July 17, 2017
by Todd Shaver | Jul 17, 2017 | Monthly Newsletter Daily 12pm if new
The Weekly Summary
Billionaire CEO of JP Morgan Chase Jamie Dimon says being an American abroad is “almost an embarrassment.” The rant came on JP Morgan’s widely followed earnings call held Friday. Dimon says the media should focus more on major issues. He doesn’t like listening to the “stupid stuff” Americans have to deal with, expressing frustration over the nation’s inability to invest in infrastructure and overhaul the tax code. There would be much stronger growth if there were more intelligent decisions and less gridlock. Reporters should focus on the major issues the nation faces rather than the vagaries of the firm’s trading businesses, he said. The United States of America has to start to focus on policy which is good for all Americans, and that is infrastructure, regulation, taxation, education. He screamed, “Why you guys don’t write about it every day is completely beyond me. And, like, who cares about fixed-income trading in the last two weeks of June? I mean, seriously.” Dimon is one of the best businessmen in America and his words are known for being the hard truth. It makes sense to us that for the bull market to continue our citizens must wake up to the realities we face and take actions.
There is always a bull market here at The Bull Market Report! This week we highlight the following stocks: PayPal, Splunk, Microsoft, and Tesoro.
Highlights From The Past Week
US Bank earnings season started on Friday. Q2 earnings season for the banks kicked off on Friday morning with results from JP Morgan, Citigroup, Wells Fargo and PNC Financial. Some analysts have highlighted a more difficult setup for the group following a June rally on the back of higher bond yields and capital return announcements that beat elevated expectations. There have also been thoughts that earnings season could shift some of the focus back to the more challenging operating environment for the group. However, there really did not seem to be any meaningful discussion about downside risk to estimates. Analysts seem to be looking for the bulk of the support for Q2 to come from additional net interest margin expansion. This should offset sluggish loan growth and weaker capital markets (near double-digit declines). The latter dynamic has been widely discussed by bank executives and in the press and was a key driver of estimate reductions. Despite some pickup in concerns surrounding the Auto sector, credit is expected to remain benign. Analysts also highlighted expectations for another solid quarter of cost control. This is our first glimpse into the new earnings season.
More conjecture on ECB policy. There is further speculation on ECB policy where the ECB is likely to signal that it is gradually winding down its QE plan at its September 7th policy meeting, and President Draghi could use his appearance at the Fed Reserve's Jackson Hole conference in August to signal a policy shift. The ECB is wary of putting an end date to its QE plan. There is a need to retain flexibility in case the economic outlook sours and also the ECB wants to follow the Fed example of exiting the policy of retaining open-ended nature of program. A Reuters poll of over 75 economists showed consensus thinks the ECB is likely to shift away from ultra-easy policy in September. The Fed and ECB are two of the most powerful institutions in the world for capital markets. This is important stuff.
CBO says Trump budget would not balance. The Congressional Budget Office (CBO) said Trump’s fiscal 2018 budget would reduce the deficit by about a third over next decade. This is a smaller estimated deficit reduction than the White House forecast due to lower revenue projections. Trump’s budget would result in average GDP growth over next decade of 0.1% more than the CBO baseline. CBO also estimated that revenues under Trump’s budget would be almost $1 trillion lower than his estimates over the next decade. Trump budget's deficit reduction would stem from lower spending, including decreasing the $2 trillion base in mandatory spending, mostly from healthcare. Press reports said CBO’s findings creates new complications for Republicans who need to build a coalition of conservatives and moderates to vote for a single budget proposal. We need to start seeing some real progress out of the White House.
Britain acknowledges Brexit bill for the first time. Ahead of this week's Brexit talks between Brexit Secretary Davis and EU negotiator Barnier, a written statement was released to parliament, which acknowledged Britain has financial obligations to the EU, which will continue beyond Brexit. The Financial Times cited EU diplomats saying it goes further than UK Prime Minister May’s previous reference to Britain being willing to reach a “fair settlement” of unspecified obligations. It noted that Davis did not refer to financial issues when he released three position papers ahead of Brexit talks. The article pointed out that the British team sees the statement on financial obligations as an effort to improve the tone of talks rather than a change in substance. Meanwhile, at least 15 Conservative MPs are in talks with Labour on keeping Britain in the European Economic Area after Brexit, which would require accepting free movement of people and paying some money to the EU. The rationale for this approach is that it would give Britain time to reach a final deal with the EU and give certainty for businesses and workers. What a mess.
Dow, S&P 500 Hit Records to Close Winning Week
The S&P 500 hit a fresh record Friday and posted its best weekly performance since late May, and the Dow Industrials notched their third consecutive record close. Let’s keep this going!
BMR Companies & Commentary
PayPal (PYPL: $57, up 6% - new all-time high [NATH) set Friday)
The price target was raised to $70 from $54 at a research firm on the Street. PayPal is the firm's "top idea" for 2017, followed by Google (GOOG: $956, up $37, 4%). Coming opportunities with PayPal's Venmo and with partnerships caused the research firm to become even more bullish.
PayPal and Apple entered into an exciting major partnership this week that sent shares to all-time highs. PayPal and Apple have partnered to give users the ability to use PayPal as a payment method when paying for Apple’s services, which includes the App Store, Apple Music, and iTunes, to name a few. The feature will be introduced in 12 markets, including the US and the UK, and it will be integrated with several devices across Apple’s ecosystem, including the iPhone, iPod, Apple TV, and Apple Watch.
The immediate impact for PayPal is getting access to a massive revenue stream. Revenue from Apple services, which is mostly from the App Store, reached $7 billion in Q416, up 18% from last year. Although the financial terms of this deal have not been disclosed, we can estimate the potential impact. If PayPal were to charge Apple 1.25% per transaction, which is much lower than the 2.9% fee it often charges merchants, and if PayPal accounts for a third of spend on the App Store in 2017 — which will be based on consumers spending a total of $40 billion on the iOS App Store, according to Street sources — PayPal would see $165 million in revenue for 2017.
In the long run, PayPal’s partnership with Apple could give the firm an opportunity to integrate itself into additional Apple services. Over the last few years, Apple has indicated that it plans to turn its chat app, iMessage, into a robust ecosystem. The app now includes peer-to-peer payments, games, and other apps, with even more features coming in the fall with the launch of iOS 11. Although it hasn't been confirmed, it's reasonable to assume that one feature coming down the pipeline is the ability to buy products via iMessage. With PayPal already being a payment option within Apple's ecosystem, users may be more willing to use it going forward.
BMR Take: PayPal ranks among the best growth stories in all of technology and this Apple deal is just another reason as to why. Earnings are growing greater than 20% per year for as far as the eye can see and should break $3 by 2020.
Microsoft (MSFT: $73, up 5%, set a NATH* on Friday)
Early in the week Microsoft proposed a $10 billion effort to bring broadband internet to the rural U.S., an economic-development program aimed at a core constituency of the Trump administration. The plan, which calls for corporate and government cash, would send internet data over unused broadcast frequencies set aside for television channels. If developed, the initiative would help connect 23 million Americans in rural areas who lack high-speed internet access.
*NATH - New All-Time High
Broadband is important for all kinds of things. It’s not just streaming high-definition movies. Slow or nonexistent connections can hinder agriculture, business, education and healthcare. Broadband is arguable now a necessity of life. Microsoft’s proposal calls for a 5-year program of corporate investment and matching federal and state grants to end the gap between rural and urban access, starting with the company’s own efforts. The aim of Microsoft’s new Rural Airband Initiative is to be up and running in 12 states by next year and connect 2 million people over the next five years.
BMR Take: Doing big things like what is described above is why Microsoft is not just a tech titan, but a leader amongst the entire S&P 500. News like this continues to push the stock toward 20x consensus estimates of $4 per share of free cash flow. Do the math – that’s $80 a share.
Tesoro (TSO: $97, up 1%)
Tesoro has been a big winner and it could keep getting better. This week the company announced plans to study the possibility of turning vegetable oil into diesel fuel at its Dickinson refinery, which it purchased in 2016.
The crude oil refiner is making plans to retrofit an 8,000-barrel-per-day diesel hydrotreater to process soy and corn oil into renewable diesel alongside its Bakken crude oil processing. This $3.5 million project would use 17,000 gallons per day of vegetable oils to create a 5% renewable diesel mix to be marketed in North Dakota by the end of 2017. The North Dakota Industrial Commission granted the company a $500,000 grant to help cover the project's cost.
Compared to biodiesel that is blended into petroleum diesel at truck racks, renewable diesel is a superior quality product because, unlike biodiesel, renewable diesel is a pure hydrocarbon stream containing no oxygen. This results in a superior quality fuel that maintains vehicle performance. The company says the project is “unique and exciting.” Of course they do!
BMR Take: The stock continues to trade at a big discount to the consensus NAV* estimate of $120. In comparison, Buffet’s ownership of peer Phillips66 is valued at a premium to NAV in the market. Disconnect that the market will correct down the road? We think so. Tesoro still looks compelling to us even after the recent appreciation.
*NAV – net asset value
Upcoming Economic News
Export Price Index
Tuesday, July 18th, 8:30 AM
Period: June
Consensus: 0.05%
Prior: -0.70%
Note: The U.S. Bureau of Labor Statistics' International Price Program produces Import Price Indexes (MPI) and Export Price Indexes (XPI) containing data on changes in the prices of nonmilitary goods and services traded between the U.S. and the rest of the world.
Housing Starts
Wednesday, July 19th, 8:30 AM
Period: June
Consensus: 1,146,000
Prior: 1,092,000
Note: The number of housing units started in the United States.
Leading Economic Index
Thursday, July 20th, 10:00 AM
Period: June
Consensus: +0.30%
Prior: +0.30%
Note: The Conference Board Leading Economic Index (LEI) for the U.S. increased 0.3% in May to 127.0 (2010 = 100, following a 0.2% increase in April, and a 0.4% increase in March. Leading Indicators are economic series that tend to change direction ahead of shifts in the business cycle. There are 10 components of the U.S. Leading Composite Indicator* published by The Conference Board. The index is constructed by averaging the individual components in order to smooth out a good part of the volatility of the individual series. Historically, the cyclical turning points in the leading index have occurred before those in aggregate economic activity. Prior to 1996, the composite leading, coincident, and lagging indicators were calculated and published by the U.S. Department of Commerce.
* Average weekly hours, manufacturing
Average weekly initial claims for unemployment insurance
Manufacturers’ new orders, consumer goods and materials
ISM Index of New Orders
Manufacturers' new orders, non-defense capital goods excluding aircraft orders
Building permits, new private housing units
Stock prices, 500 common stocks
Leading Credit Index
Interest rate spread, 10-year Treasury bonds less federal funds
Average consumer expectations for business conditions
An Interview with Tim Cook
We read a lengthy interview of Apple CEO Tim Cook by Bloomberg Businessweek Editor Megan Murphy. We thought the following few paragraphs from it were particularly insightful:
Murphy: I was a little surprised the HomePod was pitched primarily as a music device when the competitive talk is of Amazon Echo’s Alexa and the immersive experience in the home. How will the HomePod better integrate Apple inside people’s lives?
Cook: We’re actually already in the home through the iPhone you take with you everywhere. It’s in your pocket or laying on a stand. Today, pre-HomePod, I can control my home using Siri through the iPhone. When I get up in the morning, my iPhone is my alarm clock. I say, “Good morning,” and all of a sudden, my lights come on. The temperature adjusts and a series of things occur. We’re also in the home through Apple TV. Many people use iPad as their computing device. The desktop Mac enjoys a place in the home. The thing that has arguably not gotten a great level of focus is music in the home. So we decided we would combine great sound and an intelligent speaker.
Murphy: So, it’s going to be a holistic process joining up all those touch points so people can exercise control over their lives, whether through Siri or iPad?
Cook: To put it in perspective, Siri is getting requests from 375 million devices right now. My guess is it’s the largest by far of any kind of assistant. Some of those requests are done in the home. Some of those are done on the go. That’s the platform that we build off. It’s very different from our starting point. We’re also in so many languages around the world: Siri isn’t just in English. We’re well-positioned around the world. So, again, what is the thing that’s missing in this equation? The combination of quality audio and instinct.
“I am so excited about it, I just want to yell out and scream”
Murphy: Do you think people will pay $349?
Cook: If you remember when the iPod was introduced, a lot of people said, “Why would anybody pay $399 for an MP3 player?” And when iPhone was announced, it was, “Is anybody gonna pay - whatever it was at that time - for an iPhone?” The iPad went through the same thing. We have a pretty good track record of giving people something that they may not have known that they wanted.
When I was growing up, audio was No. 1 on the list of things that you had to have. You were jammin’ out on your stereo. Audio is still really important in all age groups, not just for kids. We’re hitting on something people will be delighted with. It’s gonna blow them away. It’s gonna rock the house.
BMR Take: We were pleased to see Tim Cook’s responses for two reasons. 1) the iPhone is already the home controller of choice. We knew this, but Cook really put it in perspective. And 2) The takeover of a market is Apple’s modus operandi. Start late with a high price. Then lower prices and dominate. We have no doubt the home assistant will be any different. Amazon – watch out.
Nutanix Has a Rip-Roaring Week
The stock of Nutanix (NTNX: $22) was up 16% last week. We’ve been harping on this stock for weeks, and then along comes Goldman Sachs and says Nutanix is a “once-in-a-decade” opportunity and are looking for a $31 Target. Our Price Target is $30. Is Goldman reading The Bull Market Report? We certainly think so.
We’re already up 27% in the six weeks since we added the stock in late May. And we expect more good things from the company in the future. Nutanix is the leader in hyperconverged infrastructure, meaning it uses software to combine different storage and computing functions on one device. That space has been heating up among enterprises. More businesses are looking to adapt the technology, with 18% of chief information officers saying they expect to move to hyperconverged systems in the next two years, according to Goldman Sachs.
The company’s leadership in the space, including the combination of hardware and software it offers, makes it a “once-in-a-decade tech infrastructure story,” wrote the lead Goldman analyst on the note. They see Nutanix on a path for long-term double-digit growth, high gross margins and large operating leverage.
Additionally, in the shorter-term, Nutanix should benefit from changed accounting rules that will move its software revenues, which are currently deferred, to its profit and loss statement.
BMR Take: What more can we say? All good.
First Solar Continues its Tear
First Solar (FSLR: $43) was up another 9% this past week. We’re still down 30% or so on the stock but we are big believers in the company and management. Our timing on the addition to the Special Opportunities portfolio was bad. But we believe we will be winners in the long run. The stock is up over 55% in the last three months. Keep hanging in there.
Apple Back Up To $150.
Almost. Closed at $149, up $5 for the week. The market just can’t keep this one down. We sincerely hope you have some of this wonderful firm. You think it’s too high. Not on your life.
Annaly Just Keeps Chugging Along
And it is paying 10% a year in dividends. Annaly Capital Management (NLY: $12.33) added 2% last week. The stock has been paying double-digit dividends since inception in 1997. That’s right – 20 years. Where will the stock be in a year? Good question. We would say right about at this level, after paying another four quarterly dividends of 30 cents each. Do the math – that’s a shade under a 10% return. We love this one.
The High Yield Corner
By Michael Foster
Special to The Bull Market Report
We’re getting close to earnings season for Healthcare REITs, and the market’s expectations seem to be getting increasingly bullish. Over the last week, all of The Bull Market Report’s Healthcare REIT picks were in the green, with Omega Healthcare Investors (OHI: $33) leading the pack with a 2% gain for the week. That’s pushed the stock’s year-to-date performance much higher, with a 7% gain on top of half of the fund’s 8% dividend yield. There’s been a relatively low amount of volatility in Omega Healthcare relative to what we saw both in 2015 (where rate hike fears hit all REITs) and 2016 (when the REIT bull market suddenly corrected at the end of the year).
But what about the upcoming earnings report on July 27th? So far, analysts are expecting 86 cent FFO for the quarter, up from 83 cents from a year ago. The company has reaffirmed their 86 cent guidance as recently as early May, bringing the stock’s dividend coverage ratio to 134% if they hit the number. Gotta love it.
Before we discuss whether they will hit it or not, let’s take a quick look at Welltower (HCN: $74, up 1%), which had a similarly strong week and is also planning to release earnings soon - on July 28th before the market open. Welltower has far outperformed Omega for 2017, with a 10% price jump - although the lower dividend (5%) mostly offsets this. Like Omega Healthcare, Welltower is showing strikingly little volatility as of late, a development that makes a lot of sense given Welltower’s tremendous track record and strong dividend coverage. However, it’s surprising to see that Welltower’s dividend coverage is a shade lower than Omega’s at 128%. While that’s still good (general rule of thumb: any number over 115% is good for a REIT), it’s interesting to see how the dividend coverage ratio has slipped in the last couple of years as a result of falling funds from operations. Welltower’s earnings were down 6% from a year ago last quarter, and guidance suggests that decline is set to continue. But Welltower is also increasing dividends, which is a setup for a worrisome dynamic in which, eventually, the company will under-earn its dividend. How soon could that happen? At the current clip we’re safe for another 3-4 years, but the company clearly needs to adapt, lest it find itself suddenly in a position to halt or even cut dividends. For this reason, the company’s earnings results on the 28th and especially its forward guidance will be a key issue to watch for. We will keep a close eye on this.
Finally, Sabra Health Care REIT (SBRA: $23) had a flat week (up less than 1%) despite being one of the smallest Healthcare REITs in terms of market cap and property footprint. It’s quite unusual to see the smaller stock be less volatile than its bigger cousins, but Sabra is one of the less popular REITs out there (investors, especially retail investors, spend a lot more time focusing on Omega), and there was little news on the stock to justify much price action. On top of that, the company’s massive underperformance relative to its peers has soured a lot of investors on the company, while fundamental investors know this is a very good company with strong dividend coverage and growth potential.
So, if you have few sellers and few buyers, you end up with little price change. But how is Sabra doing as we near its earnings release at the end of July? Over the last 12 months, earnings have been weak relative to expectations, with two misses out of the last four quarters. But dividend coverage is impressive, at 132%. Some investors may be a bit concerned about the company’s relatively weak revenue growth, but it’s important to remember that Sabra is pausing on acquisitions right now and reorganizing its new property portfolio additions to maximize income. This process naturally makes revenue look bad, which again is why impatient investors have shied away. Nonetheless, the ongoing restructuring continues to be successful, as the strong dividend coverage ratio proves. Expect to see good things from Sabra in the future that will help the stock recover, but we may not see those developments for a year or more. For investors, that means sitting tight with your Sabra shares, collecting a 7% dividend while you wait for the market to catch up.
Now, with upcoming earnings for these stocks, we need to ask ourselves the likelihood of them hitting their numbers. While there are differences in each company that makes some stronger than others, the broader issue that impacts all of them is the regulatory overhang. A lot of chatter about the future of Obamacare and plans from the Republicans and President Trump to change or obliterate current regulations has left a lot of investors skittish on Healthcare for a long time. But interestingly, we’ve seen the market swiftly realize how silly these concerns are - at least as it impacts the Biopharma sector, which is up solidly for 2017 and is beating the S&P 500. But why isn’t that same relief coming to Healthcare REITs with the same speed?
Simply put, REIT investors are far more risk averse as a group, and they are much slower to recognize a change in the political landscape than growth stock investors. This puts those holding Healthcare REITs in the awkward position of needing to be patient. However, it is clear that there is little change to the regulatory environment coming, and some analysts are already noting that recent GOP proposals to change Obamacare actually look a lot like Obamacare. Whatever your political leanings and opinions on the subject, it seems pretty clear that the status quo isn’t going to change anytime soon.
Again, no matter your opinions on the growing D.C.-based controversies, there is a clear conclusion: Healthcare as it operates in America is not about to change anytime soon. Healthcare REITs have been discounted for a change that would negatively impact them. Putting these together, it’s a clear time to buy or to continue to hold Healthcare REITs both before and after the upcoming earnings season.
Good Investing,
Todd Shaver, Founder, Editor and CEO
The Bull Market Report
Since 1998
July 16, 2017
by Todd Shaver | Jul 16, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
Billionaire CEO of JP Morgan Chase Jamie Dimon says being an American abroad is “almost an embarrassment.” The rant came on JP Morgan’s widely followed earnings call held Friday. Dimon says the media should focus more on major issues. He doesn’t like listening to the “stupid stuff” Americans have to deal with, expressing frustration over the nation’s inability to invest in infrastructure and overhaul the tax code. There would be much stronger growth if there were more intelligent decisions and less gridlock. Reporters should focus on the major issues the nation faces rather than the vagaries of the firm’s trading businesses, he said. The United States of America has to start to focus on policy which is good for all Americans, and that is infrastructure, regulation, taxation, education. He screamed, “Why you guys don’t write about it every day is completely beyond me. And, like, who cares about fixed-income trading in the last two weeks of June? I mean, seriously.” Dimon is one of the best businessmen in America and his words are known for being the hard truth. It makes sense to us that for the bull market to continue our citizens must wake up to the realities we face and take actions.
There is always a bull market here at The Bull Market Report! This week we highlight the following stocks: PayPal, Splunk, Microsoft, and Tesoro.
Highlights From The Past Week
US Bank earnings season started on Friday. Q2 earnings season for the banks kicked off on Friday morning with results from JP Morgan, Citigroup, Wells Fargo and PNC Financial. Some analysts have highlighted a more difficult setup for the group following a June rally on the back of higher bond yields and capital return announcements that beat elevated expectations. There have also been thoughts that earnings season could shift some of the focus back to the more challenging operating environment for the group. However, there really did not seem to be any meaningful discussion about downside risk to estimates. Analysts seem to be looking for the bulk of the support for Q2 to come from additional net interest margin expansion. This should offset sluggish loan growth and weaker capital markets (near double-digit declines). The latter dynamic has been widely discussed by bank executives and in the press and was a key driver of estimate reductions. Despite some pickup in concerns surrounding the Auto sector, credit is expected to remain benign. Analysts also highlighted expectations for another solid quarter of cost control. This is our first glimpse into the new earnings season.
More conjecture on ECB policy. There is further speculation on ECB policy where the ECB is likely to signal that it is gradually winding down its QE plan at its September 7th policy meeting, and President Draghi could use his appearance at the Fed Reserve's Jackson Hole conference in August to signal a policy shift. The ECB is wary of putting an end date to its QE plan. There is a need to retain flexibility in case the economic outlook sours and also the ECB wants to follow the Fed example of exiting the policy of retaining open-ended nature of program. A Reuters poll of over 75 economists showed consensus thinks the ECB is likely to shift away from ultra-easy policy in September. The Fed and ECB are two of the most powerful institutions in the world for capital markets. This is important stuff.
CBO says Trump budget would not balance. The Congressional Budget Office (CBO) said Trump’s fiscal 2018 budget would reduce the deficit by about a third over next decade. This is a smaller estimated deficit reduction than the White House forecast due to lower revenue projections. Trump’s budget would result in average GDP growth over next decade of 0.1% more than the CBO baseline. CBO also estimated that revenues under Trump’s budget would be almost $1 trillion lower than his estimates over the next decade. Trump budget's deficit reduction would stem from lower spending, including decreasing the $2 trillion base in mandatory spending, mostly from healthcare. Press reports said CBO’s findings creates new complications for Republicans who need to build a coalition of conservatives and moderates to vote for a single budget proposal. We need to start seeing some real progress out of the White House.
Britain acknowledges Brexit bill for the first time. Ahead of this week's Brexit talks between Brexit Secretary Davis and EU negotiator Barnier, a written statement was released to parliament, which acknowledged Britain has financial obligations to the EU, which will continue beyond Brexit. The Financial Times cited EU diplomats saying it goes further than UK Prime Minister May’s previous reference to Britain being willing to reach a “fair settlement” of unspecified obligations. It noted that Davis did not refer to financial issues when he released three position papers ahead of Brexit talks. The article pointed out that the British team sees the statement on financial obligations as an effort to improve the tone of talks rather than a change in substance. Meanwhile, at least 15 Conservative MPs are in talks with Labour on keeping Britain in the European Economic Area after Brexit, which would require accepting free movement of people and paying some money to the EU. The rationale for this approach is that it would give Britain time to reach a final deal with the EU and give certainty for businesses and workers. What a mess.
Dow, S&P 500 Hit Records to Close Winning Week
The S&P 500 hit a fresh record Friday and posted its best weekly performance since late May, and the Dow Industrials notched their third consecutive record close. Let’s keep this going!
Special Profile - Leon Black of Apollo
Private equity firm Apollo Global Management (APO: $27, up 3%) this week agreed to acquire ClubCorp Holdings, one of the largest owners and operators of private golf and country clubs in the United States, for $1.1 billion. ClubCorp owns and operates 200 golf, country, business, sports and alumni clubs in 28 states, Washington D.C. and two foreign countries,
The deal comes three months after ClubCorp announced the retirement of is CEO Eric Affeldt and said it had decided not to pursue a "strategic transaction," after efforts to explore a sale did not result in any offer for the entire company. So much for those thoughts!
Apollo said it will pay a 31% premium over its closing price on Friday, in cash for ClubCorp, a but less than the 12-month high the shares reached in February.
Who is the man behind the curtain? Apollo Chairman and CEO Leon Black. He founded Apollo in 1990 to manage investment capital on behalf of a group of institutional investors, focusing on corporate restructuring, leveraged buyouts, and taking minority positions in growth-oriented companies. From 1977 to 1990, Mr. Black worked at Drexel Burnham Lambert, where he served as Managing Director, head of the Mergers & Acquisitions Group and co-head of the Corporate Finance Department. He now serves on the boards of directors of Apollo Global Management, and The Partnership for New York City. Mr. Black is Co-chairman of The Museum of Modern Art, and a trustee of Mount Sinai Hospital, The Metropolitan Museum of Art, and The Asia Society. He is a member of The Council on Foreign Relations. Mr. Black is also a member of the board of FasterCures and the Port Authority Task Force. He graduated summa cum laude from Dartmouth College with a major in Philosophy and History and received an MBA from Harvard Business School.
BMR Take: This man is a powerhouse and the success of your investment in Apollo will depend on Mr. Black. We put him in that category of people like Elon Musk, Steve Jobs and Bill Gates. We are big believers.
BMR Companies & Commentary
PayPal (PYPL: $57, up 6% - new all-time high [NATH) set Friday)
The price target was raised to $70 from $54 at a research firm on the Street. PayPal is the firm's "top idea" for 2017, followed by Google (GOOG: $956, up $37, 4%). Coming opportunities with PayPal's Venmo and with partnerships caused the research firm to become even more bullish.
PayPal and Apple entered into an exciting major partnership this week that sent shares to all-time highs. PayPal and Apple have partnered to give users the ability to use PayPal as a payment method when paying for Apple’s services, which includes the App Store, Apple Music, and iTunes, to name a few. The feature will be introduced in 12 markets, including the US and the UK, and it will be integrated with several devices across Apple’s ecosystem, including the iPhone, iPod, Apple TV, and Apple Watch.
The immediate impact for PayPal is getting access to a massive revenue stream. Revenue from Apple services, which is mostly from the App Store, reached $7 billion in Q416, up 18% from last year. Although the financial terms of this deal have not been disclosed, we can estimate the potential impact. If PayPal were to charge Apple 1.25% per transaction, which is much lower than the 2.9% fee it often charges merchants, and if PayPal accounts for a third of spend on the App Store in 2017 — which will be based on consumers spending a total of $40 billion on the iOS App Store, according to Street sources — PayPal would see $165 million in revenue for 2017.
In the long run, PayPal’s partnership with Apple could give the firm an opportunity to integrate itself into additional Apple services. Over the last few years, Apple has indicated that it plans to turn its chat app, iMessage, into a robust ecosystem. The app now includes peer-to-peer payments, games, and other apps, with even more features coming in the fall with the launch of iOS 11. Although it hasn't been confirmed, it's reasonable to assume that one feature coming down the pipeline is the ability to buy products via iMessage. With PayPal already being a payment option within Apple's ecosystem, users may be more willing to use it going forward.
BMR Take: PayPal ranks among the best growth stories in all of technology and this Apple deal is just another reason as to why. Earnings are growing greater than 20% per year for as far as the eye can see and should break $3 by 2020.
Splunk (SPLK: $60, up 4.5%)
Splunk has come under some selling pressure and stock is still below the highs of the year at $69 set in May, providing yet another buying opportunity as the company exits this seasonal lull. In a market where the "FAAMG*" stocks and other rapidly growing tech companies are making all-time highs, Splunk is down 43% from its high made in 2014. This comes despite Splunk more than tripling its revenue in the last three years and consistently beating analyst expectations.
*FAAMG – Facebook, Apple, Amazon, Microsoft and Google
In our view, Splunk has been one of the most consistent companies over the years and one of the best pure-plays of the Big Data movement. In June, Splunk's growing importance in this market was on display at Cisco Live!, the Data Works Summit and the Cloud Expo. A prime example of Splunk's expanded importance is with Cisco, which is now indexing approximately 9-10 terabytes per day with Splunk versus 2 TB per day in 2015, significantly above the 300 GB of data per day in 2010.
After reporting strong April quarter results during its seasonally weakest quarter of the year, Splunk came under selling pressure in late May and still has not recovered from this downdraft. The market got hung up on "inconsistent performance" during the April quarter that resulted in a leadership change, while license revenue missed forecasts given the strength in the company's cloud business that drove big upside in maintenance and services revenue. As Splunk begins to head into the stronger part of the year, we believe the stock can play catch-up.
Given rising security threats, including the WannaCry Ransomware attack in May, Splunk introduced Splunk Insights for Ransomware in late June. This new offering allows smaller organizations (they offer user-based pricing for up to 1,000 employees) to fight malware in real time with a cost-effective solution.
BMR Take: By leveraging a proprietary machine data technology to turn data into real-time operational intelligence, Splunk is benefiting from its position as a pioneer and leader in the world of machine data with its core software platform called Splunk Enterprise. We see substantial upside for the stock as the current valuation is only 6x revenue versus a high-water market of 28x. We’re up 29% on the stock in a little over a year, but we would await even better returns this next six months as the market comes to recognize how strong the company is.
Microsoft (MSFT: $73, up 5%, setting a NATH* on Friday)
Early in the week Microsoft proposed a $10 billion effort to bring broadband internet to the rural U.S., an economic-development program aimed at a core constituency of the Trump administration. The plan, which calls for corporate and government cash, would send internet data over unused broadcast frequencies set aside for television channels. If developed, the initiative would help connect 23 million Americans in rural areas who lack high-speed internet access.
*NATH - New All-Time High
Broadband is important for all kinds of things. It’s not just streaming high-definition movies. Slow or nonexistent connections can hinder agriculture, business, education and healthcare. Broadband is arguable now a necessity of life. Microsoft’s proposal calls for a 5-year program of corporate investment and matching federal and state grants to end the gap between rural and urban access, starting with the company’s own efforts. The aim of Microsoft’s new Rural Airband Initiative is to be up and running in 12 states by next year and connect 2 million people over the next five years.
BMR Take: Doing big things like what is described above is why Microsoft is not just a tech titan, but a leader amongst the entire S&P 500. News like this continues to push the stock toward 20x consensus estimates of $4 per share of free cash flow. Do the math – that’s $80 a share.
Tesoro (TSO: $97, up 1%)
Tesoro has been a big winner and it could keep getting better. This week the company announced plans to study the possibility of turning vegetable oil into diesel fuel at its Dickinson refinery, which it purchased in 2016.
The crude oil refiner is making plans to retrofit an 8,000-barrel-per-day diesel hydrotreater to process soy and corn oil into renewable diesel alongside its Bakken crude oil processing. This $3.5 million project would use 17,000 gallons per day of vegetable oils to create a 5% renewable diesel mix to be marketed in North Dakota by the end of 2017. The North Dakota Industrial Commission granted the company a $500,000 grant to help cover the project's cost.
Compared to biodiesel that is blended into petroleum diesel at truck racks, renewable diesel is a superior quality product because, unlike biodiesel, renewable diesel is a pure hydrocarbon stream containing no oxygen. This results in a superior quality fuel that maintains vehicle performance. The company says the project is “unique and exciting.” Of course they do!
BMR Take: The stock continues to trade at a big discount to the consensus NAV* estimate of $120. In comparison, Buffet’s ownership of peer Phillips66 is valued at a premium to NAV in the market. Disconnect that the market will correct down the road? We think so. Tesoro still looks compelling to us even after the recent appreciation.
*NAV – net asset value
Upcoming Economic News
Export Price Index
Tuesday, July 18th, 8:30 AM
Period: June
Consensus: 0.05%
Prior: -0.70%
Note: The U.S. Bureau of Labor Statistics' International Price Program produces Import Price Indexes (MPI) and Export Price Indexes (XPI) containing data on changes in the prices of nonmilitary goods and services traded between the U.S. and the rest of the world.
Housing Starts
Wednesday, July 19th, 8:30 AM
Period: June
Consensus: 1,146,000
Prior: 1,092,000
Note: The number of housing units started in the United States.
Leading Economic Index
Thursday, July 20th, 10:00 AM
Period: June
Consensus: +0.30%
Prior: +0.30%
Note: The Conference Board Leading Economic Index (LEI) for the U.S. increased 0.3% in May to 127.0 (2010 = 100, following a 0.2% increase in April, and a 0.4% increase in March. Leading Indicators are economic series that tend to change direction ahead of shifts in the business cycle. There are 10 components of the U.S. Leading Composite Indicator* published by The Conference Board. The index is constructed by averaging the individual components in order to smooth out a good part of the volatility of the individual series. Historically, the cyclical turning points in the leading index have occurred before those in aggregate economic activity. Prior to 1996, the composite leading, coincident, and lagging indicators were calculated and published by the U.S. Department of Commerce.
* Average weekly hours, manufacturing
Average weekly initial claims for unemployment insurance
Manufacturers’ new orders, consumer goods and materials
ISM Index of New Orders
Manufacturers' new orders, non-defense capital goods excluding aircraft orders
Building permits, new private housing units
Stock prices, 500 common stocks
Leading Credit Index
Interest rate spread, 10-year Treasury bonds less federal funds
Average consumer expectations for business conditions
A Word From Gary Jefferson
First Vice-President, Investments
UBS Financial Services, Inc.
Q2 GDP estimate - +2.7%. Anything above 2% is a real plus after eight years of mostly sub -2%, and should provide the momentum needed to get to the 3%+ level.
222,000 jobs added versus 170,000 expected – A lot more should come with passage of any of the three main Trump growth initiatives.
57.8 ISM - Manufacturing is highest since 2014 – This is just what the doctor ordered!
57.4 ISM Services is nice. 60.8 forward-looking New Orders component is even nicer.
None of this means the economy is safe forever. Another recession is inevitable. But what these stats are telling us is that it's just not coming anytime soon.
We still like the Technology, Healthcare, and Financial sectors. While some folks think some of the Tech stocks are bubbly, we agree with those who simply ask about why Tech has led, and if anything has changed. The answers are "earnings" and "no"………. or how about, "FANG is dead – long live FAAMG". [We think you might have to read this last paragraph a few times to get his point!]
2nd Quarter earnings season starts this week. If it lives up to expectations we shouldn't even have to worry about a pullback. Right now, the stats favor another good earnings session. We don't expect the Fed to raise rates until September, and that will depend on how year-end earnings guidance looks. The two dates which will probably have as much if not greater effect on the market are September 5th and 30th. If nothing gets done in Washington before the August recess on September 5th, it could signal the end of any chance for growth stimulus to happen this year. That will likely create a fairly strong headwind. On September 30th, government funding expires. Hopefully we won't have to endure another ridiculous dog-and-pony show in Washington and this will not become a major distraction for investors.
An Interview with Tim Cook
We read a lengthy interview of Apple CEO Tim Cook by Bloomberg Businessweek Editor Megan Murphy. We thought the following few paragraphs from it were particularly insightful:
Murphy: I was a little surprised the HomePod was pitched primarily as a music device when the competitive talk is of Amazon Echo’s Alexa and the immersive experience in the home. How will the HomePod better integrate Apple inside people’s lives?
Cook: We’re actually already in the home through the iPhone you take with you everywhere. It’s in your pocket or laying on a stand. Today, pre-HomePod, I can control my home using Siri through the iPhone. When I get up in the morning, my iPhone is my alarm clock. I say, “Good morning,” and all of a sudden, my lights come on. The temperature adjusts and a series of things occur. We’re also in the home through Apple TV. Many people use iPad as their computing device. The desktop Mac enjoys a place in the home. The thing that has arguably not gotten a great level of focus is music in the home. So we decided we would combine great sound and an intelligent speaker.
Murphy: So, it’s going to be a holistic process joining up all those touch points so people can exercise control over their lives, whether through Siri or iPad?
Cook: To put it in perspective, Siri is getting requests from 375 million devices right now. My guess is it’s the largest by far of any kind of assistant. Some of those requests are done in the home. Some of those are done on the go. That’s the platform that we build off. It’s very different from our starting point. We’re also in so many languages around the world: Siri isn’t just in English. We’re well-positioned around the world. So, again, what is the thing that’s missing in this equation? The combination of quality audio and instinct.
“I am so excited about it, I just want to yell out and scream”
Murphy: Do you think people will pay $349?
Cook: If you remember when the iPod was introduced, a lot of people said, “Why would anybody pay $399 for an MP3 player?” And when iPhone was announced, it was, “Is anybody gonna pay - whatever it was at that time - for an iPhone?” The iPad went through the same thing. We have a pretty good track record of giving people something that they may not have known that they wanted.
When I was growing up, audio was No. 1 on the list of things that you had to have. You were jammin’ out on your stereo. Audio is still really important in all age groups, not just for kids. We’re hitting on something people will be delighted with. It’s gonna blow them away. It’s gonna rock the house.
BMR Take: We were pleased to see Tim Cook’s responses for two reasons. 1) the iPhone is already the home controller of choice. We knew this, but Cook really put it in perspective. And 2) The takeover of a market is Apple’s modus operandi. Start late with a high price. Then lower prices and dominate. We have no doubt the home assistant will be any different. Amazon – watch out.
Nutanix Has a Rip-Roaring Week
The stock of Nutanix (NTNX: $22) was up 16% last week. We’ve been harping on this stock for weeks, and then along comes Goldman Sachs and says Nutanix is a “once-in-a-decade” opportunity and are looking for a $31 Target. Our Price Target is $30. Is Goldman reading The Bull Market Report? We certainly think so.
We’re already up 27% in the six weeks since we added the stock in late May. And we expect more good things from the company in the future. Nutanix is the leader in hyperconverged infrastructure, meaning it uses software to combine different storage and computing functions on one device. That space has been heating up among enterprises. More businesses are looking to adapt the technology, with 18% of chief information officers saying they expect to move to hyperconverged systems in the next two years, according to Goldman Sachs.
The company’s leadership in the space, including the combination of hardware and software it offers, makes it a “once-in-a-decade tech infrastructure story,” wrote the lead Goldman analyst on the note. They see Nutanix on a path for long-term double-digit growth, high gross margins and large operating leverage.
Additionally, in the shorter-term, Nutanix should benefit from changed accounting rules that will move its software revenues, which are currently deferred, to its profit and loss statement.
BMR Take: What more can we say? All good.
First Solar Continues its Tear
First Solar (FSLR: $43) was up another 9% this past week. We’re still down 30% or so on the stock but we are big believers in the company and management. Our timing on the addition to the Special Opportunities portfolio was bad. But we believe we will be winners in the long run. The stock is up over 55% in the last three months. Keep hanging in there.
Twilio Hanging in There
Twilio (TWLO: $29, up 3%) had a good week. It’s down from where we added it for sure, but slowly creeping back up as the Street slowly begins to realize the potential of this company. We are again looking for another strong revenue quarter in early August when they announce. That will show the Street!
Apple Back Up To $150.
Almost. Closed at $149, up $5 for the week. The market just can’t keep this one down. We sincerely hope you have some of this wonderful firm. You think it’s too high. Not on your life.
Annaly Just Keeps Chugging Along
And it is paying 10% a year in dividends. Annaly Capital Management (NLY: $12.33) added 2% last week. The stock has been paying double-digit dividends since inception in 1997. That’s right – 20 years. Where will the stock be in a year? Good question. We would say right about at this level, after paying another four quarterly dividends of 30 cents each. Do the math – that’s a shade under a 10% return. We love this one.
The High Yield Corner
By Michael Foster
Special to The Bull Market Report
We’re getting close to earnings season for Healthcare REITs, and the market’s expectations seem to be getting increasingly bullish. Over the last week, all of The Bull Market Report’s Healthcare REIT picks were in the green, with Omega Healthcare Investors (OHI: $33) leading the pack with a 2% gain for the week. That’s pushed the stock’s year-to-date performance much higher, with a 7% gain on top of half of the fund’s 8% dividend yield. There’s been a relatively low amount of volatility in Omega Healthcare relative to what we saw both in 2015 (where rate hike fears hit all REITs) and 2016 (when the REIT bull market suddenly corrected at the end of the year).
But what about the upcoming earnings report on July 27th? So far, analysts are expecting 86 cent FFO for the quarter, up from 83 cents from a year ago. The company has reaffirmed their 86 cent guidance as recently as early May, bringing the stock’s dividend coverage ratio to 134% if they hit the number. Gotta love it.
Before we discuss whether they will hit it or not, let’s take a quick look at Welltower (HCN: $74, up 1%), which had a similarly strong week and is also planning to release earnings soon - on July 28th before the market open. Welltower has far outperformed Omega for 2017, with a 10% price jump - although the lower dividend (5%) mostly offsets this. Like Omega Healthcare, Welltower is showing strikingly little volatility as of late, a development that makes a lot of sense given Welltower’s tremendous track record and strong dividend coverage. However, it’s surprising to see that Welltower’s dividend coverage is a shade lower than Omega’s at 128%. While that’s still good (general rule of thumb: any number over 115% is good for a REIT), it’s interesting to see how the dividend coverage ratio has slipped in the last couple of years as a result of falling funds from operations. Welltower’s earnings were down 6% from a year ago last quarter, and guidance suggests that decline is set to continue. But Welltower is also increasing dividends, which is a setup for a worrisome dynamic in which, eventually, the company will under-earn its dividend. How soon could that happen? At the current clip we’re safe for another 3-4 years, but the company clearly needs to adapt, lest it find itself suddenly in a position to halt or even cut dividends. For this reason, the company’s earnings results on the 28th and especially its forward guidance will be a key issue to watch for. We will keep a close eye on this.
Finally, Sabra Health Care REIT (SBRA: $23) had a flat week (up less than 1%) despite being one of the smallest Healthcare REITs in terms of market cap and property footprint. It’s quite unusual to see the smaller stock be less volatile than its bigger cousins, but Sabra is one of the less popular REITs out there (investors, especially retail investors, spend a lot more time focusing on Omega), and there was little news on the stock to justify much price action. On top of that, the company’s massive underperformance relative to its peers has soured a lot of investors on the company, while fundamental investors know this is a very good company with strong dividend coverage and growth potential.
So, if you have few sellers and few buyers, you end up with little price change. But how is Sabra doing as we near its earnings release at the end of July? Over the last 12 months, earnings have been weak relative to expectations, with two misses out of the last four quarters. But dividend coverage is impressive, at 132%. Some investors may be a bit concerned about the company’s relatively weak revenue growth, but it’s important to remember that Sabra is pausing on acquisitions right now and reorganizing its new property portfolio additions to maximize income. This process naturally makes revenue look bad, which again is why impatient investors have shied away. Nonetheless, the ongoing restructuring continues to be successful, as the strong dividend coverage ratio proves. Expect to see good things from Sabra in the future that will help the stock recover, but we may not see those developments for a year or more. For investors, that means sitting tight with your Sabra shares, collecting a 7% dividend while you wait for the market to catch up.
Now, with upcoming earnings for these stocks, we need to ask ourselves the likelihood of them hitting their numbers. While there are differences in each company that makes some stronger than others, the broader issue that impacts all of them is the regulatory overhang. A lot of chatter about the future of Obamacare and plans from the Republicans and President Trump to change or obliterate current regulations has left a lot of investors skittish on Healthcare for a long time. But interestingly, we’ve seen the market swiftly realize how silly these concerns are - at least as it impacts the Biopharma sector, which is up solidly for 2017 and is beating the S&P 500. But why isn’t that same relief coming to Healthcare REITs with the same speed?
Simply put, REIT investors are far more risk averse as a group, and they are much slower to recognize a change in the political landscape than growth stock investors. This puts those holding Healthcare REITs in the awkward position of needing to be patient. However, it is clear that there is little change to the regulatory environment coming, and some analysts are already noting that recent GOP proposals to change Obamacare actually look a lot like Obamacare. Whatever your political leanings and opinions on the subject, it seems pretty clear that the status quo isn’t going to change anytime soon.
Again, no matter your opinions on the growing D.C.-based controversies, there is a clear conclusion: Healthcare as it operates in America is not about to change anytime soon. Healthcare REITs have been discounted for a change that would negatively impact them. Putting these together, it’s a clear time to buy or to continue to hold Healthcare REITs both before and after the upcoming earnings season.
Good Investing,
Todd Shaver, Founder, Editor and CEO
The Bull Market Report
Since 1998
June 13, 2017
by Todd Shaver | Jun 13, 2017 | 6pm News Flash
It’s been an anxious two and a half days for all investors. Starting mid-day Friday Tech stocks sold off big time, with most down 3-4%. Netflix was down 5% Friday. Monday was a continuation of the selling and the big question was whether it would continue today. The market was up in overnight trading early this morning and the market rallied and held its gains, right to the close, closing at the highs of the day.
Tesla set a new all-time high today right after the close, at $377. Huge. The market cap is now $62 billion and is worth more than BMW. Wow. This just in – Tesla’s Model X was awarded the highest safety rating of any SUV. Tesla short sellers lost another $500 million today. Too bad. Ron Baron who manages $23 billion said today on CNBC that Tesla can go to $1000 by 2020. Wow. And he expects the company to have $70 billion in revenue and to be earning $10 billion in operating profits. By 2020, the company expects to be selling 1 million cars per year. And he loves the Solar City acquisition. Of course he has $300 million invested in the stock, so he is a bit biased. But we’ll take it.
OK, back to Tech. Most of the FAAMG stocks performed well today. Amazon was up $17 or 1.8%, Facebook was up 1.6%, Microsoft was up 1.3%, Apple +0.9% and Google up 1.1%. To say the least, we were pleased with the market today. Now we just have to get through Janet Yellen’s big interest rate announcement tomorrow.
June 11, 2017
by Todd Shaver | Jun 11, 2017 | Weekly Newsletter 7pm Sunday
To end the week, the market experienced a notable rotation out of Tech (particularly the mega-cap FAAMG* stocks) and into Financials and Energy. Recall that Tech is the market-leading sector this year (+19% YTD) while Financials and Energy have been two notable laggards relative to the S&P 500 (+4% and -13% YTD, respectively). The FAANG complex has seen some significant strength this year, though concerns have been raised about valuation, positioning extremes, and complex risk narratives. We wouldn’t worry too much about the weakness to end the week related to the sector rotation just described. The bull market is alive and well.
* Facebook, Amazon, Apple, Microsoft and Google. This moniker keeps changing. From FANG – which left out Apple, to FAANG, which had Netflix, to FAAMG. We like this the best. The market cap of these five stocks is $2.4 trillion, led by Apple at $780 billion (it was over $800 billion on Thursday). Amazon is at $470 billion, Google is at $665 billion and Facebook is sitting at $450 billion. Combined, the FAAMG stocks have added $660 billion in market value this year.
Friday was a wild day. Listen to this: the Dow was up 89 points to close at 21, 272, a new all-time high. But, the S&P was flat and the Nasdaq was hammered, down 1.8%. It was the Tech stocks, that did it. It started at about 11 AM – the sellers stepped up and sold and never quit until the close. We’re going to watch the futures as they open tonight (Sunday) at 6 PM eastern. We are hopeful things will be calm, but watch out for some fireworks Monday.
The cost to have lunch with Warren Buffett fell this year. Is that a sign of an impending bear market? Of course not – how silly people can be. Lunch went for $2,680,000, down from $3,460,000 last year. The new winner is anonymous. It’s amazing how much money he has, this Mr. Anonymous! The winner gets to bring seven friends to dine with Buffett, 86, at New York’s Smith & Wollensky Steakhouse. Proceeds benefit Glide, a San Francisco charity.
There is always a bull market here at The Bull Market Report! This week we highlight the following stocks: Apple, PayPal, Cloudera, Facebook, and Visa.
Highlights From The Past Week
Credit Card Defaults Surge Most Since Financial Crisis. In late April, after some disturbing monthly charge-off reports from major credit card vendors, per the latest data from the S&P/Experian Bankcard Default Index, as of March the default rate on US credit cards jumped to 3.3%, an increase of 13% from a year ago, and the highest default rate since 2013. The troubling deterioration prompted Moody's to warn investors about the steep increase in credit card charge-off rates in 1Q17 and 4Q16 that were the largest since 2009. The size of the jump was particularly surprising considering the ongoing strength of the US employment market.
Oil Price Drought Lingers On. With crude (and gasoline) prices doing nothing but tumble since OPEC announced that it was extending the production cutbacks, erasing all the hope-fueled bounce off cycle lows, the question once again becomes, is $50 oil still realistic? Oil prices have plunged back to levels not seen since OPEC announced its original production cut deal last November. The underlying factors for the price drop are the same as before: U.S. shale production continues to rise; inventories remain elevated; and the markets are concerned that the OPEC cuts are not doing enough to drain the surplus. But, in fact, the outlook has grown a bit darker more recently, as downside risks to the market have grown. Note that for the 21st week in a row, US rig count is up.
Household Wealth Has Never Been Higher Relative To Income. For 45 years - until roughly 1994 - the average wealth-to-income of American households had held steady around 4.9x. Then the stock bubbles started, first under Greenspan, then Bernanke, and now Yellen, and as a result, as of 1Q17 for the first time in US history, household wealth reached a point where it is over 6.6x larger than household disposable income in America. The surge in wealth, driven almost entirely by new all-time highs in the S&P, has pushed this measure of rational exuberance (think of it as the country's price-to-earnings ratio), above the housing boom peak of the mid-2000s and well above the dot-com bubble-driven highs of the late 1990s.
BMR Companies & Commentary
Apple (AAPL: $149, -4%. Note that all prices in the newsletter are for the week)
Founded in 1976 by Steve Jobs and Steve Wozniak, Apple began as a personal computer vendor. Today, Apple enjoys a more diverse portfolio with the iPhone, iPad, Mac, Apple TV, Apple Watch and iPod, combined with a growing service and software offering that includes Apple Pay, iTunes, Apple Music, CarPlay, iCloud, iBooks, the App Store and more.
Apple's quarterly results will be less important this summer as investors are focused on the iPhone 8 this fall, along with the potential for increased dividend payments, P/E multiple expansion, and new innovations as showcased at Worldwide Developers Conference this week.
On Monday, Apple's innovation engine was in full force at WWDC with a plethora of software and hardware announcements that further expanded the depth and breadth of “Planet Apple”. This included the introduction of a new product category called HomePod, combined with important augmented and virtual reality announcements.
The star of WWDC was HomePod, which Apple believes will “reinvent home music” and will be a “go to” gift this holiday season. It is designed to fight it out with Amazon’s Echo – Alexa (which we have at home and love.) The HomePod will be available just in time for the holidays. As part of the iOS 11 announcement, Apple unveiled ARKit that allows developers to create apps that will enable users to place virtual content over real-world scenes. Apple believes it will create the “largest augmented reality platform in the world” given the hundreds of millions of iPads and iPhones in the market. Also, Apple announced that virtual reality support for content creation will be coming to the Mac for the first time.
BMR Take: We can’t say it enough about this company. Apple remains among the most underappreciated stocks in the world. The stock trades at 9x this year’s consensus EPS estimate of $9, and sits there with over $255 billion of cash.
PayPal (PYPL: $54, flat)
PayPal Holdings provides a leading technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. PayPal’s Payments Platform offers a wide range of products, including PayPal, PayPal Credit, Venmo, Braintree, Paydiant, and Xoom.
The stock has steadily appreciated since the 1Q17 earnings announcement in April. Why? Fears about take-rate* deceleration have diminished, among other things. Qualms over the Apple Cash announcement and impending Zelle** launch have faded. Instead investors have re-focused on fundamental usage trends. We expect consistent performance in operating metrics in the quarters ahead will bolster the cause.
* take-rate is the % collected per transaction.
** Bank of America is launching a person to person payments platform called Zelle.
Instead investors have re-focused on fundamental usage trends. We expect consistent performance in operating metrics in the quarters ahead will bolster the cause.
Payments is obviously not just about the transaction. There is a lot that goes into the user interface, risk decision, merchant- and consumer-side protection and services, and easy onboarding. All these factors build platform relevance, which in turn supports ongoing robust growth.
BMR Take: We continue to view PayPal as the way to invest in the digital commerce trend. The stock is compelling, trading at 25x next year’s consensus EPS of $2.12, versus long-term EPS growth prospects of 20%. Don’t forget about the $9 billion of cash with no debt.
Cloudera (CLDR: $19.40, -15%)
Cloudera is a developer of a data management and analytics platform designed to turn data into real business value. The company's Enterprise Data Hub is a secure and flexible big data software program that offers data engineering, real-time insights for modern data-driven businesses, all within this single, easy-to-use product, enabling businesses to access untapped opportunities currently hidden within their data which allows them to gain value from both data at rest and data in motion and to explore data in deeper context.
A subscriber wrote in to us and said that it wasn’t clear that we were adding Cloudera to the portfolio. We’ll he was right. We didn’t actually say that. But we should have. So yes, we are adding Cloudera to our Special Opportunities Portfolio.
Cloudera reported a solid first quarter. We will walk through what happened Friday as the stock was down hard. We are buyers on the weakness.
The company reported strong 1QF18 results this week – its first quarter as a public company. EPS came in at -27 cents, beating consensus of -36 cents on revenue of $80 million, beating the consensus of $76 million. Sales were fueled by impressive subscription revenue growth of 60%. Moreover, the net expansion rate* remained best-in-class at 140%, cash flow from operations was a pleasant surprise at $5 million, versus consensus of -$15 million, and the company guided well for future quarters this year.
* How much sales did you have ffrom a customer this year? How much last year? 140% means your old customers are growing their revenue nearly 2.5x over how much business they did with you a year ago.
Total revenue in the quarter was $80 million, an increase of 41% from the first quarter fiscal 2017. Subscription revenue was $65 million, an increase of 60% from the year-ago period. Subscription revenue represented 81% of total revenue, up from 72% in first quarter fiscal 2017.
"We had a strong first quarter as a public company, making progress against many of our key objectives," said Tom Reilly, CEO.
Loss from operations for the quarter was $30 million, compared to a loss from operations of $37 million in the year-ago period. Operating cash flow for the quarter was +$5.0 million compared to operating cash flow of negative $24 million in the first quarter of fiscal 2017.
After brushing against the all-time high on Thursday, the stock traded down 15% Friday due to billings that came in below consensus expectations. Management does not consider billings to be an accurate proxy for its business. We note that the company was satisfied with the performance of its sales team.
BMR Take: We think management has credibility on the outlook and just can’t view the stock’s sell-off as anything other than a major over-reaction. Stepping back from the quarter details, our thesis on Cloudera remains unchanged - we like its huge top-line growth (60%), enterprise focus, subscription-based model, large addressable market opportunity, solid gross margins, and opportunities for operating leverage. The stock looks compelling now trading at 4x the 2020 consensus revenue forecast of $540 million (which is nearly double this year’s revenue target).
Facebook (FB: $149, down 3%)
Facebook is focused on building products that enable people to connect and share, through mobile devices, personal computers and other surfaces. The company's products include Facebook, Instagram, Messenger, WhatsApp and Oculus. Facebook enables people to connect, share, discover and communicate with each other on mobile devices and personal computers.
The door is open for Facebook to knock the cover off the ball in the second half of this year. We expect ad revenue growth outperformance. Let’s re-visit why.
Facebook will be able to drive long term revenue growth without a material lift in ad load volume as the rollout of Instagram, Premium Video, and Dynamic Ads* will increase the amount Facebook can charge to advertise.
* From the Facebook website: Facebook dynamic ads automatically promote products to people who have expressed interest on your website, in your app or elsewhere on the internet. Simply upload your product catalog and set up your campaign one time, and it will continue working for you — finding the right people for each product - for as long as you want, and always using up-to-date pricing and availability. [Wow. One more reason for us to love this company. And stock.]
Street models are too conservative and underestimate the long-term monetization potential of upcoming new products. So we see optionality and upward bias to estimates, which do not contemplate contributions from multiple other products including Messenger and WhatsApp.
There was a change in ad impressions and pricing growth which came in this most recent quarter at +32% on impressions and +14% on pricing (versus prior quarters' range of +50% on impressions and 6% on pricing. The company took steps to prioritize longer form video content higher up in the newsfeed. Hence, this opens the door for pricing growth to accelerate further in 2H17 when Facebook takes more deliberate steps to moderate ad load – and presumably ad impression growth.
BMR Take: We believe Facebook can continue to dominate advertising. The stock's valuation has room to the upside as it is trading at 28x the consensus EPS outlook for this year of $5.42 despite the massive long term growth prospects. EPS is expected to double by 2020. Stick around!
Visa (V: $95, -2%)
Visa is a global payments technology company that connects consumers, businesses, financial institutions, and governments in more than 200 countries and territories to fast, secure and reliable electronic payments. Visa operates one of the world’s most advanced processing networks — VisaNet — that is capable of handling more than 65,000 transaction messages a second, while offering fraud protection for consumers and assured payment for merchants.
What’s new at this blue chip? Visa recently added 13 new token service providers to broaden global access to Visa Token Service. What? Let us tell you why this is so cool and important.
Visa announced it has signed 13 new partners to participate in its token service provider (TSP) program, as the payments industry shifts from plastic to digital and broader access to new standards, such as tokenization*, are needed. With demand expected to increase for payments to be embedded into a growing number of devices, services and experiences, Visa has built out a global network of partners to offer secure, digital payment token services and ensure that regardless of form factor, an Internet-of-Things (IoT) device, appliance, wearable or beyond, can become a more secure place for commerce.
* Tokenization, when applied to data security, is the process of substituting a sensitive data element with a non-sensitive equivalent, referred to as a token, that has no extrinsic or exploitable meaning or value. In other words, when you swipe your Visa card at the Starbucks counter, your debit/credit card information gets tokenized. So if it gets stolen later on, it is just a random number and not your actual bank info.
IoT is a monster trend. Billions of devices in the next several decades are going to end up being connected to the internet. Your refrigerator. Cars. Tractors. And anything you can think of. Why not? Hence the name—Internet of Things.
By Visa getting in now with tokenization, the company will be able to process payments on all these devices. Money, money, money! The growth we see at Visa is going to continue.
Don’t just take it from just us. Jim McCarthy, executive vice president, innovation and strategic partnerships at Visa said: “A potential tidal wave of new payment accounts is approaching — conservative estimates expect 21 billion Internet-connected devices in just three more years, so having both the partner network and the right technology in place are fundamental to driving payments on those devices.”
BMR Take: Visa defines the word blue chip. Do you remember how much Visa is worth now? $220 billion. Unreal big. And getting bigger. The stock trades at 24x next year’s consensus EPS estimate of $3.94 with EPS growth running at 15-20%. And it will stay that way for a long time with the IoT mega-trend coming online in the next few years. Plenty of growth ahead for this cash machine. Speaking of cash, they have $8 billion, with $16 billion of debt. A good ratio.
Upcoming Economic News
Producer Price Index ex-Food & Energy Y/Y
Tuesday, 8:30 AM
Period: MAY
Actual: N/A
Consensus: 2.0%
Prior: 1.9%
The Producer Price Index (PPI) is for all items less food and energy, often referred to as Core PPI.
Consumer Price Index ex-Food & Energy Y/Y
Wednesday, 8:30 AM
Period: MAY
Actual: N/A
Consensus: 1.9%
Prior: 1.9%
The Consumer Price Index for all items less food and energy, often referred to as Core CPI, excludes the two most volatile components of the overall CPI.
Industrial Production M/M
Thursday, 9:15 AM
Period: MAY
Actual: N/A
Consensus: 0.20%
Prior: 0.98%
This includes data measuring output in the industrial sector, which the Federal Reserve defines as manufacturing, mining, and electric and gas utilities.
Housing Starts
Friday, 8:30 AM
Period: MAY
Actual: N/A
Consensus: 1,225,000
Prior: 1,172,000
The number of housing units started in the United States. The U.S. Census Bureau's New Residential Construction release provides statistics on the construction of new privately-owned residential structures in the United States.
Some Thoughts on Splunk (SPLK: $58, down 7%)
Growing Pains Emerge in Q1, but the Opportunity Remains. Splunk billings grew 30% YoY, beating consensus expectations by a solid 6% in FY1Q18. The Americas region showed strong execution despite a recent sales reorganization, but European execution faltered, necessitating a change in sales leadership in the region. We see Q1 more as evidence of near-term growing pains as the company puts into place a distribution channel capable of efficiently taking revenues to the $2 billion FY20 target.
Total billings of $240 million grew 30% YoY, a deceleration from 35% in Q4, but still 6% ahead of consensus. Total revenues at $242 million also sustained 30% YoY growth, despite a growing contribution from subscription based Cloud business pushing license growth down to +16% YoY in the quarter versus
35% in Q4. Splunk added 500 new customers in the quarter, in-line with the 500 added in each Q1-Q3 FY17.
FY18 Outlook Moves Modestly Higher. Despite European execution issues, management expressed confidence in the fundamental demand environment (and Splunk's ability to accrue that demand) via an increase to full year top line targets. The revenue guidance moves up modestly from $1.18 billion to $1.19 billion. Further, the company remains committed to expanded sales capacity in line with last year's increase, as the company remains capacity constrained versus opportunity constrained.
Large Deal Growth Slows. Splunk signed 360 deals over $100K in value, up 13% YoY, however this represents a deceleration vs. the 34% growth in large deals seen thru FY17 and 33% growth in Q4. The company saw 80% of business derived from existing customers in the quarter. We don’t really think getting 80% of its revenue from existing clients is a bad thing. In fact, that means 20% came from new business. We’ll buy that logic.
Q2 Guidance Brackets Consensus, FY18 Top Line Guidance Moves Higher. Management is looking for 2Q18 revenue of $268 million and operating margins of 4%.
BMR Take: We like this company; we like the numbers they are doing; we are long term investors at this price level.
SNAP (SNAP: $18.08, down 14%)
Snap, owner of Snapchat, had a rough week. We don’t like this one here at The Bull Market Report and we want to make you aware of why. We just think they are losing too much money and their user numbers are slowing. They are the most shorted Tech IPO out there, with a 28% short interest. Now some, including us, say that a large short position is bullish. Well, yes and no. It is bullish because those shares have to be bought back at some point. But it is bearish because many of the smartest minds on Wall St. think it is going lower. We’re in the latter camp this time.
Some negatives –
User growth is slowing.
Citigroup downgraded the stock.
CEO Evan Spiegel got a $750 million bonus for taking Snap public.
They lost $200 million in the 1st quarter of 2017. That’s a lot of dough.
BMR Take: Some say this is the next Facebook, so that’s the positive angle and this cannot be discounted – there is a lot of money riding on this company succeeding. We just don’t want to be playing this game at this time. A year or two from now? Maybe. We’re happy to watch and wait patiently on the sidelines.
Apple Corner
There was a rumor that the new Apple 8 can’t handle the new, faster data speeds that are coming down the pike. Well, let us say this. First of all, Apple doesn’t comment on new products that haven’t been announced, so there is no way we can know if this is true. Secondly, the new data speeds of the internet are years away. And guess what? Apple will have new software to handle the bigger speeds, AND they will have the Apple 9 out by then. So we say: Bunk.
Apple (AAPL: $149) had a bad day Friday, down $6 from $155, and after flirting with its all-time high of $156.65, set May 15th. We’re really not too concerned about this one-day, 3% drop. Nothing has changed really – just the perception that the Tech stocks can go down from time to time. But we already knew that. Stocks are inherently risky, but we’d rather take the risk of owning an Apple, as we are up 54% from the date we added it 16 months ago. And all the while the 10-year Treasury note is paying a little over 2% a year. Take your pick.
Tesla (TSLA: $357) Update
Pacific Crest, a Wall Street research firm, put a new price target on Tesla of $439. Wahoo! The stock hit an all-time high Friday of $377 and then got hammered down to $357, finishing the week up $17 or 5%. Our Target was $350 which we raised just a week or two ago. We actually think the stock can go a lot higher, as the future of the company is ahead of it, especially as they get closer to delivering cars in massive quantities later this year and next. But what if what happened Friday is indeed the beginning of the end for Tech stocks, including Tesla?
BMR Take: Let’s do this. If the stock gets hammered Monday and Tuesday and falls below $350, let’s get out, take a breather and watch what happens. After all, having added the stock at $199 17 months ago, we have had quite a run, now up 80%. We wouldn’t want to give up these gains.
The High Yield Corner
By Michael Foster
Before we start talking about high yield, we want to talk about oil.
Oil futures have not been doing well. If you’re a futures trader, you’re probably laughing at the absurd understatement of that sentence. Crude oil futures slumped 4% this week after the steep drop on Wednesday, bringing it closer to its 52-week low of $44, which it reached in early May during another moment of energy volatility. Oil is now down about 20% year-to-date, leading to the somewhat rational question of whether 2017 proves to be the worst year for the commodity since the blood bath of 2014.
With oil prices tumbling, everyone is affected. Of course, the effect is quite different depending on where you are in the market and who your customer base is. The classic argument is that low oil is good for consumer discretionary stocks. If Americans are spending less at the pump, so the theory goes, they’ll have more money to spend buying all kinds of stuff they normally wouldn’t buy.
Simple theory. It sounds logical enough to be compelling, although it’s very wrong. The problem with the theory is that it doesn’t take into account things like income growth, ex-energy CPI trends, and labor participation rates. The macroeconomics are quite different now, so consumer discretionary may not be as unaffected by cheaper oil than in 2014, but the Consumer Discretionary SPDR (XLY: $91) is already up 12% for 2017, so it may be too late to play oil’s weakness this way—especially since other macroeconomic factors make the correlation not so 1-to-1.
Likewise, other sectors and entire asset classes get impacted by changes in oil. High yield is one of them. Back in 2014, high yield assets were hit pretty hard with the fall in oil; when oil prices got even worse in 2015, high yield assets were hit yet again. To make matters worse, the Federal Reserve was hinting at raising interest rates, which itself tends to be bad for high yield. All of this meant high yield funds like the SPDR High Yield Bond Fund (JNK: $37) had an awful run, and high yield was being rejected as an asset class by the broader market.
Now that oil is repeating its 2014-2015 decline and consumer discretionary is repeating its 2014 run-up, you would expect high yield to also repeat its historical weakness and be at best on the decline and at worst in a full-on bearish downtrend. But the SPDR fund and most high yield bond funds are up healthily for 2017. The SPDR fund is up 2% so far excluding its near 6% yield, and The Bull Market Report pick Pimco Dynamic Income Fund (PDI: $30) is up 8% for the year excluding its near 9% dividend (which doesn’t exclude special dividends, which last year brought the yield up to a whopping 14%). From the start of 2016, the Pimco fund is up over 9% excluding the $5.19 in dividend payouts since then (giving the fund a 19% total return over the period, well above the S&P’s 15% return over the same period).
That leads to the question of whether it’s time to sell, since you’d expect cheap oil and rising interest rates to be significant problems for bonds. Remember the Fed is widely expected to raise rates this week. Cheaper oil will cause poor performing energy companies to be insolvent and default on loans; higher interest rates will make it harder for existing firms to pay back their loans while also lowering the price in the market for corporate bonds. All of this is really, really bad for junk bond funds.
Again: So the simple theory goes. In reality many of these problems have been priced into junk bonds for a long time. The low and depressed prices of junk bonds in 2014-2015 helped create the bull market from 2016 to today. But it goes back even further than that. If you look at the SPDR High Yield fund’s price return from 2013 to 2015, you’ll see that every year saw the fund’s net asset value go down due to lower and lower demand for risky corporate bonds. Junk was really acting like junk.
Go back even further, and you’ll see that junk bonds stayed pretty much at the same price range from the end of 2009 to early 2015, which is actually 8% lower than today’s current price for high yield corporate bonds.
High yield debt isn’t supposed to act this way. These debts are supposed to go up in price during times of economic growth and go down very sharply in times of economic weakness and/or recession. But the U.S. since 2012 has been in a state of admittedly slow but steady improvement. Corporate bonds should be attracting more capital, not less.
Finally, starting last year, this began to happen in a noticeable way. But the bonds are still not priced where they should be relative to the business cycle. This means high yield bonds still have room to go up in value.
This isn’t just true of corporate bonds. In fact, something very similar has been happening to municipal bonds and REITs, which is why we have been aggressively recommending them for a long time. Sadly, there isn’t enough room this week to go into the details of why these asset classes are also well-positioned in this odd business cycle. But next week we’ll take a closer look at why both of these, like junk bonds, are deeply underappreciated in today’s market.
Good Investing,
Todd Shaver
Editor, Founder and CEO
The Bull Market Report
Since 1998
Disclosure: The Bull Market Report is a compilation of original writings, news from publicly available sources, and third-party research. The subscriber agreement acknowledges that The Bull Market Report is an information source to give you the background to invest in the stock market.
June 4, 2017
by Todd Shaver | Jun 4, 2017 | Weekly Newsletter 7pm Sunday
The Week Ahead
Skepticism mounts for a post-June rate hike at the Fed. While Janet Yellen and her Federal Reserve colleagues are poised to raise interest rates at their meeting this month, investors increasingly doubt the central bank’s projection for additional hikes following soft reports on U.S. employment and inflation. Goldman Sachs pushed back its forecast for a third rate increase this year to December from September. Investors are now pricing in less than one rate hike in 2018 for the first time since the eve of the U.S. elections in November. What does it all mean? As long as the Fed is accommodative with low interest rates, we see the bull market continuing.
There is always a bull market here at The Bull Market Report! This week we highlight the following stocks: Nutanix, VMware, Microsoft, Tesla, Tesoro and Splunk.
Highlights From The Past Week
"It's Not Just Wages" - Workers Without College Degrees Face "More Instability" If you believe San Francisco Fed President John Williams, the US labor market has almost never been more robust than it is today. Of course, middle- and working-class Americans who are struggling with levels of financial uncertainty that would be unfamiliar to their parents’ generation don’t necessarily care that the official unemployment rate is 4.3%. They’re too busy struggling to make ends meet when real wages have been stagnant for decades and economic growth is expected to slouch along at 2% for the foreseeable future. While researching their new book “The Financial Diaries,” Jonathan Morduch and Rachel Schneider followed more than 200 working and middle-class families around for a year and tracked “every dollar of their financial lives." They found that millions of workers without college degrees, especially those who are paid hourly, or who are paid by commission, experience what they call “income variability” - when their pay fluctuates by 25% above or below their average. Perhaps some of us can relate to facing "income variability" challenges, which is why you look to The Bull Market Report for good investment ideas to help supplement your future financial plans.
Stockman Warns Trump "Not a Chance of Reaching 4% Growth" Stuart Varney, the Fox Business economic host, recently interviewed David Stockman, the former Director of Office of Management & Budget under Ronald Regan. Stockman said that, during Reagan’s tax cut policy ranging from 1983 until Reagan’s exit in 1989, the U.S economy grew at an annual rate of 4.8%. However, he went on to say that there is no way we get to that level under Trump. To do so will require Trump-style inflation first, or “Trumpflation”. Doing so might not even be a good idea, he reminded the audience, by pointing out that Reagan’s greater than 4% growth was followed by a massive and deep recession in 1991 and 1992.
Central Bank Cash Flood Spurring Borrowing The good news for investors is that riskier assets will probably keep rallying in the near term. Companies and consumers have substantially boosted their leverage in the past few years as central bankers worldwide flood the market with cash to suppress borrowing costs. Though one thing to watch out for is lower recoveries in the future. In other words, companies and consumers that eventually become insolvent will have fewer assets available to repay their growing mountain of obligations. This is already happening on a small scale in the U.S. Auto industry, which has been suffering recently from falling sales and lower used-car values. Consumers borrowed more money than they could repay to buy new cars and trucks and are now defaulting on those loans at an increasing pace. Ultimate recoveries have declined to levels not seen since 2009.
BMR Companies & Commentary
Note: We would like to reiterate a part of our philosophy of investing here at The Bull Market Report. First of all, we primarily pick and follow stocks from this country. We don’t really have any great interest in Chinese companies. There are a few exceptions, but there are plenty of stocks to look at in this country, without worrying about what’s happening in Europe or Asia.
OK, on to the BMR Company section.
Nutanix (NTNX: $18.58, -5% - net changes in this newsletter are for the week)
Nutanix is a United States-based company that is an enterprise cloud platform that converges servers, virtualization and storage into an integrated solution.
Dheeraj Pandey, founder, chairman and CEO of "hyper-converged" technology vendor Nutanix is going up against all the old guard of tech, including Cisco. Hewlett Packard, Dell and VMware. He is undaunted, explaining his views on how companies and people evolve to new circumstances. He was recently interviewed and some of the excerpts are below.
Will Nutanix ever go all software? Is there are time when Nutanix will be all software, and stop making its own hardware appliances? Not anytime soon, he suggests. "Customers want a consistent experience, and the appliance will always be important for us. So, it’s very early to say that, for at least the next three to five years, it’s still an important part of our strategy” to have hardware. One reason is that some customers might want a “low-end” appliance. Pandey has noticed that other companies that were all software stumbled when they tried to meet such demands because it hit their high profit margins. “It’s about how we use the software gross margins to do a better job,” he says. "Oracle has done a good job of this, with their appliances. They started in software, and for us it’s the other way around. But think about how our software balances out the total company profit."
What about cloud computing? Doesn’t it constrain Nutanix’s growth? Not in Pandey’s view. In fact, he quickly rattles off the figures about Amazon’s AWS cloud service that he has committed to memory. When it was at $8 billion in annual sales, it was growing 84% per annum. When it reached $13 billion the slowed to 43%. "At $30 billion annually, they will be maxed out,” he says. "When we started this company, combined we had a $35 billion incumbency we were up against,” he says, referring to Cisco, privately held Dell, EMC, and the many other enterprise companies. In other words, $30 billion of AWS is not unlike the $35 billion of entrenched vendors Nutanix has already taken on. Then he adds, "What is the overall TAM [total addressable market] of computing? It’s about $215 billion, between servers and storage and networking. But OPEX [operating expenses] is over $400 billion annually." “So, it's more than a $600 billion market that needs to be addressed."
BMR Take: We feel Nutanix is undervalued, trading at 2.6x the consensus 2018 estimated sales forecast with Nutanix growing revenues 52% faster than peers.
VMware (VMW: $95, -2%)
Founded in 1998 and headquartered in Palo Alto, CA, VMware is the leading provider of virtualization solutions. Its virtualization solutions separate the operating system and application software from the underlying hardware, resulting in improvements in efficiency, availability, flexibility, and manageability, while lowering IT costs. In recent years, VMware has expanded beyond virtualization to include Software-Defined Data Center, Hybrid Cloud Computing, and End-User Computing.
The company reported strong F1Q18 results, with EPS of $0.99 (consensus $0.95) on revenue of $1.74 billion (consensus $1.71 billion) and also raised guidance for the year.
Overall, a number of things are going well for VMware, including: 1) its new products like NSX and vSAN, which grew license bookings 50%+ and 150%+ y/y, respectively; 2) its partnership with Dell, which is beginning to yield revenue synergies; and 3) perhaps most interestingly, the VMware Cloud on Amazon Web Services (AWS) seems to have relieved CTOs of some cloud transition anxiety and unlocked spending on VMware solutions.
In terms of the tech spending environment overall, CEO Pat Gelsinger made two key points. First, he simply said, “From the macro sense, we feel good.” Second, he argued that VMware is a beneficiary of the concept of digital transformation. In particular, as “every business is becoming a tech business,” VMware is “uniquely positioned to benefit from many of those trends” with its cloud offerings and software-driven offerings.
VMware said that it “made great progress with Dell this quarter.” In particular, Dell “grew well and performed a bit better” than VMware had expected in F1Q18. Management cited a number of key product areas that are benefiting from that partnership. In addition, VMware expects roughly $250 million of the $1 billion of revenue synergies from the partnership to be materialized in FY18.
BMR Take: We see VMware as a compelling value trading at just 18-19x the consensus 2018 earnings of $5.25, compared with $4.75 for 2017. Fundamentals are strong, revenue growth is in double-digits, and the new partnership with Dell brings excitement and much promise.
Microsoft (MSFT: $72, +3% - a new all-time high)
Microsoft is an American multinational technology company headquartered in Redmond, Washington, that develops, manufactures, licenses, supports and sells computer software, consumer electronics and personal computers and services. As we all know!
[Follow us here closely, as this discussion is about to get technical.] Microsoft Azure is a growing collection of integrated cloud services that developers and IT professionals use to build, deploy, and manage applications through the company’s global network of datacenters. With Azure, customers get the freedom to build and deploy software, using the tools, applications, and frameworks of the their choice. Azure modernizes IT applications. [For those of you more technically savvy folks, below is some of the specifics on how. For those of you who are bored by this, skip down to BMR Take, below.]
Microsoft will soon be delivering the Azure Stack capabilities that will provide Azure cloud services to customer and partner data centers. Combining current Azure cloud capabilities with the Azure stack will position Microsoft as the market leader in true hybrid platform and solutions which meet customers where they are, based on their current cloud adoption maturity. This hybrid approach translates into increased Microsoft hybrid platform adoption regardless of their current cloud maturity but more importantly secures an organization's future modern IT growth on the Microsoft hybrid platform.
A key reason Microsoft can leapfrog competitors is that its hybrid solution will allow customers to maintain their current Microsoft investments (e.g. platform, identity, infrastructure, tools, and resource skills) and extend their IT experience across cloud, hybrid, and on-premise.
It also overcomes connected and disconnected scenarios and data sovereignty limitations that limit many customer’s abilities to develop modern IT applications and accelerate their movement to hybrid models that best meet their risk and data requirements. Also, most Azure marketplace solutions will work on Azure Stack without modification driving more ISVs to promote their cloud-only offerings to on-premise opportunities expanding their potential revenue stream.
A key driver for Azure Stack adoption will also be the hardware and chip companies that can sell a full solution combining their hardware and Microsoft services for on-premise solutions. This will incent hardware manufacturers like Intel, HP, Lenovo to promote an Azure stack solution to maximize their hardware margins. It will also increase Microsoft hybrid adoption by customers driven by hardware partners.
Microsoft is best positioned to maintain its current on-premise customer base and to accelerate further Microsoft Azure adoption through unified development and operations capabilities and by Hardware and Cloud Software providers that want to take advantage of on-premise scenarios.
BMR Take: Microsoft Azure is one of the best assets in cloud technology and is fueling a new wave of growth for the company. While Microsoft is at all-time high, set Friday, the valuation of just 18x the ability to generate $4 of EPS with healthy dividends and buybacks, culminates in what we believe to be a compelling value.
Splunk (SPLK: $63, flat)
Splunk is an American multinational corporation based in San Francisco, that produces software for searching, monitoring, and analyzing machine-generated big data.
Splunk sold off quickly following Q1 earnings 10 days ago. However, most of the Q1 metrics in terms of revenue, billings and operating cash flow were solid. Furthermore, the revenue guide for Q2 and 2018 were raised a bit relative to consensus. The negative reaction towards Q1 results stemmed from License revenue and current product billings metrics that were soft and were attributable to Cloud revenue contribution and Europe region revenue under-performance.
The European results may have been related to deal-timing issues. Field contacts indicate that demand generation events have been well attended by prospects and sales activity in that region has been robust. Nevertheless, the shortfall in Q1 is going to necessitate that Splunk make organizational changes to get that region back on track.
Post Q1 checks indicate the Cloud business continues to enjoy momentum. AWS established a Quick Starts deployment option for Splunk this past February which could facilitate additional business on the AWS platform. Splunk continues to get tremendous leverage from the AWS platform.
Splunk has over 745 active partners globally, and the company wants to grow that number carefully, as we have seen other IT Security vendors suffer from being over distributed.
BMR Take: After a strong performance in the seasonally weakest quarter of the year, we would be buyers of Splunk on any weakness. Despite more than tripling revenue between FY:2014 to FY:2017 and consistently beating analyst expectations, the stock is 37% below the peak made in 2014. Now is a great time to take a closer look if you have not already.
Upcoming Economic News
United States - Total Light Vehicle Sales
Sunday, June 4 8:00 PM
Period: MAY
Actual: N/A
Consensus: 17.0M
Prior: 16.8M R
Unit: Millions of Vehicles
Institute for Supply Management (ISM) - Non-Manufacturing
Monday, June 5, 10:00 AM
Period: MAY
Actual: N/A
Consensus: 57.0
Prior: 57.5
Unit: Index
Notes: The Non-Manufacturing ISM Report on Business is based on data compiled from monthly replies to questions asked of more than 370 purchasing and supply executives in over 62 different industries representing nine divisions from the Standard Industrial Classification categories. A reading above 50 indicates that the non-manufacturing economy is expanding; below 50, that it is declining.
JOLTS* Job Openings
*Job opening and labor turnover survey – Janet Yellen’s favorite
Tuesday, June 6, 10:00 AM
Period: APR
Actual: N/A
Consensus: 5,725K
Prior: 5,743K
Unit: Thousands of Units
Notes: Part of the US Bureau of Labor Statistics, the Job Openings and Labor Turnover Survey (JOLTS) program produces a monthly study that has been developed to address the need for data on job openings, hires, and separations. With the release of May 2003 data, the JOLTS program began publishing industry estimates based on the North American Industry Classification System (NAICS).
Consumer Credit
Wednesday, June 7, 3:00 PM
Period: APR
Actual: N/A
Consensus: $15.0B
Prior: $16.4B
Initial Unemployment Claims
Thursday, June 8, 8:30 AM
Period: 6/03
Actual: N/A
Consensus: 240K
Prior: 248K
United States - Wholesale Inventories
Friday, June 9, 10:00 AM
Period: APR
Actual: N/A
Consensus: -0.3%
Prior: -0.3%
Notes: The Monthly Wholesale Trade Survey provides monthly estimates of sales and inventories of wholesale trade industries. .
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
Well, finally, the market broke out and set a new all-time high, with the Dow closing above 21,200. This was despite some concerning bad economic news. New Home Sales for April fell 11%. The Richmond Fed Manufacturing Index for May fell off a cliff. The headline number declined from 20.0 to 1.0 and it was the first time in five months to be in single digits. New orders fell from 26 to zero. Order backlogs dropped from 4.0 to -15. The shipments component fell from +25 to -1. This suggests the post-election optimism in manufacturing sector is crashing. Another troubling component was shopper traffic that fell from 27 to 7 and expected demand fell from 96 to 73. Inventories fell from 24 to 1.
As we have said repeatedly, earnings fundamentals, of course, are ultimately the key in determining the price or value of a stock. Numerous research articles have shown that companies receiving upward earnings estimate revisions outperform the market while companies receiving downward earnings estimate revisions underperform the market. That's pretty much just plain old common sense. The fact remains that earnings estimate revisions are still the most powerful force impacting stock prices. Therefore, earnings, not other economic data, carried the day. Earnings are going to be the key that determines where the market ends up this year – i.e., they need to stay on track for the market to remain above 2400 and continue to move higher (2436 now.) And there was some good news to counter the weak numbers listed above which was found in the most recent GDP numbers:
GDPNow released it estimate at +3.7% for Q2 estimates and the Blue Chip economist consensus was at +3.1%. After eight years of sub 2%, these are very good numbers.
There are a couple of questions which need answering in order to get more clarity on the future of earnings. These include:
1) How many rate hikes will we get this year? Most analysts expect two more. The bigger question may be what the Fed will do to its balance sheet – if they decide to reduce it, this could create some issues for earnings and stocks.
2) Are current earnings growth estimates without a tax cut already priced into today's market? We think so. The question is raised whether tax cuts are still even possible or whether Trump's pro-growth agenda is completely derailed by a dysfunctional Congress caught up in all the political drama. It still seems to us that the market wants tax reform and wants the economic stimulus that will be provided by tax cuts, repatriation and infrastructure programs. As long as these things are still possible, we think the market will grind higher.
And, there are always the wild cards of 1) oil prices 2) an acceleration in the recent bond rally (bonds still compete with stocks) and 3) the overall world economy, in particular China. The bottom line at this juncture: The market is still signaling that it expects the current expansion to continue.
More on VMware (VMW: $95, down 1%)
VMware set a new all-time high on Thursday at $98 before settling a bit on Friday in a calm market. Here’s an update.
There are 34 Wall Street analysts that follow the stock:
18 Hold Ratings, 16 Buy Ratings
Targets:
5/31/2017 Royal Bank of Canada $110
5/31/2017 Robert W. Baird $115
5/25/2017 Cowen and Company $98
What are analysts saying about VMware stock?
Here are some recent quotes from research analysts:
"VMware’s revenues continue to register strong growth driven by its innovative product offerings. The company continues to benefit from its strength in the virtualization and hybrid cloud market. Its innovative product pipeline, strategic partnerships, frequent contract wins and robust international sales are expected to drive overall results.”
Drexel Hamilton: "VMware delivered a better than expected 4Q16 and we are pleased with the outlook for FY18. Moreover, VMware authorized an additional $1.2 billion stock repurchase program. As such, we are raising our price target to $105 from $90 and reiterate our BUY rating."
Robert W. Baird: "VMware posted a good Q4 and F18 guide. Its public cloud strategy is actually beginning to make sense, and we believe Dell has a better chance of driving revenue synergies than EMC.”
Jefferies Group: "Midway through an earnings season when many infrastructure software companies either reported soft results, guidance, or both, VMW reported one of its best quarters in years and gave very strong guidance that easily exceeded expectations.”
Note that VMware's management team includes the following:
Michael S. Dell, Chairman of the Board
Patrick P. Gelsinger, Chief Executive Officer, Director
Zane C. Rowe, Chief Financial Officer, Executive Vice President
Ownership of the company.
VMware's stock is owned primarily by Dell Technologies at 82%.
VMware declared that its board has authorized a share repurchase program in April, which allows the company to repurchase $1,2 billion in shares.
Cash and Debt
The company has $8 billion in cash and just $1.5 billion in debt. We like these numbers.
BMR Take: VMware is a fabulous company and we are seeing the rewards of the past few years as the company continues to tweak its business model and management continues to improve. With Michael Dell in control now, we expect even bigger things in the future. We wouldn’t be surprised if he decided to buy out the small interest in the company that he doesn’t already own. We added the stock at $83 and our Target is $95. The stock shot through our target recently so we hereby raise our Price Target to $108, and our Sell Price to $90 from $80. With the bull market continuing we expect to see the Target reached this year.
Tesla CEO and the Paris Climate Accord
Elon Musk had vowed to leave President Donald Trump’s advisory councils if the president were to pull the U.S. out of the Paris climate accord. Tim Cook of Apple placed a call to the White House on Tuesday with the same message. 25 companies, including Intel and Microsoft, have signed on to a letter that ran as a full page advertisement in the New York Times and Wall Street Journal on Thursday. A television ad ran Wednesday showed CEOs of top U.S. companies backing the pact.
To many of Musk’s fans, it’s about time. The accord was decades in the making, involving more than 200 nations representing almost the entirety of humanity.
He said Wednesday via Twitter before the announcement on Thursday:
“Don’t know which way Paris will go, but I’ve done all I can” to convince Trump to stick with U.S. commitments made under his predecessor, Barack Obama. Asked what he’d do if Trump decides to leave, the chief executive said he “will have no choice but to depart councils.”
Well, guess what? Trump ruled that we leave. Musk stuck to his word and left.
Tesla Motors (TSLA; $340) had another amazing week on Wall Street. The stock was up 5% to a new all-time high set Thursday. The company is worth $56 billion now.
The founder of Tesla and SpaceX angered many of his supporters earlier this year when he started meeting with Trump and joined the president’s business and manufacturing advisory councils. Some customers even canceled their $1,000 reservations for Tesla’s upcoming Model 3 electric car and posted their refunds on Twitter. Musk continued to advise Trump even as Uber CEO Travis Kalanick succumbed to similar pressure to step down. Musk insisted that it was his chance to ensure the president was hearing from people who take the threat of climate change seriously. Obviously, Trump doesn’t listen to the top minds of the world.
The only nations that haven’t signed on are Nicaragua and Syria.
Tesoro (TSO: $84.50, up 1%)
Tesoro is an independent petroleum refining, logistics and marketing company. The Company operates through three segments. The Refining operating segment refines crude oil and other feedstocks into transportation fuels, such as gasoline and gasoline blendstocks, jet fuel and diesel fuel, as well as other products, including heavy fuel oils, liquefied petroleum gas and petroleum coke for sale in bulk markets to a range of customers within its markets. The Logistics segment includes crude oil and natural gas gathering assets, natural gas and natural gas liquids processing assets, and crude oil and refined products terminaling, transportation and storage assets acquired from third parties. The marketing segment sells transportation fuels through branded and unbranded channels.
On the Street there are 19 firms that follow the stock.
There are 3 Hold Ratings and 16 Buy Ratings
Here are the Targets that a few firms have on the stock
5/30/2017 Morgan Stanley $110
5/19/2017 Credit Suisse Group $100
4/27/2017 Royal Bank of Canada $98
4/22/2017 Citigroup $104
4/19/2017 Jefferies Group $94
BMR Take: We’ve been saying for quite some time now that Tesoro is undervalued. But it’s been frustrating waiting and waiting. As you can see above, the Street has a strong following and high hopes for the company. Our Target remains at the high end as well at $110.
The Weekly High Yield Corner
By Michael Foster
AstraZeneca (AZN: $35, up 4%) had another strong week to help the stock reach a 52-week high, bringing the stock’s 1-year return to 18% excluding dividends. AstraZeneca has been an interesting company for a while, because it suffered both from market worries about pharmaceutical regulation and worries about British companies following Brexit. Both concerns have so far failed to materialize, with both the British economy showing consistently strong numbers and threats of pharma regulation having little bite in a Trump administration.
Instead, pharma is having something of a renaissance. FDA drug approvals have doubled from a year ago. At the same time, AstraZeneca’s pipeline is looking extremely strong. The company has unveiled new products on top of three recently released cancer-fighting drugs, bringing the firm halfway to its 2020 target to release six new medications for a variety of cancers. Ovarian cancer and lung cancer drug studies are so far looking good, with new drugs in Phase 2 and Phase 3 testing. That indicates a continually strong pipeline.
That, in turn, has made the stock more expensive in more than one way. Not only is the price up, but the stock’s PE ratio has risen to over 26. With new drugs in the works, this higher valuation is not unsurprising. It also means that Bull Market Report readers who bought this stock when it was down big got in at a much better valuation and are now better positioned to profit from the future earnings that drug pipeline will deliver.
Our Target has been $37 and our Sell Price has been $29. We raise both to $42 and $32 respectively. The all-time high of $39 set in 2014 is within reach.
More diversified Bull Market Report picks had a less strong but still good showing in the last week, with Invesco Municipal Trust (VKQ: $12.80) and Nuveen AMT-Free Municipal Credit Income Fund (NVG: $15.15) rising over 1% each in the last week. These funds are still delivering a 5%+ tax-free income stream and have delivered modest capital gains since the start of 2017. Both are also offering modest discounts to their net asset values (i.e., the value of the total assets in the fund if sold at market price and immediately distributed to shareholders).
Since Nuveen’s early 2017 dividend cut, the fund’s net investment income has been exceeding distributions on average and the fund is clearly better positioned to have a more sustainable dividend payments in the future. In fact, many municipal bond funds, following dividend cuts in the last five years or so, have been showing greater dividend sustainability in recent months. Why is this? Well, in part it’s because of the weakness in municipal bond markets last year. When muni bond prices go down, their yields rise, and that is actually a good thing for municipal bond funds like these. At the recent higher interest rates paid by already-issued municipal bonds, these funds can buy more aggressively by increasing leverage and/or by buying higher yielding bonds after older bonds in the portfolio are called away or expire. Since both the Nuveen and Invesco funds have loaded their portfolios with lower-duration municipal bonds (that is, bonds that expire in the next 3-4 years) over the last half decade, they have been in a prime position to buy more bonds.
If this sounds complicated, rest assured: These guys know what they’re doing. Nuveen and Invesco have seen their bond funds attract significant capital this year. They have the market experience and knowledge to take advantage of the recent weakness in the municipal bond market.
Now let’s talk REITs. We have been recommending Omega Healthcare Investors (OHI: $31) for a long time, which is why the early 2017 bump in the stock was a welcome sign that the market had caught on to our point of view. In fact, in April and May we came across several articles on various websites pounding the table on Omega Healthcare, arguing that demographic tailwinds, a sound and growing income stream, and an absurdly cheap valuation made this a great stock to buy.
We couldn’t agree more, as we have been saying this for over a year. And at the start of 2017, it seemed the market as a whole had accepted this way of thinking. Then, in the last few weeks something odd has happened with Omega. On May 25, the stock tanked for no clear reason. Again, exactly a week later, the stock tanked again - but recovered slightly to end this past week flat. After all of this, the stock is down over 3% from a year ago excluding dividends that yield 8% at the current price (and note those dividends have gone up every quarter). So no one who owns Omega should be crying just yet. In fact, it would make sense to buy at these current levels. The stock remains very well-valued considering its recent funds from operations report (think of it as EPS for REITs).
Elsewhere, we’ve seen Digital Realty Trust (DLR: $120, up 2%) continue to soar. The stock is now up over 21% year to date. That sounds like a heady number, but keep in mind that the stock was up a similar amount from the year before that. Why? We’re anniversaring the big REIT run-up of 2016, which was both great for Digital Realty and something of a curse in the late months of the year. Of course, that wasn’t a curse for us, since The Bull Market Report continued to recommend buying aggressively as the stock fell. Investors who did that in late 2016 are now sitting on more than 20% gains in a few months on top of the 20%+ gains from two years ago in June, 2015. Granted, the big price run-up means Digital Realty doesn’t really qualify as a “high yielder”, and one may question whether its 3% yield really prices in the risks of the data center rental space. That means the risks of buying at these levels are greater than before, and one may prefer to just hold the stock.
Let’s look at our Target and Sell Prices. We added the stock at $85 in early 2016 so we are up 41% not counting the dividend. The Target is currently $120 and the Sell Price is $89. We always hate to sell stocks that are doing well because of a previously picked Target Price. After all, the stock might go higher. So we will do this. We are going to set the Target at $125 but move the Sell Price up to $115. If it hits $115 we are out.
Good Investing,
Todd Shaver
Founder, Editor and CEO
The Bull Market Report
Since 1998
