taxes on the left hand if lowering them on the right hand so as to keep the "debt" constant - is tantamount to keeping the status quo and, ultimately, the same drag on business that we have today. It is apparent that the $5 trillion gain in the overall stock market since the election is because of both increased earnings and the perception that those earnings will continue to grow in part due to lower taxes which drop directly to the bottom line of businesses. Our view is that it will be difficult for the market to act as if tax reform failure is a non-event. It's a major event that could make US companies more competitive in world markets and super-charge domestic small business like nothing has for the past 20 or 30 years.
Business and the markets both need an overhaul of a tax system that is so out-of-control that, as a generality, if one hundred experts file the same tax return, there will be ninety-nine different results. That said, tax reform failure by itself should not derail the current bull market - rather it will likely result in a "reset", or as the pundits like to say, a "consolidation of gains" before the next move higher. Until we see a recession or a bad policy move that, for example, results in an inverted yield curve, we expect that the market will continue to grind higher based on the quality and stability of earnings growth.
The High Yield Corner
By Michael Foster
Let’s start with the elephant in the room.
Government Properties Income Trust (GOV: $18.22, down -2%*) fell just 1% on Friday after receiving an unfavorable mention on Jim Cramer’s Mad Money. This move surprised us for two reasons. Firstly, we didn’t think anyone still watched Cramer’s show, and, secondly, we didn’t think anyone actually listened to him for investing advice. Apparently this failed hedge funder still has a following, though, and the selloff is a result of that.
* The company paid a 43 cent dividend on Friday and a stock that goes x-dividend always opens up down the amount of the dividend on that day, so in reality, the stock was down just a touch last week.
And what exactly is Cramer’s thesis? To be honest, we’re not sure. We’ve seen the clips and read a couple of takes, but the dismissal seems to be without any substance beyond “it’s a high dividend stock and it’s not for me.” No close look at FFO, dividend coverage, or revenue growth.
So, we will give you that here.
Let’s start with revenues. Government Properties Trust saw a 9% year-over-year increase last quarter, an acceleration from a decline at the start of 2016. Revenue growth acceleration has been occurring for nearly two years now, fueled in part by acquisitions and the company’s diversification away from government offices and towards office space leased to think tanks, public companies, private contractors, and so on. That investment has cost money, which means FFO has been weaker than it was back in 2014-2015, which also means dividend coverage is below 100% (it’s actually about 76% over the last 12 months).
Investors should in theory be rewarded for that lower dividend coverage with a higher yield, and at 9% that is exactly what they are getting. But really what we need to think about is the REIT’s ability to generate cash from operations to fuel the distribution in a sustainable manner.
If its expansion efforts bear fruit, this is exactly what we should see. But keep in mind that a bet on Government Properties is a bet on its future growth potential - and with revenue growth still accelerating, it remains a REIT growth stock. The second we see that sales growth weaken is the second we reconsider the stock. No matter what the bald guy on CNBC says.
Elsewhere in REIT land, things were extremely quiet. Omega Healthcare Investors, Inc (OHI: $32, up 1.5%) saw slight gains, whereas we saw a little dip in Ventas (VTR: $63, flat). Welltower (HCN: $68) ended the week flat, as did Apollo Commercial Real Estate (ARI: $18.44). One other REIT had a very fine showing, which is little surprise to us, since it’s been doing a lot of that lately.
Namely, Digital Realty Trust (DLR: $124, up 1%) had another strong week that pushed its dividend yield even lower, and we’ve finally hit the 3% mark yet again. Last week we discussed the significance of this barrier, and it’s not too surprising that it was hit. That should also make investors pause and consider why exactly they’re in the stock. At a 3% dividend or less, it’s more than generous to call Digital Realty a high yield stock. Yet it is unquestionably a high growth stock. Revenue growth, at 10% last quarter, fell from the 20%+ growth of 2016, but considering just how tough it was to compare revenues to 2016’s figures, that slowdown was more than expected. And at near 10% sales growth, the company is still growing like a weed. That has helped FFO growth accelerate markedly, which should indicate more aggressive dividend increases are on their way.
That leads us to the question: what to do with this stock. If you aren’t in need of a high yield, Digital Realty is a great place to be, because you’re essentially Google and Amazon’s landlord for their most precious assets: their data and global presence. But if your goal is to target a 7% income stream or higher, you could easily make do with removing allocations to Digital Realty with a nice profit and move into other higher yielding stocks in our two high-dividend-paying stocks. That’s especially true now that we’ve seen Digital’s stock soar 83% in 3 years. Yes, more upside is on the way, but maybe not as quickly and as profoundly as we’ve seen so far this year and in recent history.
Now let’s move on to the other, somewhat smaller elephant in the room: PIMCO Dynamic Income Fund (PDI: $30, down 4%), which wasn’t the worst performing Pimco fund of the week, although it was pretty close. Across the board, the market punished Pimco’s funds after the company announced that net investment income for most of its funds was far from covering distributions. This wasn’t a surprise, but the market has mostly ignored this issue until just now. Both the Dynamic fund and other Pimco funds have seen dividend coverage slip to less than 100%, although Dynamic’s coverage is not the worst of the lot. Still, the market is worried that the fund won’t be able to cover its payouts.
This is an overly simplistic view. Dynamic’s NAV has gone up 12% in 2017 - more than many bond funds and even some other Pimco funds. Since closed-end funds can fund distributions from Net Investment Income (NII), this just means Dynamic’s payouts can come from capital gains instead of NII. There are some tax issues here, but in terms of dividend sustainability, Dynamic’s distributions are fine.
But there is one implication many aren’t talking about, and we have addressed it earlier this year: the specials. Dynamic is famous for paying a huge special dividend at the end of the year, which has historically come from massive NII. Now that NII is weak, Pimco has a great excuse to tell investors, “Worry, income was weak, so no big special dividend this year.” We are not sure this will happen, but we’re leaning more to this being likely than we were earlier this year. If you were depending on this fund’s special distribution like the big one we saw last year, be prepared for disappointment. Also be prepared for that to hit the stock at the end of the year.
Is this a bad thing? Not really. The regular dividends are still safe, and the fund’s yield is a very nice 9%. And we could see NII improve significantly next year. There’s definitely more to come with Pimco funds in the coming months! But, if you don’t like drama, take your profits and squirrel them away in Annaly Mortgage (NLY – 10% div.) or any of the other stocks in our two high-yield portfolios and sleep like a baby.
Good Investing,
Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998
August 27, 2017
by Todd Shaver | Aug 27, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
What a week. So much for a quiet end to the summer. Yellen made perhaps her final speech in Jackson Hole. Trump is battling a debt ceiling to fund The Wall. And the markets are partying like it’s 1999!
Federal Reserve Chair Janet Yellen, speaking in Jackson Hole, Wyoming, on Friday, issued her broadest defense so far of the government’s response to the 2008 financial-market meltdown while outlining some areas that regulators could review to improve efficiency in the financial system. “Any adjustments to the regulatory framework should be modest and preserve the increase in resilience at large dealers and banks associated with the reforms put in place in recent years,” Yellen said, in what could be her final speech as Fed chair at the annual gathering of central bankers. Her term expires in February.
President Donald Trump is spoiling for a fight with Congress over funding a border wall with Mexico, but he’ll have a hard time waging that battle because of a looming deadline to avert a U.S. debt default. Some of the president’s advisers consider a tough stand on border wall funding crucial to Trump’s credibility, two White House officials said. Some say that failure to make progress on the border wall -- or at least go to the mat on the issue -- may fracture what has been a solid political base for the president.
In 1999, then-Federal Reserve Chairman Alan Greenspan kicked off the central bank’s annual Jackson Hole symposium by highlighting the impact of rising stock prices on an economy that was then enjoying low inflation and low unemployment. Now today, eerily similar, buoyant asset prices and low unemployment argue for Yellen to press ahead with interest-rate increases -- or even accelerate them. Weak inflation suggests she might even want to consider providing more stimulus, not less. That would mimic the tack Greenspan took 18 years ago, when, faced with a frothy stock market, he continued to hike rates until May 2000. The result was a disaster for the stock market -- the technology-heavy Nasdaq Composite Index plunged by 78% over a 2.5 year period from its peak as the dotcom bubble deflated -- but was not all that bad for the economy. Gross domestic product did contract during 2001, but the fall was so small that former Fed Vice Chairman Alan Blinder has called it a “recessionette.” And inflation remained contained. “There are a lot of similarities,” between the late 1990s and today, said Laurence Meyer, who was a Fed governor from 1996 to 2002.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks/funds where we think you can still make good money, including: high yield equities like Annaly or larger caps like Amazon, Facebook, First Solar, Google, Microsoft, and Netflix, as well as small caps like Nutanix.
BMR Companies & Commentary
Amazon (AMZN: $945, down 1%, (for the week))
Amazon Announces New Online Teaching curriculum TenMarks Writing. TenMarks Writing is a new online curriculum designed for teachers to help their students improve their writing skills by using scaffolding, an instructional technique in which students learn step-by-step how the writing process builds.
TenMarks Writing incorporates natural language processing technology to provide students with automatic, personalized feedback and helps teachers deliver differentiated comments as students work through their compositions. It is available for $4 per student for an entire year.
BMR Take: This is just the latest example of another new innovative effort by Amazon. We call Amazon the innovation machine for a reason. Hardly a week goes by without something new and creative coming out from the company. We all know about their entry into food (Whole Foods is part of Amazon as of Monday) and now education. Will this be a major push by the firm? We shall see.
Facebook (FB: $166, flat)
Facebook Usage Growth May Slip among Teens, Young Adults. According to eMarketer's latest forecasts, usage rates for Facebook, Instagram and Snapchat are running roughly in parallel between the US and UK, with Instagram and Snapchat expected to rise by double digits. However, Facebook will see its user growth continue to slow in both countries as lessening usage among teens and young adults drags down overall user growth. Monthly Instagram usage in the US will grow 24% in 2017 to 85 million, also higher than previously forecast.
BMR Take: Do not be alarmed. We repeat. Do not worry. This news of “lowered estimates” and all the talk on TV of slowing engagement for Facebook means very little. It sounds bad. But the reality is engagement is healthy and the bigger factor is new user growth, which remains robust.
First Solar (FSLR: $47, down 1%)
First Solar Sells California Project. This week First Solar announced it completed the sale of the 280 Megawatt (MW) California Flats Solar Project in Monterey County to global private asset manager Capital Dynamics. Terms of the deal were not disclosed.
Located on approximately 2,900 acres of ranch land within the Jack Ranch owned by the Hearst Corporation near the San Luis Obispo and Monterey County borders, California Flats comprises two phases. The 130 MW first phase is expected to be commissioned in 4Q17, and is fully contracted under a long-term Power Purchase Agreement (PPA). The 150 MW second phase, which is currently under construction, is expected to be commissioned by the end of 2018, and is fully contracted under a long-term PPA.
BMR Take: We like this. We understand the cash is going to be reinvested in part of the business with much greater growth prospects. This is just want we want to see from the management teams running the companies we follow.
Google (GOOG: $915, up 1%)
Google and Walmart partner on Voice Shopping. Now people who own a Google Home will be able to order things by voice from Walmart. Cool! But this is copying Amazon Alexa, to be frank. If you can’t beat them join them.
The companies will also participate in the Google Express shopping marketplace, for which Google will eliminate the $95 annual membership fee. Shipping for orders through Google Home or Google Express will be $5 per order, or free if the order reaches a certain level. Costco, Walgreens, and PetSmart already sell via Google Home.
BMR Take: Good news for Google. Amazon is trailblazing the way forward with new innovations by spending tons of money. But there are competitive factors and various stakeholder conflicts, which creates room for companies like Google to jump in with little upfront capital investment, creating great investment opportunities. This could be the start of something big.
We've noticed that Google is lagging the rest of the market. After hitting $980 a month ago, the stock has faded a bit. It seems like a lot, but it's like a $98 stock dropping to $92, not really a big deal. So what do you do from here. You sit back and realize that the market is giving you a huge buying opportunity. Repeat after us: The market is giving you an opportunity to buy the stock a lot cheaper than its all-time high of $988 in June.
Microsoft (MSFT: $73, flat)
Microsoft Acquires Cycle Computing to Accelerate Big Computing in the Cloud. From finding a cure for cancer to making vehicles safer to fulfilling the promises of artificial intelligence, today’s complex problems require the ability to harness massive amounts of computing power. For too long, Big Computing has been accessible only to the most well-funded organizations. Microsoft believes that access to Big Computing capabilities in the cloud has the power to transform many businesses and will be at the forefront of breakthrough experimentation and innovation in the decades to come. Thus far, Microsoft has made significant investments across infrastructure, services and partner ecosystems to realize this vision.
As a further step in this direction, Microsoft recently acquired Cycle Computing, (no price details given), a startup specializing in helping companies perform heavy-duty computing. That includes crunching data for developing new drugs and analyzing risk in the financial services industry. This will make it easier than ever for customers to use High-Performance Computing and other Big Computing capabilities in the cloud. The cloud is quickly changing the world of Big Compute, giving customers the on-demand power and infrastructure necessary to run massive workloads at scale without the overhead. Your compute power is no longer measured or limited by the square footage of your data center.
BMR Take: We’ve already seen explosive growth on Microsoft Azure in the areas of artificial intelligence, the Internet of Things and deep learning. As customers continue to look for faster, more efficient ways to run their workloads, Cycle Computing’s depth and expertise around massively scalable applications make them a great fit for customers. We expect big growth ahead and see Microsoft’s business in a very healthy place.
Netflix (NFLX: $166, flat)
We are not afraid to tell you the good, bad, and the ugly. We know you count on it. We unfortunately have to report that Netflix will lose Disney content in 2019. Disney will end Netflix's film distribution deal as it launches its own streaming services starting with an ESPN service in 2018 and a Disney/Pixar service in 2019. Netflix had inked a deal with Disney to stream films and content just a year ago.
Netflix's stock traded lower on the news as investors see the premature end of the distribution deal as a loss of popular exclusive content. Some have compared the deal termination to the Starz (another Disney property) refusal to renew with Netflix in 2011 and see the move as another example of increasing license renewal risk and streaming competition.
BMR Take: The future of content creation is the holy grail of the media business. While Netflix can survive this one lost deal, the question is how much more of this will we see in the future. There is a long way to go until it is a big problem. But we are worried. Our Target is and has been $165. The stock was higher in July as it rocketed from $146 to $189 but it has fallen since. With a market cap of $72 billion and a PE of a ridiculous 215, we believe it is time for us to put this one to bed. We hereby remove the stock from our Stocks for Success portfolio with a gain of 65% since early 2016. There are lots of better places for your money at this time.
Have you taken the time to go onto the BullMarket.com website? Check out the six portfolios – you’ll find some interesting ideas here for the profits from Netflix.
Nutanix (NTNX: $22, flat)
Cisco Systems announced its intent to acquire Springpath, a leader in hyperconvergence software, for $320 million in cash, with the transaction expected to close in 1Q18. Springpath has developed a distributed file system purpose-built for hyperconvergence that enables server-based storage systems, and Cisco believes the acquisition will allow it to continue to deliver next-generation data center innovation to its customers.
In terms of Cisco, the acquisition was not a surprise, as the two companies have a relationship that goes back to Springpath's 2012 founding and Cisco previously making an investment in the company with an option to acquire it. That said, it is still a bummer for Nutanix. Analysts believed Cisco was a potential acquirer of Nutanix.
BMR Take: Hyperconvergence software is an exploding market. We expect Nutanix to do great things and generate big growth. The stock is hovering our Sell Price and we have had tons of calls and letters about whether we would “sell” the stock. First of all, we don’t own the stock. We don’t buy any of our recommendations as we want to remain clear of any conflict of interests. Secondly, the Target and Sell Prices are there for YOU to decide what to do with your investment. All of you are different. Some have multiple millions and some of you are just getting started. So you have to weigh every investment as it affects you and your family.
With that said, we believe Nutanix will be a big, big winner. Revenues are strong with last quarter coming in at $192 million vs. $115 million the year before. This is HUGE. But remember, this is a small cap stock – tiny in comparison to a Facebook or Google. The market cap is just $3.3 billion. So watch and wait and make a decision for yourself and your family. We think the company is a potential great one, but the market is stretching our patience.
We found this interesting too:
Firsthand Technology Value Fund, a publicly traded venture capital fund that invests in technology and cleantech companies, disclosed that its top five holdings as of July 31, 2017, included Nutanix. The fund’s investment in Nutanix consisted of 460,000 shares of common stock and represented approximately 7% of the fund’s total.
Upcoming Economic News
Consumer Confidence
Tuesday, August 29th, 10:00 AM ET
Period: August
Consensus: 120.0
Prior: 121.1
ADP Employment Survey
Wednesday, August 30th, 8:15 AM ET
Period: August
Consensus: 180,000
Prior: 177,700
Personal Consumption Expenditure
August 31th, 8:30 AM ET
Period: July
Consensus: 0.40%
Prior: 0.10%
Apple Has Debt Too
A few of you have written us and given us grief because we only report Apple’s cash position and don’t report the debt levels. Our internal excuse has always been that Apple’s debt is at very low interest rates. Here are some examples of Apple’s debt:
Apple 2.4% 5/03/2023 $5.5 billion
Apple 1.0% 5/03/2018 $4.0 billion
Apple 4.65% 2/23/2046 $4.0 billion
Apple 3.25% 2/23/2026 $3.25 billion
Apple 2.85% 5/06/2021 $3.0 billion
Apple 3.85% 5/04/2043 $3.0 billion
Apple 2.25% 2/23/2021 $3.0 billion
Apple 3.45% 5/06/2024 $2.5 billion
Here is some more detail:
From their latest financial reports, the last three yearly balance sheets ended September have shown that debt has risen from $29 million in 2014 to $53 million in 2015 and to $75 billion in 2016. At the same time cash has risen from $154 billion to $206 billion to $236 billion, reaching $260 billion in their last quarterly report on July 1st.
So: Big cash. And big debt. The NET CASH position at year-end September 2016 was approximately $160 billion. (And much higher now.)
We’ll take it.
Opko Health (OPK: $6.13, flat) Two weeks ago, the company reported earnings for 2Q17. Total revenues of $314 million were down 12% year over year from $357 million. Revenues included a $10 million payment associated with the commercial launch of Varuby in Europe in comparison to the $50 million payment related to a Rayaldee license in the same quarter in 2016.
Research and development expenses totaled $33 million, up 4%, while selling, general and administrative expenses amounted to $128 million, up 9% year over year. Consequently, loss from operations came in at $4 million, highlighting a significant decline from an operating income of $55 million in the prior-year quarter. The decline can be attributed to a rise in operating expenses owing to the company’s significant investments associated with the commercial launch of Rayaldee along with consistent investments in the pharmaceutical pipeline.
The company has $130 million in cash, unchanged from the quarter before.
This is a biotech company in an industry that is known for companies with years and years of little or no progress (and revenues) and then a big announcement of great success. Luckily Opko isn’t in the camp of no revenues. Revenues as you know are over $1 billion.
Chairman and CEO Frost On the Impact of Opko’s 4Kscore
Released in 2014, the 4Kscore Test is the only blood test that can accurately identify a patient's risk for aggressive prostate cancer, Opko claims. As calls to reduce health care costs across the United States grow louder, 4KScore is as a cost-effective alternative to biopsies, Frost said.
About 30 million tests are done each year to measure men’s prostate-specific antigens, or PSA. Of those, 4 million identify elevated PSA levels and typically would require biopsies.
“If you do the test after the elevated PSAs, you can avoid 50% of all biopsies,” Frost said. “This is the type of thing that if you wanted to be able to cut healthcare costs in this country, this has to be the easiest thing in the world to do.”
On why he continues to buy thousands of OPKO shares
“I always believe in investing in things that I know about rather than things I don’t,” Frost said.
BMR Take: Opko Health is a relatively small biotech firm with great potential. Many times “great potential” results in “no results.” This $3.4 billion market cap company is poised for success, but remains the most speculative stock in our six portfolios.
Splunk (SPLK: $65, up 10%)
Splunk had a great week. They reported earnings on Thursday after the close and they were stellar. This is what we have been waiting for. Revenue rose to $280 million from $213 million a year ago, for a percentage gain of 31%. Huge quarter. Adjusted earnings were $11 million or 8 cents a share.
Guidance is solid with next quarter revenue of $308 million. Operating margins are projected to be approximately 8%.. Growth in yearly revenues has been spectacular. For the last three years we have seen $450,000,000, $670,000,000 and $950,000,000. For fiscal year 2018, ending this coming January, revenue is now expected around $1.21 billion.
Billings in the quarter grew 32% year over year to $303 million. They again increased full fiscal-year 2018 guidance to call for billings of $1.45 billion.
Splunk has been ranked number one in worldwide IT Operations Analytics (ITOA), as well as Event and Log Management software market shares for 2016 by International Data Corporation. Splunk said that these two markets have witnessed the highest growth rates within the overall IT market, with ITOA seeing an increase of 33%, and Event and Log Management growing 23%. This is the third consecutive year that Splunk took the top spot in the ITOA software market, beating the competition of IBM, Microsoft, Hewlett Packard Enterprise and VMware.
More than 500 new customers were added during the quarter, including Athenahealth, Carnival Cruise Lines, the Department of Homeland Security, Harvard Business School, Shutterfly, Uber, and Verizon.
Splunk appears quite dominant in its machine data analytics niche. And the company's market opportunity is growing as its software, traditionally used for IT operational intelligence, gets adopted for security, fraud-detection, app analytics and other use cases.
BMR Take: Great quarter. Looking for continued growth for years to come. Our Target is $75 and our Sell Price remains $60. Note that Splunk has exceeded guidance for 11 straight quarters.
VMware Has a Strong Quarter
VMware ($103, up 7%) had a great week after reporting $1.9 billion in revenues up from $1.7 billion last year with net income of $335 million up from $265 million, $1.19 a share up from $0.97. Huge. Total cloud management bookings rose by a 13% year over year, and the company closed 10 deals valued at over $10 million. Network Virtualization (NVX) revenues were again strong, at over a 40% increase.
The company guided for the year: Revenue of $7.83 billion, EPS of $5.06, and free cash flow of $2.7 billion. These are big numbers.
VMware raised $4 billion earlier this month in a debt offering, mostly overseas, with coupons of 2.3% to 3.9%. Note that Dell Technologies owns 82% of VMware.
Take a look at this chart:
BMR Take: We think you get the drift!
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
As Alfred E. Neuman might say, "What – me worry?" ……as in why care about things such as 1) When will the Fed hike rates again and how many hikes can we expect? 2) Has the 2nd quarter economic rebound already been priced into stocks? 3) Are tax cuts still possible or has the pro-growth agenda been totally derailed by swamp politics? 4) Will we have a trade war with China? 5) Will we go to war with North Korea? 6) Are we headed into a recession?
Sure, we care and everyone else should care about getting tax relief. We have the worst tax system in the world if you don't count dictatorships. But we've lived in the current system for decades and so, while it would be a whole lot better if we got tax reform, investors and the stock market will survive if we don't. We also admit that of course we would care if we had a war. That is highly unlikely however, because none of the large powers has any desire to start WW III. Otherwise, worrying about all of the above is not a good idea - or, as Mom used to say, "If you worry too much, you'll worry yourself to death." So, we are adding a little bit of Alfred's advice to our medicine cabinet and are just going to go on about our business and not worry too much.
Business as usual with all these worries hanging around (stocks love to climb a wall of worry) generally means an investor should expect more volatility. We expect just that. We know stocks tumble way faster than they go up. Thus, we know not to panic - and that is a huge plus for every investor. Or, we might have a little cash to buy into any sale that may come along. Or, we have dividend stocks that will reinvest into more shares whenever they go on sale. And finally, we aren't going to worry about a recession now because the facts simply don't support it. We've looked at inflation, housing starts, retail sales, industrial production, oil prices -- there just isn't any "big trouble" in the economy today.
Not only that, it wasn't that long ago when the US economy seemed like the only regional power heading in the right direction. Europe had record joblessness and was teetering on the edge of recession. Japan was in its 20th year of malaise and China was headed for a hard landing if not a total crash.
Today, all of these regions are showing signs of renewed strength. European markets are doing better than expected. Japan also recently impressed with a +4% GDP growth rate - well above estimates - and China has emerged from a soft patch with a string of positive economic readings. With 40% of US corporate profits coming from abroad, all of the above is then a simple equation pointing to more earnings growth and share price appreciation ahead.
T. Rowe Price once said, "No one can see ahead three years, let alone five or ten." So, we aren't forecasting that conditions won't change in the immediate or distant future. But for the time being, we still see the glass as half full.
A Little Unsettling News
We follow the trends in cash flows into and out of mutual funds. We remember well, back in the 2004-2007 time frame the cash inflows into the stock market were consistent, month after month as cash poured into the market. But we noticed recently that cash outflows are continuing these past few months. U.S. equity funds suffered their longest streak of outflows in 13 years as growing signs of political deadlock in Washington cast doubt on a rally that has taken the S&P 500 Index to record highs.
Investors pulled $2.6 billion from U.S. stock funds in a 10th consecutive week of outflows. That takes total outflows since late June to $30 billion, which covered the week to Aug. 23.
BMR Take: This is serious stuff in our book. We’ve watched these stats for over 30 years and we have found it to be a strong indicator of future prices. We’re watching this one closely.
The High Yield Report
By Michael Foster
Senior Writer
The Bull Market Report
This week could best be described as dull. High yield investments neither enjoyed the euphoria that some assets enjoyed earlier this year, nor continued the panic that we saw in recent weeks due to political noise.
This is not terribly surprising; as we’ve said repeatedly in this column, the fundamentals are strong and there’s little reason to expect a selloff anytime soon. At the same time, however, there is little reason to believe the strong bull run of previous months is going to continue - a lot of the upside is already priced in. That puts us in the rather boring “hold and collect income” position, but when that income is 8% or more on high yield assets, that dullness is quite enriching.
So let’s get specific on a few of our high yield investments in this dull week. A number of Bull Market Report recommendations moved through the week quietly, including several REITs. Omega Healthcare Investors (OHI: $31, up 1%), Apollo Commercial Real Estate (ARI: $17.84, flat), and Ventas (VTR: $68, up 3%). These REITs suffered some volatility earlier this year but have had a much better long-term performance. Much more importantly for us, their dividends remain safe as ever - the recent market turmoil and even more recent market calm have not impacted the income streams of these funds.
Omega in particular is worth a close look because of its high yield and aggressive dividend growth policy. Its 8.2% dividend yield implies a lot of risk, but its dividend coverage ratio over the last twelve months is 134% - far higher than many comparable REITs, and even higher than a lot of lower-yielding REITs. We’ve pounded the table on Omega several times this year for this reason, and with good reason. There os just too much safety in this dividend relative to its yield; if you don’t already own Omega, ask yourself why you aren’t enjoying a growing 8.2% dividend that is more covered by FFO than several 3-4% yielding REITs? And if you have a good answer to that question, let us know, because we can’t imagine there is one.
Elsewhere, municipal bond funds had a quiet week, with both Nuveen AMT-Free Municipal Credit (NVG: $15.49) and Invesco Municipal Trust (VKQ: $12.94) ending the week flat. To understand this, let’s talk a bit about Treasury yields. A big reason why muni bonds fell so heavily in mid-2016 (which is why we waited to recommend them until the end of the year) is that the market was pricing in steep interest rate increases throughout 2017. While we’ve had two rate hikes so far and a third expected in December, (although the probability of even that is declining), that’s less than the Fed had hinted at in 2016. That’s good for municipal bonds, which is why muni bonds have had a strong showing in 2017. For instance, the Nuveen fund we’ve recommended is up 7.2% year-to-date on price alone - that’s less than 200 basis points less than the S&P 500, despite muni bonds’ much lower risk profile and the fund’s 5.6% dividend yield!
The reason for this strong run up in muni bonds - and their relative quiet last week - has to do with interest rates. The market priced into munis a fast pace of rate hikes in 2017, but the reality is that the rate hike schedule is getting longer and longer - meaning the value of munis isn’t going to go down as much as was previously expected. Since the downside was 100% priced in, the lesser downside means these assets were priced too cheaply. And so they’re going up in 2017. It’s also partly why muni bonds have seen relative volatile price movements both up and down in the last couple of years.
Is it still a good time to buy munis? Maybe - it isn’t as clear of a good buy as, say, Omega Healthcare, but holding these funds and collecting their tax-free income stream right now makes a lot of sense.
And there are other interesting options out there, such as the strong performing Digital Realty Trust (DLR: $118, up 3%) and AstraZeneca (AZN: $29, flat). Both of these names are riding a strong wave of momentum thanks to growth in the companies’ fundamental businesses. AstraZeneca was far underpriced last year due to fears of regulations that obviously are not coming anytime soon. Additionally, the drug pipeline is as strong as ever. Similarly, endless demand for server space has made Digital Realty Trust a no-brainer at almost any price. The only problem is that the price growth has lowered their yields - Digital Realty is yielding 3.2% and AstraZeneca is down to 4.8%. It’s becoming clearer and clearer that these two names really should be considered growth or value investments rather than high yield investments. If your goal is to secure a high rate of current income, these names aren’t exactly for you. However, if you appreciate companies with growth potential that haven’t had their future growth fully priced in, but have decent dividends, both names are definitely worth serious consideration.
In any case, the last few weeks have given us a very clear lesson again: Short-term panics based on political headlines are not reasons to sell investments, while fundamental trends in terms of economic demand and dividend coverage are. Financial considerations tell us there’s really nothing to worry about right now.
Good Investing,
Todd Shaver, CEO, Founder and Editor
The Bull Market Report
Founded 1998
August 21, 2017
by Todd Shaver | Aug 21, 2017 | Monthly Newsletter Daily 12pm if new
The Weekly Summary
It was rough week with lots of domestic and international issues popping up, producing anguish. In particular, nine CEOs turned their back on Trump. It all started when first Merck’s Kenneth Frazier, then Under Armour’s Kevin Plank and Intel’s Brian Krzanich stepped down from a White House business group set up to advise Donald Trump. While none mentioned the president, Frazier, one of the country’s most-prominent black chief executive officers, quit the council as Trump was being assailed for failing to quickly condemn white supremacists for deadly violence at a rally Saturday in Charlottesville. Frazier said he was acting on a “matter of personal conscience.” Trump shot back on Twitter Tuesday morning, saying, “For every CEO that drops out of the Manufacturing Council, I have many to take their place.
Then on Wednesday President Trump rushed to announce that he was shutting down the two advisory councils of business leaders, after the members had decided on their own to disband in the wake of the president’s comments on the events in Charlottesville. Of course, these kinds of advisory councils seldom accomplish much of anything.
Look, all this drama will pass. The market will move on. But there is definitely an unsettled feeling out there. It is good that the market showed signs of turning around at week’s end, but we did see a few glimpses of nasty selloffs in a few trading sessions this week. It was a rough week. If you are super worried, then we suggest you take some profits off the table. There are many choices for you to move your money to in the High Yield and the REIT portfolios. These are much more secure, stable stocks with very nice dividends that you can enjoy and sleep better with.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks/funds where we think you can still make good money, including: high yield equities like Annaly and larger caps like Apple, Google, Microsoft, Home Depot, and Visa,
BMR Companies & Commentary
Annaly Capital Management (NLY: $12.34, up 1%)
Annaly recently reported respectable earnings at the beginning of the month. Here are our thoughts on the outlook for the rest of the year and what to watch. Many people are cautious given Annaly’s fixed-rate agency exposure and the current valuation. We know that the company has a set yield on government guaranteed paper. So while there is no credit risk other than the full faith and credit of the United States, there is interest rate risk – we know this and accept this. The newer investments are coming on at lower rates with higher yielding holdings rolling off. And we know that if short term rates rise the current portfolio valuation will be sensitive to the movements. We are likely to see some pressure on Annaly’s business model.
But what can the company do? They can rotate into higher yielding MBS* investments. They can increase leverage. They can do a number of things to cover the dividend. Look, if you think a business model is flawless without risk then you don’t know it well enough. Annaly has rsk to higher rates, but higher rates are ultimately good for the company. And investors are missing all the offsetting possible moves management can take. Remember, this is a company that is 18x the size of the median mortgage REIT by market cap, has outperformed the S&P 500 by 3x since its IPO for total return, and has successfully raised $1.5 billion in new capital this year. They know the world they live in and have survived and thrived for 20 years.
* Mortgage-backed Securities
BMR Take: A Director at the company just bought 13,500 shares. Another one just bought 17,700 shares. We love love love to see that! We are looking at a $0.30 dividend paid quarterly for the time being which is good. The stock looks compelling based on this income stream, producing a dividend over 10%.
Apple (AAPL: $158, flat) is Getting into Programming
Apple has set a 12-month budget of $1 billion to develop original programming. Apple could buy and produce as many as 10 TV shows. Apple's first two efforts -- Planet of the Apps and Carpool Karaoke -- have not been warmly received by critics. Apple executives are talking with Hollywood agents about shows that Apple can buy.
BMR Take: Note that Apple has $260 billion in cash now, and with a market cap of $813 billion cash is 32% of the stock price. So $50 of the stock price is in cash. 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.
And how about Apple's performance last week in a very tough week for equities.
Google (GOOG: $911, flat)
The Cloud is a huge opportunity in technology and all the industry giants are fighting to grab their fair share. Let's stipulate up front that Amazon Web Services (AWS) remains the top choice for most companies that are thinking about moving their data and software into cloud data centers. Having said that, however, Amazon's cloud is no longer the only option that companies consider. For example, those companies wanting extensive analytics are taking a good hard look at the Google Cloud Platform. And many firms are hedging their bets by using multiple cloud providers to avoid being stuck with one down the road.
While AWS is still the largest cloud provider by far, Microsoft and Google are coming on strong. AWS's revenue growth appears to be slowing, in part because it's hard for such a huge business - AWS is expected to produce $16 billion in revenue this year - to grow as fast as its younger, smaller incarnations. Startups are considering alternatives now for several reasons: standard cloud computing and storage services from the three top players are all seen as competitive, and no one thinks any of the three major cloud contenders is going away. Basically, AWS, Microsoft, and Google are seen as safe bets.
BMR Take: Google took a hit on the recent earnings report. Buy the dip. This company will generate over $40 of EPS in 2018. The stock is far from a stretched valuation.
Microsoft (MSFT: $72, up 1%)
As Internet-of-Things (IoT), artificial intelligence (AI), smart factories and intelligent applications continue to advance, businesses are increasingly turning to these technologies to create new business solutions with greater agility in order to drive competitive advantages. Microsoft launched its IoT Innovation Center in Taiwan last October to spur development between IoT partners and international enterprises and organizations. In September, Microsoft will hold its second IoT Expo in conjunction with the World Congress on Information Technology. Jason Zander, Corporate Vice President, Microsoft Azure, will deliver a keynote on "Leading Digital Transformation and Landing IOT Value with a Strong IoT Partner." Zander oversees the development and global deployment of cloud infrastructure and technology, including Microsoft Azure IoT. In addition to sharing the success of Microsoft's IoT Innovation Center and its partners, Mr. Zander will also provide Microsoft's vision of the development of IoT and in-depth analysis on the integrated application solutions of the world's leading IoT partners.
BMR Take: The Internet of Things is a megatrend. We are going from 10 billion devices connected to the internet to 30 billion. Your hair dryer will be connected to the internet someday. All of this is going to be a huge opportunity for Microsoft. The company is on track to generate $4 of EPS in 2018. The valuation remains compelling.
And note how strong Microsoft was last week in the very rough week on Wall Street. This company is solid.
Upcoming Economic News
Richmond Fed Index
August 22th, 10:00 AM
Period: August
Consensus: 12.0
Prior: 14.0
New Home Sales
August 23th, 10:00 AM
Period: July
Consensus: 614,000
Prior: 610,000
Building Permits
August 24th, 8:00 AM
Period: July
Consensus: 1,223,000
Prior: 1,223,000
Blackstone Entity Merging with Starwood Homes
Invitation Homes (INVH, $23), a portfolio company of The Blackstone Group (BX: $32, down 1%) , is merging with Starwood Waypoint Homes. The combined company, to be called Invitation Homes, will have 82,000 homes. Once the deal closes Invitation Homes stockholders will own about 59% of the combined company. The total enterprise value of the deal is $20 billion.
Invitation Homes, a U.S. home rental company, went public in February. Blackstone will own about 40% of Invitation.
--- The portfolio of homes will be focused on high-growth markets, with nearly 70% of revenue coming from the Western US and Florida.
--- The merger is expected to drive $50 million in annual synergies.
--- Continued strong performance with the combined company experiencing 7% same-store NOI growth in Q217 with over 95% occupancy.
--- The two companies have invested nearly $2 billion, an average of approximately $22,000 per home, in renovations and maintenance, improving resident experience and driving economic growth and job creation in local communities.
BMR Take: Just one more example of the innovation that Blackstone is involved with day in and day out. With a dividend of 7% and a leader (Schwarzman) dedicated 24-7 to moving the stock higher, what is there not to like. $38 billion market cap. Reaching the all-time high of $44 set in 2012 is surely on the horizon.
Tesla Near to Completion of Gigafactory
Tesla ($348, down 3%) has released some interesting pictures and a video of their gigafactory in Nevada, 95 times bigger (sic) than a football field. New drone footage shows how massive Tesla's Gigafactory is.
http://www.businessinsider.com/tesla-gigafactory-pictures-facts-2017-8
In other news, Tesla raised $1.8 billion in a bond sale on Friday, boosting the amount by $300 million to meet demand. The 8-year bonds were priced at a record-low yield of 5.3%. The 5.3% coupon is a record low for a bond of its rating and maturity, according to data compiled by Bloomberg. The sale was managed by Goldman Sachs Group and Morgan Stanley.
BMR Take: The bond market loves this company. We do too. But we know the risk involved here is on the high end of the scale. Tesla is either headed to $400 a share or $300. And one could make an argument for either. If it hits $400 and they continue to ramp up production as promised, then $500 is a great possibility. But if it goes to $300, $200 would be in range. You want a risky stock? Then Tesla is your baby.
Amazon Sells Bonds for Whole Foods Acquisition
Speaking of bond sales, Amazon (AMZN: $958, down 1%) went to the markets for money last week and sold $16 billion of unsecured bonds to fund its $14 billion acquisition of Whole Foods Market. And in a sign of market interest, the longest portion of the offering, a 40-year security, was sold at a yield of 1.45 percentage points above Treasuries.
BMR Take: Now that is just unreal low. The company has $21 billion in cash so they didn’t need to go to the bond market but did because rates are so low. Smart thinking, Jeff. The deal is the 4th largest this year, behind ATT and Microsoft.
Apple Goes to the Debt Market in Canada
Apple raised $2.5 billion at a rate of 2.51% in a 7-year note sale in Canada on Tuesday. At $2.5 billion the financing is the largest corporate non-financial borrowing in Canadian history.
Stocks Cheap Compared to Bonds
We’re Just Sayin’
The High Yield Report
By Michael Foster
We’re continuing to see market chaos and a lot of selling of high quality assets although the macro risks from political uncertainty are dwindling. But the current selloff is very different from the previous week’s in one very telling, interesting way: Not all assets are falling at the same rate, and some are actually doing very well.
To wit, take a look at The Bull Market Report’s Healthcare REIT pick Omega Healthcare Investors (OHI: $31) which had a strong showing this week after some initial weakness, helping Omega Healthcare end the week up 2%.
We’re seeing a lot of reshuffling in the markets, with investors rotating in and out of funds, stocks, and assets as they rise or fall due to market demand. This is the real “random walk” of Wall Street, and it’s a dynamic that makes short term trends for any individual asset to be unpredictable. In reality, we’re seeing a lot of individual investors making choices to buy on the dip - and they’re pulling money from other assets to do so.
What can an investor do in such an environment? Simple: sit tight. If you have extra cash on the sidelines, now is the time to deploy into the high yield picks that The Bull Market Report has been recommending for a long time. Last week we suggested buying more of Omega Healthcare shares; it’s up 2% since then. Now is the time to do the same with other REITs seeing irrational weakness like Sabra.
You can also consider adding Kimco Realty Corporation (KIM: $19.34) and Apollo Commercial Real Estate (ARI: $17.92) to your shopping list after Kimco fell over 3% in the last week and Apollo remained flat. There is no change in these companies FFO to justify the decline, and Kimco’s year-long weakness on the often-touted (and always inaccurate) “death of retail” has made it just that much more compelling. We have discussed at length here why Retail isn’t dead, and how Amazon’s recent purchase of Whole Foods indicates that the shift from pre-dotcom retail to mobile “bricks and clicks” commerce is far more complicated than the simple narrative of dying malls. In any case, Kimco doesn’t buy enclosed malls! It’s a high-quality strip mall-focused REIT, and Whole Foods (and thus soon Amazon) is one of its biggest tenants.
There are more buying opportunities beyond REITs, and investors are keen to lighten up their cash allocation to consider the other funds and stocks in the High Yield portfolio. However, there is one word of caution to consider when it comes to one of our best performing picks, the PIMCO Dynamic Income Fund (PDI: $29). This fund was flat last week.
What’s going on here is a pretty basic misunderstanding of the fund’s future income potential. You see, Pimco releases a monthly scorecard of net investment income (NII) on its website, while also calculating its dividend coverage ratio. And, simply put, the news isn’t good for the Dynamic Income Fund.
In the past, Pimco easily out-earned its dividend and had a tremendous amount of undistributed net investment income (UNII). That’s why the fund paid a special dividend of $1.45 at the end of 2016. By this time last year, the fund had around $1 in UNII, so it was pretty obvious that a big special dividend was coming (we discussed this at the time and estimated a strong special dividend at the end of last year – and nailed it). This year, however, the Dynamic Income fund has only 4 cents in UNII - a pretty tremendous drop from a year ago!
There are a few reasons why the fund isn’t earning as much income as it used to, most of which revolves around the crowding out of great investment opportunities in mortgage backed securities. The MBS is a pretty daunting asset made sinister by The Big Short and growing awareness of their role in the subprime housing crisis. However, that crisis is a decade behind us, and the quality of MBS investments has skyrocketed. While Pimco was one of the few asset managers aggressively buying up these assets in the past, there are now a lot of people wanting to buy them. That means lower yields for the assets, thus weaker income for the Dynamic Income Fund.
However, at the same time, it also means growing market prices for these assets. This fund’s NAV has risen by 10% so far in 2017, largely a result of that constant demand for MBS’s in the market. Last year, the Dynamic Income Fund’s NAV had risen by far less than 1% over the same time period, because the demand for these assets simply wasn’t there. That means that the fund is sitting on a lot of capital gains with dwindling income.
What does this mean for shareholders? In all honesty, it’s hard to tell. The fund hasn’t really faced a crowding out of supply due to strong demand since 2012. It has enjoyed both NAV and income gains in earlier years, and the end-of-year special dividends reflected that. We simply don’t know if the fund’s managers will decide to return some of those capital gains to shareholders or hold on to it and give a massively reduced special dividend at the end of the year.
It seems that the market has begun to price in the likelihood of a lower special dividend. The fund’s premium to NAV has plummeted from over 10% earlier this year to just 3%. It may fall even further as we get closer to December. If Pimco surprises and gives a big special payout at the end of the year, that could reverse quickly. If it doesn’t, we’ll probably see middling price growth throughout 2017.
The risk with the fund is that its Net Investment Income continues to fall and it fails to cover its dividend on a long-term basis. While we’ve seen hints of that now, it’s far too early to conclude that this risk is really here and it’s time to sell. But investors need to prepare for that eventuality. We will keep a close eye on this trend and advise you if it’s time to move out of this great fund. Hopefully we won’t have to recommend selling anytime soon.
How should you react? Holding the fund for its income stream makes sense now, and buying more when the fund’s premium disappears and it starts trading at a discount also makes sense. That means there’s no reason for investors to get scared and sell off the fund, but it also means investors shouldn’t expect a massive jump in the fund’s price throughout 2017. That’s not a bad thing - it really reflects what the fund should be seen as: A source of steady and reliable income.
Good Investing,
Todd Shaver, Founder, CEO and Editor
The Bull Market Report
Since 1998
August 20, 2017
by Todd Shaver | Aug 20, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
It was rough week with lots of domestic and international issues popping up, producing anguish. In particular, nine CEOs turned their back on Trump. It all started when first Merck’s Kenneth Frazier, then Under Armour’s Kevin Plank and Intel’s Brian Krzanich stepped down from a White House business group set up to advise Donald Trump. While none mentioned the president, Frazier, one of the country’s most-prominent black chief executive officers, quit the council as Trump was being assailed for failing to quickly condemn white supremacists for deadly violence at a rally Saturday in Charlottesville. Frazier said he was acting on a “matter of personal conscience.” Trump shot back on Twitter Tuesday morning, saying, “For every CEO that drops out of the Manufacturing Council, I have many to take their place.
Then on Wednesday President Trump rushed to announce that he was shutting down the two advisory councils of business leaders, after the members had decided on their own to disband in the wake of the president’s comments on the events in Charlottesville. Of course, these kinds of advisory councils seldom accomplish much of anything.
Look, all this drama will pass. The market will move on. But there is definitely an unsettled feeling out there. It is good that the market showed signs of turning around at week’s end, but we did see a few glimpses of nasty selloffs in a few trading sessions this week. It was a rough week. If you are super worried, then we suggest you take some profits off the table. There are many choices for you to move your money to in the High Yield and the REIT portfolios. These are much more secure, stable stocks with very nice dividends that you can enjoy and sleep better with.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks/funds where we think you can still make good money, including: high yield equities like Annaly and larger caps like Apple, Google, Microsoft, Home Depot, and Visa,
BMR Companies & Commentary
Annaly Capital Management (NLY: $12.34, up 1%)
Annaly recently reported respectable earnings at the beginning of the month. Here are our thoughts on the outlook for the rest of the year and what to watch. Many people are cautious given Annaly’s fixed-rate agency exposure and the current valuation. We know that the company has a set yield on government guaranteed paper. So while there is no credit risk other than the full faith and credit of the United States, there is interest rate risk – we know this and accept this. The newer investments are coming on at lower rates with higher yielding holdings rolling off. And we know that if short term rates rise the current portfolio valuation will be sensitive to the movements. We are likely to see some pressure on Annaly’s business model.
But what can the company do? They can rotate into higher yielding MBS* investments. They can increase leverage. They can do a number of things to cover the dividend. Look, if you think a business model is flawless without risk then you don’t know it well enough. Annaly has rsk to higher rates, but higher rates are ultimately good for the company. And investors are missing all the offsetting possible moves management can take. Remember, this is a company that is 18x the size of the median mortgage REIT by market cap, has outperformed the S&P 500 by 3x since its IPO for total return, and has successfully raised $1.5 billion in new capital this year. They know the world they live in and have survived and thrived for 20 years.
* Mortgage-backed Securities
BMR Take: A Director at the company just bought 13,500 shares. Another one just bought 17,700 shares. We love love love to see that! We are looking at a $0.30 dividend paid quarterly for the time being which is good. The stock looks compelling based on this income stream, producing a dividend over 10%.
Apple (AAPL: $158, flat) is Getting into Programming
Apple has set a 12-month budget of $1 billion to develop original programming. Apple could buy and produce as many as 10 TV shows. Apple's first two efforts -- Planet of the Apps and Carpool Karaoke -- have not been warmly received by critics. Apple executives are talking with Hollywood agents about shows that Apple can buy.
BMR Take: Note that Apple has $260 billion in cash now, and with a market cap of $813 billion cash is 32% of the stock price. So $50 of the stock price is in cash. 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.
And how about Apple's performance last week in a very tough week for equities.
Google (GOOG: $911, flat)
The Cloud is a huge opportunity in technology and all the industry giants are fighting to grab their fair share. Let's stipulate up front that Amazon Web Services (AWS) remains the top choice for most companies that are thinking about moving their data and software into cloud data centers. Having said that, however, Amazon's cloud is no longer the only option that companies consider. For example, those companies wanting extensive analytics are taking a good hard look at the Google Cloud Platform. And many firms are hedging their bets by using multiple cloud providers to avoid being stuck with one down the road.
While AWS is still the largest cloud provider by far, Microsoft and Google are coming on strong. AWS's revenue growth appears to be slowing, in part because it's hard for such a huge business - AWS is expected to produce $16 billion in revenue this year - to grow as fast as its younger, smaller incarnations. Startups are considering alternatives now for several reasons: standard cloud computing and storage services from the three top players are all seen as competitive, and no one thinks any of the three major cloud contenders is going away. Basically, AWS, Microsoft, and Google are seen as safe bets.
BMR Take: Google took a hit on the recent earnings report. Buy the dip. This company will generate over $40 of EPS in 2018. The stock is far from a stretched valuation.
Microsoft (MSFT: $72, up 1%)
As Internet-of-Things (IoT), artificial intelligence (AI), smart factories and intelligent applications continue to advance, businesses are increasingly turning to these technologies to create new business solutions with greater agility in order to drive competitive advantages. Microsoft launched its IoT Innovation Center in Taiwan last October to spur development between IoT partners and international enterprises and organizations. In September, Microsoft will hold its second IoT Expo in conjunction with the World Congress on Information Technology. Jason Zander, Corporate Vice President, Microsoft Azure, will deliver a keynote on "Leading Digital Transformation and Landing IOT Value with a Strong IoT Partner." Zander oversees the development and global deployment of cloud infrastructure and technology, including Microsoft Azure IoT. In addition to sharing the success of Microsoft's IoT Innovation Center and its partners, Mr. Zander will also provide Microsoft's vision of the development of IoT and in-depth analysis on the integrated application solutions of the world's leading IoT partners.
BMR Take: The Internet of Things is a megatrend. We are going from 10 billion devices connected to the internet to 30 billion. Your hair dryer will be connected to the internet someday. All of this is going to be a huge opportunity for Microsoft. The company is on track to generate $4 of EPS in 2018. The valuation remains compelling.
And note how strong Microsoft was last week in the very rough week on Wall Street. This company is solid.
The Home Depot (HD: $147, down 4%)
Home Depot took a bad hit on earnings. But we feel this is a great time to initiate a position or add to an existing one. A few Wall Street analysts upgraded the stock to Buy reaffirming our confidence.
Revenue for the quarter was $28.1 billion versus the consensus for $27.8 billion. Revenue guidance for the year is $95 billion, short of the $99 billion consensus. EPS of $2.25 beat the consensus of $2.21. Chairman, CEO Craig Menear said: "We were pleased with our results this quarter as our customers rewarded us with the highest quarterly sales in company history. We also achieved the highest quarterly net earnings in company history."
So what happened? Analysts were largely upbeat on the results, with same store sales beating expectations despite a tough backdrop for all of the Retail industry. Specifically, same store comparable sales growth was +5.5% beating the +4.6% guidance. So all the momentum looked good this quarter but why the bad outlook for lower revenue? The shares traded down because of this guidance miss. But under the covers many people just think it is conservatism from management, not something serious.
BMR Take: We expect to see momentum continue over the rest of the year following what was the largest quarter ever, pointing to strong sales growth, operating margin expansion and EPS growth. With EPS heading to $9 in 2018 we this valuation is compelling right here to be buying.
Visa (V: $103, up 3%)
Visa announced a multi-year, global partnership with Marqeta, the open API payment card issuing platform, to drive further innovations in commercial and consumer payments. Additionally, Visa has made a strategic investment in Marqeta to support both company’s domestic and international growth objectives.
The Fintech industry is booming, Fintech being short for financial technology. Everybody in financial services from banks like JP Morgan to networks like Visa are having to figure out how to keep up with the technology revolution in finance. That is why this deal is so key for Visa. Visa is embracing the change and going to be delivering the most innovative solutions in payments for years to come. This supports why we love the Visa EPS growth story and believe the stock should be a core holding in your portfolio.
The initial efforts of the partnership will involve growing opportunities for virtual, physical and tokenized payments across a number of commercial markets and use cases that can benefit from Marqeta’s developer-friendly platform.
The market for electronic payments continues to grow in commercial payables, alternative lending, disbursements, eCommerce, on-demand services and P2P payments. To enable this growth, Marqeta’s platform allows companies of all sizes to authorize their own card transactions, fundamentally changing how companies engage with card issuing and transaction processing.
This is the latest partnership and investment for Visa with an emerging innovator within the payments ecosystem. As a global payments technology company, Visa continually evaluates technologies of all kinds – especially those that have the potential to advance digital payments for Visa’s clients and their customers. Recently, Visa has made investments in Chain, Klarna, Square and Stripe, among others.
BMR Take: Visa is a safe haven investment. With EPS heading to $4, we continue to see tremendous value here.
Upcoming Economic News
Richmond Fed Index
August 22th, 10:00 AM
Period: August
Consensus: 12.0
Prior: 14.0
New Home Sales
August 23th, 10:00 AM
Period: July
Consensus: 614,000
Prior: 610,000
Building Permits
August 24th, 8:00 AM
Period: July
Consensus: 1,223,000
Prior: 1,223,000
Blackstone (BX: $32, down 1%) Entity Merging with Starwood Homes
Invitation Homes (INVH, $23), a portfolio company of The Blackstone Group, is merging with Starwood Waypoint Homes. The combined company, to be called Invitation Homes, will have 82,000 homes. Once the deal closes Invitation Homes stockholders will own about 59% of the combined company. The total enterprise value of the deal is $20 billion.
Invitation Homes, a U.S. home rental company, went public in February. Blackstone will own about 40% of Invitation.
--- The portfolio of homes will be focused on high-growth markets, with nearly 70% of revenue coming from the Western US and Florida.
--- The merger is expected to drive $50 million in annual synergies.
--- Continued strong performance with the combined company experiencing 7% same-store NOI growth in Q217 with over 95% occupancy.
--- The two companies have invested nearly $2 billion, an average of approximately $22,000 per home, in renovations and maintenance, improving resident experience and driving economic growth and job creation in local communities.
BMR Take: Just one more example of the innovation that Blackstone is involved with day in and day out. With a dividend of 7% and a leader (Schwarzman) dedicated 24-7 to moving the stock higher, what is there not to like. $38 billion market cap. Reaching the all-time high of $44 set in 2012 is surely on the horizon.
Tesla Near to Completion of Gigafactory
Tesla ($348, down 3%) has released some interesting pictures and a video of their gigafactory in Nevada, 95 times (sic) bigger than a football field. New drone footage shows how massive Tesla's Gigafactory is.
http://www.businessinsider.com/tesla-gigafactory-pictures-facts-2017-8
In other news, Tesla raised $1.8 billion in a bond sale on Friday, boosting the amount by $300 million to meet demand. The 8-year bonds were priced at a record-low yield of 5.3%. The 5.3% coupon is a record low for a bond of its rating and maturity, according to data compiled by Bloomberg. The sale was managed by Goldman Sachs Group and Morgan Stanley.
BMR Take: The bond market loves this company. We do too. But we know the risk involved here is on the high end of the scale. Tesla is either headed to $400 a share or $300. And one could make an argument for either. If it hits $400 and they continue to ramp up production as promised, then $500 is a great possibility. But if it goes to $300, $200 would be in range. You want a risky stock? Then Tesla is your baby.
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
Earnings were everything expected, plus a little more. So here we are with about six weeks before the 3rd quarter comes to a close. Unemployment is low, interest rates are low, energy costs are low and consumer confidence is fairly high. Besides a garden variety correction, what could derail the markets? - not counting a war, which in our opinion and most experts we listen to is a fairly low probability. The most likely candidate would be a recession. With earnings growth better now than the past eight years, this critical element in the recession scenario seems relatively safe for the next several quarters.
However, after speaking with some very learned folks in the banking industry, there is one problem that has caught our attention. We have been told that it is very difficult for banks to make enough profit to lend money when short-term and long-term interest rates are less than 1%. Today, the difference between a 2-year Treasury note and a 10-year Treasury bond remains less than 1%. Rate hikes have a history of producing bear markets in the past and could do so again because there just isn’t enough profit for commercial banks to lend money. Recessions develop out of these situations. We are not yet in an "inverted yield curve" situation (where short-term rates are higher than long-term rates), which is a classic signal of a coming recession, and we don't believe banks are to the point that they are going to substantially curtail lending. However, it is something we will watch for over the coming quarters.
As we said last week, stocks don't go straight up forever. There will be volatility and pullbacks as Fed-tightening continues, but until we see actual signs of an approaching recession, we believe stocks continue to offer better value than bonds.
Amazon Sells Bonds for Whole Foods Acquisition
Speaking of bond sales, Amazon (AMZN: $958, down 1%) went to the markets for money last week and sold $16 billion of unsecured bonds to fund its $14 billion acquisition of Whole Foods Market. And in a sign of market interest, the longest portion of the offering, a 40-year security, was sold at a yield of 1.45 percentage points above Treasuries.
BMR Take: Now that is just unreal low. The company has $21 billion in cash so they didn’t need to go to the bond market but did because rates are so low. Smart thinking, Jeff. The deal is the 4th largest this year, behind ATT and Microsoft.
Apple Goes to the Debt Market in Canada
Apple raised $2.5 billion at a rate of 2.51% in a 7-year note sale in Canada on Tuesday. At $2.5 billion the financing is the largest corporate non-financial borrowing in Canadian history.
Stocks Cheap Compared to Bonds
We’re Just Sayin’
Cantor Fitzgerald: OPKO Health - Overweight Rating, $20 Price Target
And how about this:
In other Opko Health news, Director John A. Paganelli purchased 5,000 shares of the company’s stock on June 1st. Following the transaction, the director now owns 350,000 shares in the company. Director Richard A. Lerner purchased 10,000 shares of the company’s stock on June 5th. Insiders have bought a total of 1,600,000 shares of company stock worth $10,000,000 in the last three months. Insiders own 40% of the company’s stock.
There are eight research companies following Opko. Six have a buy rating; two have a hold. Their average price target is $16.40.
BMR Take: For those of you still hanging in there with Opko Health (OPK: $6.12, down 2%) this report from Cantor Fitzgerald is good news. $20 Wow. That is over three times the current price. What are we missing here? Oh – I know. We are missing a higher stock price! Well maybe, just maybe this is the start of the re-rising (is that a word?) of the stock to the $8 level and then $10 and then on to the races from there. Hope springs eternal, doesn’t it? Well, yes, but with all the good things this company has going for it, for it to stay at $6 any longer JUST DOESN’T MAKE ANY SENSE!
The High Yield Report
By Michael Foster
We’re continuing to see market chaos and a lot of selling of high quality assets although the macro risks from political uncertainty are dwindling. But the current selloff is very different from the previous week’s in one very telling, interesting way: Not all assets are falling at the same rate, and some are actually doing very well.
To wit, take a look at The Bull Market Report’s Healthcare REIT pick Omega Healthcare Investors (OHI: $31) which had a strong showing this week after some initial weakness, helping Omega Healthcare end the week up 2%.
We’re seeing a lot of reshuffling in the markets, with investors rotating in and out of funds, stocks, and assets as they rise or fall due to market demand. This is the real “random walk” of Wall Street, and it’s a dynamic that makes short term trends for any individual asset to be unpredictable. In reality, we’re seeing a lot of individual investors making choices to buy on the dip - and they’re pulling money from other assets to do so.
What can an investor do in such an environment? Simple: sit tight. If you have extra cash on the sidelines, now is the time to deploy into the high yield picks that The Bull Market Report has been recommending for a long time. Last week we suggested buying more of Omega Healthcare shares; it’s up 2% since then. Now is the time to do the same with other REITs seeing irrational weakness like Sabra.
You can also consider adding Kimco Realty Corporation (KIM: $19.34) and Apollo Commercial Real Estate (ARI: $17.92) to your shopping list after Kimco fell over 3% in the last week and Apollo remained flat. There is no change in these companies FFO to justify the decline, and Kimco’s year-long weakness on the often-touted (and always inaccurate) “death of retail” has made it just that much more compelling. We have discussed at length here why Retail isn’t dead, and how Amazon’s recent purchase of Whole Foods indicates that the shift from pre-dotcom retail to mobile “bricks and clicks” commerce is far more complicated than the simple narrative of dying malls. In any case, Kimco doesn’t buy enclosed malls! It’s a high-quality strip mall-focused REIT, and Whole Foods (and thus soon Amazon) is one of its biggest tenants.
There are more buying opportunities beyond REITs, and investors are keen to lighten up their cash allocation to consider the other funds and stocks in the High Yield portfolio. However, there is one word of caution to consider when it comes to one of our best performing picks, the PIMCO Dynamic Income Fund (PDI: $29). This fund was flat last week.
What’s going on here is a pretty basic misunderstanding of the fund’s future income potential. You see, Pimco releases a monthly scorecard of net investment income (NII) on its website, while also calculating its dividend coverage ratio. And, simply put, the news isn’t good for the Dynamic Income Fund.
In the past, Pimco easily out-earned its dividend and had a tremendous amount of undistributed net investment income (UNII). That’s why the fund paid a special dividend of $1.45 at the end of 2016. By this time last year, the fund had around $1 in UNII, so it was pretty obvious that a big special dividend was coming (we discussed this at the time and estimated a strong special dividend at the end of last year – and nailed it). This year, however, the Dynamic Income fund has only 4 cents in UNII - a pretty tremendous drop from a year ago!
There are a few reasons why the fund isn’t earning as much income as it used to, most of which revolves around the crowding out of great investment opportunities in mortgage backed securities. The MBS is a pretty daunting asset made sinister by The Big Short and growing awareness of their role in the subprime housing crisis. However, that crisis is a decade behind us, and the quality of MBS investments has skyrocketed. While Pimco was one of the few asset managers aggressively buying up these assets in the past, there are now a lot of people wanting to buy them. That means lower yields for the assets, thus weaker income for the Dynamic Income Fund.
However, at the same time, it also means growing market prices for these assets. This fund’s NAV has risen by 10% so far in 2017, largely a result of that constant demand for MBS’s in the market. Last year, the Dynamic Income Fund’s NAV had risen by far less than 1% over the same time period, because the demand for these assets simply wasn’t there. That means that the fund is sitting on a lot of capital gains with dwindling income.
What does this mean for shareholders? In all honesty, it’s hard to tell. The fund hasn’t really faced a crowding out of supply due to strong demand since 2012. It has enjoyed both NAV and income gains in earlier years, and the end-of-year special dividends reflected that. We simply don’t know if the fund’s managers will decide to return some of those capital gains to shareholders or hold on to it and give a massively reduced special dividend at the end of the year.
It seems that the market has begun to price in the likelihood of a lower special dividend. The fund’s premium to NAV has plummeted from over 10% earlier this year to just 3%. It may fall even further as we get closer to December. If Pimco surprises and gives a big special payout at the end of the year, that could reverse quickly. If it doesn’t, we’ll probably see middling price growth throughout 2017.
The risk with the fund is that its Net Investment Income continues to fall and it fails to cover its dividend on a long-term basis. While we’ve seen hints of that now, it’s far too early to conclude that this risk is really here and it’s time to sell. But investors need to prepare for that eventuality. We will keep a close eye on this trend and advise you if it’s time to move out of this great fund. Hopefully we won’t have to recommend selling anytime soon.
How should you react? Holding the fund for its income stream makes sense now, and buying more when the fund’s premium disappears and it starts trading at a discount also makes sense. That means there’s no reason for investors to get scared and sell off the fund, but it also means investors shouldn’t expect a massive jump in the fund’s price throughout 2017. That’s not a bad thing - it really reflects what the fund should be seen as: A source of steady and reliable income.
Good Investing,
Todd Shaver, Founder, CEO and Editor
The Bull Market Report
Since 1998
July 30, 2017
by Todd Shaver | Jul 30, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
North Korea test-fired its second intercontinental ballistic missile within a month on Friday, a provocation that heightens pressure on the U.S. and China to find ways to rein in Kim Jong Un’s nuclear ambitions. The U.S. said its top general called his South Korean counterpart to discuss “military response options.” The missile traveled about 620 miles. Trump called the launch a reckless and dangerous action and said "the United States will take all necessary steps to ensure the security of the American homeland and protect our allies in the region.” Why is this so important? It is more than the obvious geopolitical risks. The CBOE Volatility Index (^VIX) touched multi-decade lows earlier this past week at 8.84, but closing Friday at 10.29. It is really hard to see the markets remaining as calm as they are right now. This North Korea news is a fresh reminder that it is highly unlikely the markets remain this placid for long.
However, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks: Amazon, First Solar, Shopify, Square, Facebook, and AstraZeneca.
Highlights From The Past Week
Tech Slide in Week of Upbeat Earnings Underscores Growing Unease. Better earnings equals higher share prices, or so goes the customary thinking. For Technology stocks during this reporting season, it’s the exact opposite. Companies from Google to Microsoft announced quarterly results that beat analyst estimates by a combined 8%, more than any other industry group in the S&P 500 Index. Be reminded, that too much love can prove perilous when momentum reverses. In June, after investors had flocked to Tech stocks anticipating faster earnings growth in a move that pushed the Nasdaq 100 Index to rise twice as fast as the S&P 500, they rushed for the exit all at once, sparking the worst selloff since 2008 relative to the rest of the market.
Focus Turns To The Fed's Balance Sheet. If the Federal Reserve delivers any surprises in the near-future, it will probably come from news on when it plans to start shrinking its balance sheet. Economists don’t foresee an interest-rate hike anytime soon. Yet policy makers might update their language on inflation, because weakness in price data has persisted since they last met, but those changes should be minor.
A larger source of uncertainty stems from the timing of when the Fed will start to shrink its $4.5 trillion holdings of mainly Treasuries and mortgage-related debt. Everyone wants to know how the Fed will cut the bloat after building assets to record levels to help shield the U.S. economy during the financial crisis. Officials expect to begin the process this year and Chair Janet Yellen has said it could get under way “relatively soon.” Her lack of specific guidance has us looking toward the Fed’s meeting in September for an announcement. It sure seems like they would like to get the process started in the Fall. This will undoubtedly be a big shift for markets. But, it is expected and seems to be priced into the markets now. The 10-year Treasury is still very, very low from a historical standpoint at 2.29%. We don’t expect that to change much in the near future.
Howard Marks Sounds Alarm on Tech Stocks. We love to follow what the billionaires say. After all, they have made a lot of money and that is what we are trying to do. Just this week, billionaire Howard Marks, who’s warned of excessive risk in the markets for the past five years, is now sounding the alarm as hazards converge from red-hot Tech stocks, and investor confidence in SoftBank’s $100 billion fund raise. In a 22-page memo -- longer than most of his missives to clients -- the Oaktree Capital Group co-chairman said he sees several phenomena that by themselves seem reasonable but together reveal markets to be heated and risky. “Since we never know when risky behavior will result in a market correction, I’m going to issue a warning today rather than wait until one is upon us,” Marks said. “This warning is likely to feel premature, and perhaps it is, but I think it’s better to turn cautious too soon rather than wait until it’s too late.”
We’re not saying we are in this camp. To the contrary, we remain bullish on America and the stocks in our portfolio. But we want to let you know that there is another side to the bullishness and Marks above is just one of them. But this is nothing new. There are always two sides to every market and guess what? No one knows what the market is going to do in the future. So as we have said many times, if you find yourself with too much worry at night, move out of those stocks that make you nervous and move into the High Yield stocks in our High Yield and REIT portfolios. They are sleep-well stocks that are paying nice 5-10% dividends.
BMR Companies & Commentary
Amazon (AMZN: $1,020, down 1/2% - all changes are for the week)
Amazon traded lower after the company forecast a potential quarterly loss for the first time in two years, a reminder to investors that its reshaping of the worlds of Retailing and Cloud-computing industries doesn’t come without a cost. The company indicated the investment cycle is likely to continue, as it gave third quarter operating income guidance in the range of a $400 million loss to a $300 million profit. Amazon CFO Brian Olsavsky said the third quarter typically sees lower operating income because it has to prepare for the holiday peak season. Revenue guidance came in between $39 billion and $42 billion.
Amazon Web Services remains the company's main growth driver, growing 42% year-over-year, and generating $915 million in operating income. That's more than double the Amazon’s North American business's $435 million in operating income. Its international business continues to lose money with an operating loss of $725 million.
To accommodate exploding growth, the online giant has gone on a hiring spree, pledging to hire more than 100,000 people earlier this year.
The company blew away revenues but came up short on earnings. Revenues were $38 billion in the quarter, up from $30 billion a year ago. Earnings were 40 cents a share, vs. $1.78 last year.
Cash levels remain strong with over $21 billion on the balance sheet vs. just $8 billion in debt.
The company on Thursday said it is boosting spending on new warehouses to meet growing eCommerce demand, data centers for its Amazon Web Services division, video programming to keep customers engaged, and gadgets like the Echo line of voice-activated speakers to stay on the cutting edge of the emerging smart-home market. This comes after shares hit all-time highs Thursday, briefly making Jeff Bezos the richest man in the world. But Gates has staying power after Microsoft reported solid earnings, while Amazon missed estimates and the stock fell a bit.
While analysts remain optimistic about the future of Amazon and their growing revenue, the 2nd quarter earnings report from the company underscored the high cost of its business model. We at The Bull Market Report believe we are in the early stages of the shift of compute to the cloud and the transition of traditional retail online, and that the market is underestimating the long-term financial impact of both to Amazon. That said, Amazon continues to generate high returns on cash invested despite the growing scale of its investments, with significant value in early stage efforts in AI, voice, and robotics. The top line growth acceleration like that we saw in the second quarter is likely to continue in the long term
BMR Take: While EPS estimates are getting knocked around, don’t take your eye off the long term picture. Some analyst models are calling for EPS potential of near $25 in 2020. This could send the stock a lot higher. At the same time, there are many who believe Amazon is a bubble and that Bezos will never allow the company to report sizeable earnings. This is a tough one for us. We believe that Amazon will eventually turn the spigot on and report strong earnings. We aren’t sure when this will happen but we believe it will happen. But others say that he never will.
Oh my – the bulls and the bears fight it out in the end. We are sticking with our bullish stance as we believe revenues ultimately win out (as earnings are destined to follow.)
First Solar (FSLR: $49, up 8%)
First Solar raised this year’s profit forecast on improving terms for power plant sales and unexpectedly strong demand for technology that’s being phased out. This year’s EPS is now seen as up to $2.20, up from earlier guidance of 40 cents. Wow. Gross margins and sales will also come in higher after they shipped a record of 900 megawatts of its Series 4 panel in the second quarter. Big.
First Solar is benefiting from higher module prices in the U.S. as developers and distributors stock up ahead of a potential tariff on U.S. imports. First Solar’s thin-film technology has also seen gains. The sale of its 180-megawatt Switch Station solar farm also came in higher than expected, and management was optimistic for higher margins on two more plant sales later this year. They’re doing a better job of extracting cash out of their sales of plants and modules.
First Solar has begun installing equipment for its larger, more efficient Series 6 panel at its factory in Ohio and plans to ramp up production next year. Analysts estimate that panels can be produced for about 25 cents per watt, less than the 72 cents per watt floor price that may be imposed on imported panels by President Trump under a trade dispute later this year. Chief Executive Officer Mark Widmar said that he may extend production of the Series 4 module even as initial output of series 6 starts this year in Ohio and next year in Malaysia and Vietnam. Stable pricing globally and U.S. tariffs on competing suppliers will factor in that decision. The outlook sure looks good.
BMR Take: First Solar is a top player in a sweet market niche. Better energy efficiency is so important to our future. First Solar’s earnings are re-setting and returning to growth. The stock has almost doubled in the last three months.
Shopify (SHOP: $93, up 4%)
Shopify, the rising e-commerce platform dominated by small business owners, is teaming up with eBay to allow its merchants to sell directly through the online marketplace. The move adds another outlet for Shopify’s roughly 400,000 users. When Shopify signed a similar deal with Amazon in January, its stock surged as investors predicted a boost to revenue.
The company’s strategy has been to integrate with as many online channels as possible, letting its customers diversify away from their personal websites and sell on Twitter, Pinterest, Facebook, BuzzFeed and Amazon. Shopify also provides payment tools, shipping and small loans to help its users build their businesses.
Shopify is a growing player in the battle for turf in the rapidly growing world of online shopping. Instead of building a centralized marketplace such as Amazon and eBay, it provides tools for independent merchants, both large and small to sell online in various ways. It also provides point-of-sale software and hardware for physical stores, similar to Square.
Customers have been asking for Shopify to integrate with eBay for a while. We think a lot of merchants will gravitate toward this new announcement.
BMR Take: Like Amazon? Then you’ll like Shopify. It’s the same big picture story of massive eCommerce growth with a twist of being less widely known. With EPS on track to reach profitability next year, there is a big turn in the stock happening and now is an opportune time to be involved.
Square (SQ: $26, down 2%)
After building a unique payment solution that caters to micro and small merchants, Square is now in the process of rolling out more services (financing, payroll, capital) that accommodates a wider array of merchants and has been successfully moving up-market with a strengthening platform-based approach.
The company has entered a stretch where it’s investing to consolidate its services onto a singular platform with access to services, which should help improve already solid retention, and increase engagement with the company’s services driving robust volume growth. In addition, the company has successfully expanded into four countries outside the US (latest launch in the U.K.)
The company is complementing robust growth with a planned annual margin expansion from operational efficiencies utilizing machine learning and other artificial intelligence techniques.
BMR Take: Given the aforementioned factors, we believe Square is well-positioned to continue solid top-line momentum in 2017, continuing to capture the +$60 billion US market opportunity and beyond (6x opportunity globally) while driving leverage in the business. The company reports EPS on August 2nd. We see compelling upside ahead over the longer term.
Facebook (FB: $172, up 5%) Reported Earnings Last Week
For its second quarter, revenues spiked 45% year-over-year to $9.3 billion, and earnings per share came to $1.32, up 69%. Wall Street’s pros were looking for $1.13 per share in profits. They killed. The stock was up big last week in response, on top of a 44% year-to-date gain.
A few other highlights from the report:
• Daily active users (DAUs) reached 1.32 billion, while monthly active users (MAUs) hit 2.01 billion. Both were up a huge 17%.
• Mobile advertising revenues represented 87% of the total, compared to 84% in the same period a year ago. (We are amazed. 87% of revenues is astounding. We had to double-check what we read.) Remember when they went public and the world thought they had no mobile strategy? What a switch.
• During the past year, Facebook increased global headcount by 43% to 20,700.
• Facebook has $35 billion in the bank and no debt.
Here are the numbers for advertising:
Mobile ad revenue accounted for 87% of the company's total advertising revenue of $9.15 billion in the latest quarter, up from 84% a year earlier. Net income rose to $3.9 billion, or $1.32 per share, from $2.3 billion, or 78 cents per share, a year earlier.
Facebook's CFO once again warned the Street the company's revenue growth is being slowed down by a lower rate of advertisements on its properties, but the Street hardly cared, pushing price targets as high as $210, and the stock zoomed to half a trillion dollars in market capitalization, joining the exclusive club of Google, Microsoft and Apple.
The company noted that there are opportunities for incremental ad load on Instagram, increased engagement from Instagram stories, and potential for new monetization levers through Messenger and WhatsApp.
BMR Take: Facebook is an ad machine like the world has never seen. There is still so much potential ahead. With EPS pushing towards $10 over the next few years, we love this stock.
AstraZeneca (AZN: $30, down 11%)
AstraZeneca plunged after the U.K. drugmaker suffered a blow to its next-generation cancer therapy, with a new drug combination failing to do better than chemotherapy in checking the growth of lung tumors. This has posed a major setback to Chief Executive Officer Pascal Soriot’s ambitions. Imfinzi, used in combination with tremelimumab, didn’t meet a primary endpoint for progression-free survival in the study dubbed Mystic. The drugs were poised to generate more than $7 billion in sales by 2022, according to analysts’ estimates.
The failure calls into question Soriot’s ability to deliver on his growth strategy, put in place to keep the company independent when he rebuffed Pfizer Inc.’s $117 billion-takeover bid in 2014, and may make the firm vulnerable again. Imfinzi, which was poised to become Astra’s biggest medicine by sales, is the cornerstone of its cancer portfolio and key for meeting Soriot’s goal, set in 2014, of boosting revenue to $45 billion by 2023. Sales were $23 billion for 2016, so he has some serious work to do.
“Despite the outcome of the initial readout, we must be patient as the Mystic trial continues as planned to evaluate overall survival,” Soriot said in the statement. The study will continue to assess whether imfinzi or the combination of drugs can help improve life expectancy, with the results expected in the first half of next year.
The Mystic study was a crucial test for Astra’s two immuno- therapies -- a new class of drugs that activate the body’s defense system to attack tumors -- in a race with rivals including Merck, Roche Holding and Bristol-Myers Squibb to dominate the market for cancer treatments.
BMR Take: This is tough news to hear. We will keep a close eye on the situation and consider what to do about it after more careful analysis in the weeks ahead. We don’t like to panic. The stock dropped below our Sell Price of $32, so if you wish to get out you can do so on Monday. The stock came back over $1 on Friday and we are going to stick with it for a little bit more, watching the price closely.
Upcoming Economic News
Pending Home Sales Index
Monday, July 31st, 10:00 AM
Period: June
Consensus: 109.6
Prior: 108.5
Personal Consumption Expenditure
Tuesday, August 1st, 8:30 AM
Period: June
Consensus: 0.20%
Prior: 0.10%
Note: Monthly Personal Income and Outlays data are published by the U.S. Bureau of Economic Analysis. Personal consumption expenditures include consumer spending for all goods and services. These data are published on a quarterly basis in the GDP data release.
Total Light Vehicle Sales
Wednesday, August 2nd, 8:00 AM
Period: July
Consensus: 16.7 million
Prior: 16.4 million
Source: U.S. Bureau of Economic Analysis.
Average Workweek
Friday, August 4th, 8:30 AM
Period: July
Consensus: 34.5
Prior: 34.5
Note: Establishment survey data measuring the average workweek for production or nonsupervisory workers on private nonfarm payrolls.
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
It looks like it's a pretty done deal for the S&P 500 to hit 2500 based on a very good earnings trend reported so far. One exception was Google - it went down even though its gross revenues and underlying ad metrics were good. It also beat its earnings per share estimates, but the investment community figured out this beat was driven by taxes and that for the first time in 5 years, traffic acquisition spending outpaced revenue growth. This reminds us of the typical slaughter of a stock because its earnings missed by a penny.
When you think about investing to grow your money into the future, an investor has to be more of a longer-term investor than one single quarter. Big trends don't come and go on a single quarter's earnings. And, speaking of big trends, what giant long-term trends come to mind first? The "no-brainer" is of course Technology – everything from mobile, the cloud, augmented reality, artificial intelligence, alternative energy and autonomous cars. But there is a sector that is bigger than Technology and has beaten it by 300% since 1999.
Healthcare. In a way, it is comprised of a great deal of "technology" on its own – think biotechnology and all of the remarkable medical devices being created. Healthcare also offers just as much innovation and diversification as technology – there are 800 companies and 12 industries to choose from. And today, there is not one but four "mega-trends" fueling the long-term trend behind Healthcare.
The first and most important is of course the once-in-a-lifetime baby boomer demographic tsunami which will drive it for another decade. Secondly, there is a new age of genetics and medical technology which has ushered in unprecedented advances in scientific and medical research. Companies, investors and charities are pouring billions of dollars yearly into R&D, and this is a trend with no end in sight as they seek to find cures for every disease on earth. Thirdly, earnings have been a classic example of what a mega-trend looks like. In 2016, the Healthcare sector was responsible for nearly 20% of the earnings in the S&P 500, bigger than the Financial, Energy, and Telecom sectors combined.
Yes, we are aware there are concerns that the government will try and hold down drug prices. These are, we believe, going to be overcome by the simple concept that everyone can agree they do not want companies to stop trying to find a cure because they no longer can make a profit.
The last trend is that of mergers and acquisitions. The big Pharma companies need to keep their pipelines full and avoid the revenue drops created when patents expire. During this bull market, over $500 billion in deals have been done, mostly by big drug companies buying emerging Giotechs. While the pace of M&A may slow down, we believe it will always be a positive force driving values in the Healthcare sector - especially if any tax reform policy unleashes a tidal wave of overseas corporate cash onto US shores.
Thus, the moral of this story is: If you own a "mega-trend" such as Healthcare, don't let a bad quarter in the stock market make you react like the investor who bails out of a stock because it missed that quarter's expected numbers. Markets go up and down, but Healthcare is a mega- trend we believe won't stop this decade and probably not in the next one either. We think we are right in the middle of this one.
Tesla Update
Tesla (TSLA: $335, up 2%) announced the first deliveries of Its Model 3 on Friday. There was big fanfare and discussion of the 500,000 orders they have for the car and how they are going to ramp up production from 90,000 cars this year to 500,000 next year. We see a coming let-down on this number and we are sure Elon is working on the language now that he will use to tell us that he is not going to make the numbers. But with that said, the company is amazing. The cars are spectacular. Customers rave about their cars like never before. And in the next five years this firm will become one of the greatest firms in the world. (You heard that here first at The Bull Market Report!)
Here are a few tidbits of things the Elon Musk is talking about:
Musk said that by 2020 Tesla will likely be able to make its cars go as far as 745 miles per charge.
The current record for hypermiling in a Tesla is about 560 miles. What is hypermiling? By taking it easy on the gas pedal and brakes, hypermilers achieve gas mileage feats far beyond the fuel economy ratings given to cars by the Environmental Protection Agency. They coast to stop signs, accelerate slowly, and sometimes raise the ire of other drivers.
The official range for Tesla's Model S is about 315 miles per charge, and note that the Model 3 was announced Friday with a range of 310 miles, up from 220 miles that most thought. Do you think Tesla will NOT continue to enhance the batteries over time? If you don’t, you are delusional. There is no question about this in our mind.
Here is some of the Press Release from Tesla on Friday, paraphrased by Bloomberg.
“Three hundred ten.
“That’s the electric range of a $44,000 version of Tesla’s Model 3, unveiled in its final form Friday night. It’s a jaw-dropping new benchmark for cheap range in an electric car, and it’s just one of several surprises Tesla had in store as it handed over the keys to its first 30 customers.
“Tesla has taken in more than 500,000 deposits at $1,000 a piece, Chief Executive Officer Elon Musk told reporters ahead of the event. This has created a daunting backlog that could take more than a year to fulfill - and that was before Musk took the stage in front of thousands of employees, owners, and reservation-holders to lift the curtain on the company’s most monumental achievement yet.
“We finally have a great, affordable, electric car - that’s what this day means,” Musk said. “I’m really confident this will be the best car in this price range, hands down. Judge for yourself.”
Here’s some of what Tesla disclosed at its plant in Fremont, California:
Two Battery Versions
Tesla has simplified the manufacturing process “dramatically,” Musk said. In the same factory space where Tesla can build 50,000 Model S or Model X cars, it will soon be able to produce 200,000 Model 3s. Part of that is due to a simplified package of options.
The car comes in two battery types: standard and extended range. Here’s how they break down:
Standard Battery:
Price: $35,000
Range: 220 miles (EPA estimated)
Supercharging rate: 130 miles in 30 minutes
Zero to 60 mph time: 5.6 seconds
Long Range Battery:
Price: $44,000
Range: 310 miles
Supercharging rate: 170 miles in 30 minutes (Same as Tesla’s Model S)
Zero to 60 mph time: 5.1 seconds
Only one other electric car in the world has broken the 300-mile range barrier: The most expensive versions of Tesla’s Model S, an ultra-luxury car that costs $97,500 or more. The new Model 3 has cheaper range availability than the current record holder, the $37,500 Chevy Bolt, which is outclassed in nearly every way by the Model 3.
Take a look at this video of the introduction of the Model 3:
https://www.bloomberg.com/news/articles/2017-07-29/tesla-s-model-3-arrives-with-a-surprise-310-mile-range
The High Yield Report
By Michael Foster
Special to The Bull Market Report
One of the biggest stories this week in high yield was Welltower’s (HCN: $73) earnings report, which was a very slight disappointment. Revenue fell 2%, slightly short of expectations, to $1.06 billion. FFO of $1.06 was a one-cent beat, again demonstrating Welltower’s continued acumen at financial discipline. The stock was offer a minor 1% for the week.
What about the dividend? Well, the company’s annual dividends are currently $3.48, with an annualized dividend coverage of 122%. That’s good, but admittedly not fantastic - our general rule of thumb is 130% or more dividend coverage should be every REIT’s target. Yet the company’s massive scale - we’re talking about a $27 billion market capitalization company with $30 billion in assets on the balance sheet - indicates that the income stream is extremely well insulated from a sudden market shock. Welltower also reported some interesting developments both in this quarter and in the future, including two properties spanning over 100,000 square feet that are 100% fully occupied. Partly because of this, the company raised its guidance.
Also significantly, Welltower’s borrowing costs went down. The company has lowered its net debt and improved its debt ratio in the quarter - a wise move considering the higher borrowing costs that are impacting the entire high yield universe. This is another indication that Welltower’s dividend coverage, while slightly soft now, will improve over the coming quarters. For this reason, there is a good reason to hold firm and keep buying this stock.
Also this week, we saw Omega Healthcare Investors (OHI: $31) report results quite similar to Welltower, and it too fell over 1% following the news on that day. The company saw revenue rise 4% a touch short of expectations at $194 million with EPS of 87 cents, which was a 2 cent beat. Again financial discipline was at play for the dynamic. Adjusted FFO rose over 3% from a year ago and the company raised its guidance, now expecting full year FFO to be between $3.42 and $3.44. The company also raised its dividend by a penny, continuing its history of raising dividends every quarter.
How did it do this? A big part of the REIT’s results center around its financing strategy. The company retired some unsecured credit and borrowed with new senior lines of credit, helping to lower overall borrowing costs for the firm. Omega also spent $8 million in new investments in the first quarter while spending another $30 million to renovate existing and build new facilities. The new investments include $180 million worth of property - $115 million in the U. K. and the rest in America.
Omega is doing what it does best: expanding its footprint, finding new opportunities, and improving rent potential with existing properties while increasing its dividend. If the REIT reaches its FFO guidance, the dividend coverage ratio will stay over 130%. Yet the stock is down 3% for the week (after the 64 cent dividend Friday) and is yielding a monstrous 8.2%. This is clear irrationality, and tells us that Omega isn’t just a hold - it’s a strong buy. Investors long this stock should continue to appreciate the dividends and expect their growth to continue. Now is a good time to buy more.
Elsewhere in REIT earnings, Ventas (VTR: $67) reported a revenue beat with 5.6% year-over-year growth to $895 million and EPS of $1.06, a penny above expectations. The company also re-affirmed full-year guidance of $4.15 FFO per share, giving it a dividend coverage ratio of about 133%, around the same as Omega Healthcare. Ventas’s long history means that its yield is quite a bit lower as the market trusts this bigger company. Its $24 billion market cap shows strength and diversification. But 4.6% is a very strong income stream in today’s reality of low interest rates, so this stock continues to be a buy for investors who are looking for income.
What about their future? The company spent $110 million on investments in the second quarter to expand its footprint and provide greater dividend growth for investors in the future. There’s just one snag - Ventas funded this with common stock instead of debt, as Omega did. That’s a trifle concerning. Does the Ventas management believe their company’s stock is overpriced? Total liabilities of $13 billion are 56% of the company’s total assets, giving it a pretty decent debt-to-asset ratio that would justify more lending activity. So why is the company issuing shares, thus diluting investors’ positions in the firm?
A large part of it has to do with the relatively low yield on common shares right now - that 4.6% is lower than the rising borrowing costs that floating-rate loans would cost Ventas in the future. So there’s some logic to the move, whereas Omega’s 8% yield is far too costly to issue too many shares versus the 5% or less borrowing costs on debt that Omega can get through bonds and loans. Thus the financial activities of both REITs, while different, make a lot of sense in their own context.
It seems pretty clear that, in a busy week for Healthcare REITs, the recent earnings releases give renewed confidence to stay long these companies and to continue to collect their dividends. Omega seems to be the strongest buy right now, and it makes sense to buy the company at any point when the dividend is more than 8%. We suspect that won’t last long, so it makes sense to add on to your Omega positions now.
Good Investing,
Todd Shaver, CEO, Editor in Chief, Founder
The Bull Market Report
Since 1998
