November 12, 2017
by Todd Shaver | Nov 12, 2017 | Weekly Newsletter 7pm Sunday
[Note that the formatting is not up to our normal layout. We are having some editing issues. Next week should be better.]
The Weekly Summary
The big story right now remains central banks. The reversal of easy central bank monetary policies across the globe has begun to reverse. Quantitative easing had a meaningful favorable impact to asset prices to the upside. The removal of this stimulus will work in reverse. Accordingly, investors should be prepared for more volatility in the months ahead. Major central banks say they want to normalize monetary policy, which suggests higher interest rates and the eventual end of nearly a decade of quantitative easing. As widely expected, the US Federal Reserve said in September that it would begin the multiyear process of reducing its $4.5 trillion portfolio of US Treasury and mortgage-backed bonds. But it also confirmed that another interest-rate hike is likely in December and we could see three more hikes in each of 2018 and 2019. By this time next year, investors will be staring at a completely different market environment.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks and one not so favorite including: First Solar, Opko Health, Apple, CBRE Group, Twilio, and Andeavor.
BMR Companies & Commentary
First Solar (FSLR: $62, up 3%)
First Solar designs and manufactures solar modules using a proprietary thin film semiconductor technology that is one of the lowest cost in the world. The firm’s objective is to reduce the cost of solar electricity to levels that compete on a non-subsidized basis with the price of retail electricity in key markets throughout the world. What a lofty goal and an exciting opportunity!
What is the most recent progress to report? First Solar has confirmed that PlantPredict, the company’s solar photovoltaic energy prediction software, has been used to generate the reference energy predictions in the sale of three utility-scale projects totaling more than 350 MW.
PlantPredict is a sophisticated solar energy modeling tool designed to develop energy estimates for utility-scale solar PV installations. Easy to use with advanced modeling options, PlantPredict reduces uncertainty to generate more accurate energy predictions. More than 500 companies have already used PlantPredict to model energy predictions for their solar sites.
The transactions demonstrate that the cloud-based modeling tool has gained acceptance by lenders and asset owners as a bankable primary resource in analyzing and predicting performance of utility-scale solar projects.
This is a lot of jargon. What it means is that there remains big demand out there for solar.
BMR Take: First Solar is doing $3 billion in sales and $2 of EPS right now. Looking down the road, we think there is plenty of room in the overall market opportunity for sales and EPS to double. Now that is the kind of growth we love to find.
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Opko Health (OPK: $5.50, down 16%)
Opko took an unfortunate nose dive on its earnings report this week. Revenue of $264 million badly missed the consensus for $319 million and was down from $298 million a year ago. OPKNet loss was $46 million compared to a loss of $15 million for the comparable 2016 period.
What the heck happened?
Rayaldee commercial activities continued to progress, but just not as much as expected. Total prescriptions for Rayaldee, as reported by IMS, increased 66% during the three months ended September 30th compared to the three months ended June 30th. Opko expanded its sales force from 35 to 71 as of October 1st. The commercial and medical science liaison teams now total more than 80 professionals.
BMR Take: Many are saying to be patient; that Rayaldee still has big time long term potential and this is just one of multiple opportunities in front of Opko; that revenue is forecast to double from $1.0 billion to $2.0 billion by 2020. Some say that if we see this top line growth, profitability is going to come quickly, and when that happens, the stock is off to the races.
Well, we say hogwash. We are VERY DISAPPOINTED in this company. They have one of the biggest hype machines out there and we have fallen for it. We have waited and waited, being very patient, as the stock goes down down and down.
Look, if you wish to stay in an wait another year, more power to you and I hope the company crushes from here and the stock goes to $15.
But we are OUT. We added the stock 14 months ago at $10 and exit Monday at $5.50. Not happy about this one.
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Apple (AAPL: $175, up 2%)
Augmented reality (AR) is a big theme in the markets. The technology is going to shake things up. This means some people are going to make money and some people are going to lose money. Apple is on the right side of the trend.
Apple is working on a augmented reality display. In the company’s most recent financial results conference call, Apple CEO Tim Cook once again made it clear that AR is at the top of his agenda, saying it will “change the way we use technology forever.”
Of the new iPhones and a new version of iOS just released, all boast augmented reality as a selling point. Apple says the A11 Bionic chip inside both the iPhone X and the iPhone 8 series is specifically designed for AR.
At least 13 brokerages raised their price targets on the stock, with Citigroup making the most bullish move by raising its price target by $30 to $200.Of the 37 analysts that track the stock, 31 had a “buy”, or higher rating. None had a “sell”. With the latest brokerage actions, at least nine Wall Street analysts now have target prices that put Apple’s market value above $1 trillion. Drexel Hamilton is still the most bullish raising their target price further to $235.
Apple has 5.17 billion shares outstanding and could reach the $1 trillion-dollar market cap level if its shares rose to $194.
Apple is already the largest market cap stock in the S&P 500 and made up 4.5% of the index's market cap as of Friday's close. If Apple's market cap rose to $1 trillion, the stock would be 4.75% of the S&P 500's market cap, ranking Apple ninth when looking at the stocks with the largest percentage of the S&P's market cap at year-end since 1980. IBM holds the top four spots with AT&T taking the next two and Exxon and Microsoft (in 1999) rounding out the top eight.
If Apple's stock can reach the $1 trillion market cap some on Wall Street say that it validates the belief that Apple is not just a smartphone business but a platform.
BMR Take: Apple did $9.21 of EPS this year and estimates call for greater than $11 next year. AR technology is the future and Apple’s ability to participate supports EPS growth continuing on like we are seeing now for a long time ahead. Apple set a new all-time high last week and since the stock has passed our Target of $170, we hereby raise our target to the level to which the market cap will reach $1 trillion. That number is $194. Our Sell Price remains: “We would not sell Apple.”
CBRE Group (CBG: $41.50, up 4%)
Never higher. CBRE has never been higher. CBRE is arguably the leading real estate company on the planet. As a highlight of how locked in the company is, look at CBRE Research’s 2017 Tech-30 report that was just published where they demonstrated exceptional expertise. The company ranked the strength of tech job growth across 30 North American office markets, which is creating stability and demand-driven performance through occupancy gains and rent premiums. Four key points are highlighted below.
--- Tech jobs grew four times faster than the national average. San Francisco was the top high-tech job growth market for the sixth year in a row.
--- Eighteen markets added more tech jobs over the past two years than the prior two-year period.
--- Tech’s share of major leasing activity has nearly doubled to 19% over the past five years, resulting in strong occupancy and net absorption gains.
--- Desirable tech submarkets are priced at a premium, while emerging submarkets often offer discounts. The overall average asking rent of tech submarkets is priced at a 16% premium.
BMR Take: We are staring at the company’s EPS power closing in on $3. This stock remains a compelling value at the current level. We don’t see the company doing anything but maintaining and growing its leading market share for the foreseeable future.
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Twilio (TWLO: $25.50, down 15%) on Earnings Report
Revenue reported was strong, and you know how we feel about revenue. We will tell you what happened, and let’s stay focused on the long term.
The company lost $0.08 versus $0.04 a year ago. Revenue was $101 million versus $72 million a year ago. The good news is that revenue beat the consensus of $93 million. Moreover, the company guided to a better outlook for the remainder of the year.
So what the happened here? Uber.
While total revenue growth of 41% was strong, we believe it is important to look at the underlying growth of Twilio’s core business. In particular, we consider base revenue excluding Uber, which came in at $87 million, up 63% from a year ago. Revenue from Uber hit $14 million in 4Q16 and came in at $5 million in 3Q17, down 53% y/y. Management expects a modest sequential decline in Uber revenue in 4Q17. The loss of Uber business continues to weigh on results.
Total revenue rose to $100 million from $71 million. Management itself had called for a net loss of $0.08 per share on sales near $92 million. The adjusted loss was right in line with that forecast, but Twilio crushed its own sales expectations.
For the upcoming quarter, Twilio expects an adjusted loss per share of 6 cents and revenue of $103 million. Analysts are predicting an adjusted loss per share of 6 cents and revenue of $99 million.
Jeff Lawson, Twilio’s Co-Founder and Chief Executive Officer said, “We hit a number of exciting milestones in Q3, including our first $100 million revenue quarter, our first enterprise license agreement for our higher level software products, and the launch of Twilio Studio. With Twilio Studio, the visual builder for Twilio, we can accelerate our customers’ roadmaps and help an even larger set of users build on our platform. We are excited by the size, scale and diversity of what new and existing customers are creating with Twilio.”
Recent Business Highlights – released by the company:
46,500 Active Customer Accounts compared to 34,400 a year ago. Twilio Studio was introduced in the third quarter, giving clients a simple drag-and-drop tool to simplify and accelerate their production efforts. Twilio already offers separate production tools for popular platforms such as Android and iOS, but the new Studio streamlines the development process in ways that had not been available before.
Announced our commitment to meet the new GDPR (General Data Protection Regulation) requirements coming from the EU, using this as an opportunity to raise the bar for data protection worldwide for all of our customers.
Expanded the reach of our Super Network by announcing the availability of Twilio phone numbers in more than 100 countries.
Average revenue per user rose 18% to $8,000.
Cash position strong: Twilio held $284 million of cash equivalents at the end of the third quarter, down from $289 million in the second quarter and $306 million by the end of fiscal year 2016.
Guidance: – released by the company:
Full year ending December 31, 2017:
Total Revenue - $387 million
Loss from operations (millions) $22.0 to $23.0
Net loss per share - 0.22 to 0.23
BMR Take: The good news is Twilio continues to innovate and add net new customers at a remarkable clip (3,100 in 3Q17), which is driving strong underlying revenue growth. The company remains one of the fastest top line growers in all of cloud computing.
This company is one the most frustrating that we follow. With another stellar report like we describe above, any normal stock would be up 10%. Not Twilio. Down 15%, now well below our Sell Price of $29. We are going to stay the course but you might get tired of waiting and sell in order to redeploy these assets into something better like Nutanix or Square. With that said, we believe Twilio should be a $50 stock, a long way from where it is today. But again, top line growth will win in the end. Do you and we have enough patience to endure these losses? That is the ultimate question.
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Andeavor (ANDV: $107, down 3%)
Could oil breech $80 before Christmas? Some options traders think so. With oil trading near its highest level in two years, some traders are betting that the price rise could have more room to run.
A total of 48,000 option contracts traded over the last few days that would profit most if crude spikes before Christmas, including several large individual trades. They all expire on Dec. 21.
Oil prices have rallied in recent weeks as OPEC supply cuts help to rebalance an oil market plagued by oversupply. More recently, growing tensions between Saudi Arabia, OPEC’s largest oil producer, and some of its neighbors helped prices break above $60 a barrel for the first time since 2015.
Andeavor Reported Third Quarter 2017 Results on November 8th.
Earnings of $550 million, or $3.50 per share; results included the following pre-tax items
Returned $345 million to shareholders including $252 million in share repurchases; they expect to repurchase $300 million of shares in 4Q17
Total retail and branded stations up 27% year-over-year to over 3,100 stores
On October 30th, Andeavor closed its $1.7 billion acquisition of Western Refining Logistics
New totals for Andeavor
Number of Refineries: 10
Refining Capacity: 1.2 million bpd
Employee Count: More than 13,000
Retail Sites: More than 3,100
Barrels of Storage Capacity: More than 46 million
Miles of Pipelines: More than 5,300
Marine, Rail and Storage Terminals: 40
Natural Gas Processing Complexes: 6
States where they operate: 18
BMR Take: Higher oil prices above $80 could be a huge positive for many companies including our beloved refiner Andeavor. Recall, Andeavor’s net asset value is $120 and the stock still trades an unwarranted discount. We think more stable energy markets are the first step needed for good sentiment to return to the oil patch stocks like Andeavor. And we’re certainly on the way with crude being so strong of late.
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Upcoming Economic News
PPI ex-Food & Energy
Tuesday, November 14th, 8:30 AM Eastern
Period: October
Consensus: 2.2%Prior: 2.2%
Retail Sales ex-Auto Wednesday, November 15th, 8:30 AM
Period: October
Consensus: 0.20%
Prior: 1.0%
Initial Claims
Thursday, November 16th, 8:30 AM
Period: 11/11
Consensus: 235,000
Prior: 239,000
Housing Starts
Friday, November 17th, 8:30 AM
Period: October
Consensus: 1,193,000
Prior: 1,127,000
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A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
The markets seem to be firing on all cylinders. Is there anything that could derail it before year-end? About all we can see is the Russian investigation (none and no chance), the tax-cut drama (possibly, but more likely to cause a correction rather than a derailment), a government shutdown (slim if any chance at all) or a major Fed rate hike (little to no chance).
A couple of things have caught our attention, however. What usually derails a bull market is a recession. At this point, we don't see the usual suspects that signal a coming recession, such as widening credit spreads, deteriorating market internals, collapsing commodity prices, falling new orders or falling earnings. In fact, it is just the opposite.
However, two things are not making sense from a historical perspective. First, with near full employment and accelerating worldwide growth, inflation remains stubbornly low. This is usually not the case. Inflation signals rising prices and continued rising earnings. It should be readily apparent but it simply isn't expressing itself even at this stage of the earnings growth cycle.
Secondly, if there is one warning signal for an approaching recession that is more reliable than all the others, it might be an inverted yield curve. Since January, the spread between the 10-year Treasury and the 2-year Treasury has fallen from about 1.30% to 0.75%. In our experience, whenever we have seen accelerating revenue growth, rising earnings, potential tax cuts – i.e. so many positives – the yield curve should be steepening, not flattening. Maybe we are experiencing a "new norm" in the markets, or it "is different this time" (the four most dangerous words in our industry), or this is going to be normal as part of the 4th Industrial Revolution we have supposedly entered (artificial intelligence, augmented reality etc.). In any event, we are going to closely follow the lack of inflation and the yield curve because neither is "confirming" this bull market rally as each would normally do if one looks back at the history of the market.
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Square (SQ: $39, up 6%) Continues to Shine
A few Wall Street firms had some new announcements on Square this week. The target raised to $38 from $34 at Stephens. They believe the stock "can grind higher" following the company's Q3 report. They still sees Square as likely to change the game for Small and Mid-sized business payments and thinks the likelihood of it achieving true "platform for small business" status gets more likely every quarter.
Square price target raised to $33 from $23 at Craig-Hallum
Square price target raised to $35 from $24 at SunTrust. SunTrust said that it is entering a period requiring heavier investment which will weigh on margin expansion. They said that Square trades at a significant premium of about 60-times FY18 EBITDA relative to 13-times for its peer group.
GoDaddy (GDDY: $48) announced two new integrations with Square that help small businesses thrive with online and offline selling and payment capabilities. By collaborating with Square, GoDaddy is making this an easy reality for tens of millions of people building small businesses. Integrating GoCentral Online Store and Square online payments enables small businesses to easily sell their products and services online and in person through a single Square account and GoDaddy website. The second integration provides service-based businesses, such as personal trainers, hair stylists and photographers, the ability to book client appointments online, sync calendars using GoCentral, and get paid using Square. Payment transactions can be processed online, in-person or both without switching accounts.
Square target raised to $41 from $31 at Cantor Fitzgerald citing accelerating revenue growth. The firm expects Square's "rapid growth" to continue and further margin expansion going forward. He notes that Gross Payment Volume growth remained above 30% in the quarter.
Square target raised to $41 from $31 at RBC Capital. The firm says the Q3 beat and raise for 2017 outlook is indicative of the company's ability to drive its products into existing partners and expanding to larger merchants.
BMR Take: This one has a long way to go on the upside.
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Options Corner – All about Square
From time to time we like to bring you an interesting options trade. We like to do long-term bullish trades on stocks, unless we find one that is going to go bankrupt in which case we can design a trade to profit from the demise of a firm using puts.
Square has been knocking the cover off of the ball of late. We added the stock at $17 in March of this year and it is now $39, setting a new all-time high on Friday, so we are up 130% in 8 months, giving us an annualized return of ……. Well, you get the point! A great stock pick. A great stock. Better yet: A great company. With a market cap of $15 billion now, it is moving into the big leagues. We have said quite a few times that Square would be a great buyout candidate for one of the big boys (Amazon, Microsoft, Apple, etc.) but they better move fast before the stock hits $20 billion.
And in fact, we think a $20 billion valuation is quite possible next year. That would equate to a $52 stock. Can that happen here with Square? We certainly think so.
An options trade can produce much bigger returns than this 33% increase, if it were to happen. But guess what? OPTIONS ARE RISKY! Please repeat after us. Options are very risky.
OK. Let’s get started.
We love long term options called LEAPS. They expire in January as long as they have at least six months of life. So the January 2018 options aren’t called LEAPs any more. But the Jan 2019 options are. And soon we should see the Jan 2020 options start trading. We can’t wait.
We like to buy options that are in the money. With the stock at $39, the 35s are $4 in the money. Better yet the 30s are $9 in the money. They are worth $9 but they trade for $13. Why is that? The $4 is the TIME PREMIUM. And note that that time premium will go to zero eventually as it approaches the end of its life in January 2019.
In order to pay for the time premium we like to SELL calls against the long LEAP to recoup this time premium and also to help us get our cost down on the option that we bought. Let’s look at some real numbers.
Buy the Jan 2019 30 LEAPs for $13,Sell the June 45 call for a little less than $6.
The cost of this trade is now $7 for an option WORTH $9. Do you understand this? If not, go back to the top of this article and re-read. These options discussions are confusing the first time, but It WILL come to you if you re-read this 3-4 times. We are serious.
Now, let’s say the stock goes up a bit and is selling at $45 in June. Your June option is going to expire worthless (great) and now you SELL a January 2019 call, say the 50 call, for approximately $7. (We are not sure of these numbers because it is so far into the future but we think this is about right -- we hope you get the point.) The cost of the trade is now zero. You are in this trade for zero dollars. (Gosh, we love this trade!)
Now, let’s tally up. If the stock goes to $50 or higher by January 2019, you will be left with an option worth $20 ($50-$30). If you had bought 10 options for $7,000, they are now worth $20,000, almost a triple (185%), with a stock that went from $39 to $50 or 28%. If you had put $25,000 in this trade (the equivalent of buying 640 shares of Square) you would now have $75,000 and that’s real money.
This options trade will more than likely take lots of tweaking of your position and the return could be better or worse depending on where the stock goes. No one is going to hand you a triple without a little bit of work. But it could be a super trade IF the stock heads to $50.
The downside is that the stock goes down to $30. You will lose money but if you religiously sell calls against your position, you can get your cost down to close to zero, thus minimizing your losses.
Note that if this all-options trade is too risky or confusing to you, you can just do a normal covered call trade by buying the stock and selling calls against it. If you were to buy 1000 shares at $39 for $39,000 and the sell the calls as described above, you would bring in $6000 for the June $45 call and $7000 for the January $50 call giving you a purchase price of $26,000. If the stock goes to $50 you have a $50,000 position, and a return of 92%. Not bad.
But, again, lots of “ifs” in these scenarios. Invest with caution.
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The High Yield Corner
By Michael Foster
Last week, AstraZeneca PLC (AZN: $33, down 5%) reported strong revenue and earnings above expectations, but that wasn’t enough to keep the stock from being the biggest loser of the week for the Bull Market Report’s high yield portfolio. A deeper dive into the results can explain what happened—and why this isn’t really a cause for concern.
To start with: revenues rose 9.3% on a year-over-year basis in the third quarter to $6.23 billion with solid EPS of $0.54, which was a little shy of expectations: analysts were expecting just 55 cents per share in earnings. In their press release, the company highlighted weak sales in the U.S. as a cause of the weaker earnings, while also pointing out that weakness was offset by major growth elsewhere: emerging markets were up 5%, China was up 12%, and Japan was up 3%. Those numbers were all higher on a constant currency basis.
But the U.S. weakness is a large part of the stock decline. AstraZeneca pointed to continued weakness in Symbicort as a cause for the weakness; the asthma drug’s challenges have been a major issue for this company, which analysts see as being heavily reliant on for future sales. Nonetheless, a closer look at the drug pipeline indicates there are other sources of growth to come.
More specifically, AstraZeneca highlighted that Lynparza, a breast cancer drug, has received priority reviews in America and Japan, while Imfinzi, a lung cancer drug, has received the same in America while also getting regulatory acceptance in the EU and Japan. A total of 7 drugs got new regulatory approvals as of the end of the reporting period, including two type-2 diabetes drugs that will obviously have tremendous appeal for this widespread ailment.
So the company’s pipeline looks fine. The focus on Symbicort unquestionably overlooks that fact, and provides a buying opportunity at this current price—provided the pipeline remains healthy.
Elsewhere in high yield investing, we saw a really mixed week despite the market’s weakness towards the end of the week. This is pretty unusual—high yield tends to be more volatile in REITs, high yield bonds, and BDCs, but we didn’t see that happen yet. That could mean more aggressive selling is yet to come in late 2017, especially as tax-loss harvesting becomes more commonplace, but that doesn’t change the fundamental strength and attractiveness of many high yield assets.
There are exceptions, however. Municipal bonds were relatively untouched by last week’s jitters, possibly as risk-averse investors were adding to municipal allocations as a result of what they saw in the stock market. Invesco Municipal Trust (VKQ: $12.34, flat) saw little movement on strong volume while Nuveen AMT-Free Municipal Credit (NVG: $15.36, up 1%) gained slightly. Both remain high-quality municipal bond funds with above-average yields and excellent management teams. Neither looks significantly overpriced right now.
Bigger news came from the REIT world, but the news had little effect. Welltower (HCN: $68, up 2.5%) had strong earnings, with FFO per share of $1.08 a 2 cent jump from the prior quarter and NOI up 4.1% on same-store senior housing operations. RevPAR also gained by 3.9%, which helped the company’s revenue rise nearly 1% to $1.1 billion for the quarter. FFO was a 3 cent beat over expectations, and higher earnings guidance (the company now expects normalized FFO per share of $4.19 to $4.25 for the full year) make Welltower’s valuations even more attractive, especially after the stock price remained stuck for the week. Defying negativity in the skilled nursing facility world, Welltower’s massive size and market penetration are proving stores of value and investor safety; the stock is a better buy now than it’s been for most of this year.
*Revenue per available room
That’s it for earnings news this week, but a lack of major news didn’t stop Government Properties Income Trust (GOV: $18.76, up 2%) from having a strong week, thanks in small part to the continued recovery from last month’s anxiety that the company’s earnings results at the end of October proved to be a paranoid non-issue. However, protracted worries about Omega Healthcare Investors, Inc (OHI: $28, down 1%) and their very disappointing earnings are keeping shares down and the yield up at the 9% level. That more than compensates for the risks, which makes this a very appealing option for investors who accept that the dividend growth is likely going to end in 3-5 years’ time. The market is discounting a cut to dividend growth much sooner, making this an irrational price and a good bargain right now.
Elsewhere, we are seeing growing anxiety in Collateralized loan obligations (CLO) and high yield corporate bonds, but that hasn’t stopped AllianzGI Equity & Convertible (NIE: $21, unch.) and PIMCO Dynamic Income Fund (PDI: $30, up 1%) from proving resilient. That’s in no small part thanks to the high-quality management teams of each, which have wisely avoided the more exotic high-yielding CLO markets and shifted towards much safer MBS’s and away from the riskiest junk bonds. The market is rewarding both with price stability. That may not last - after all, irrational selling is still very much a thing in modern markets - but that just means a buying opportunity will open up. Neither fund shows any indication of weakness despite the broader worries growing in the credit sectors.
Good Investing,
Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998
(Again, sorry about the crazy formatting this week.)
October 1, 2017
by Todd Shaver | Oct 1, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
Welcome to October! Boo! October can be a scary time in more ways than just Halloween. October has a special place in finance, known as the October effect, and is one of the most feared months in the financial calendar. Why? Check the history. There was The Panic of 1907 (October), where multiple bank runs and heavy panic selling occurred on the stock exchange. There was The Crash of 1929 (October), where stock market slides set records. There was Black Monday in 1987 (October), when automatic stop-loss orders and financial contagion gave the market a thorough throttling as a domino effect echoed across the world in a quick 22% drop. In summary, keep a close eye on what’s around the next corner, and don’t get surprisingly spooked by market volatility.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks where you can still make good money, including: Celgene, BlackRock, Facebook, UPS, Home Depot, PayPal, and Government Properties Income Trust.
BMR Companies & Commentary
BlackRock (BLK: $447, up 3% - all prices are for the week)
BlackRock was upgraded to buy this week by Goldman Sachs and placed on the conviction buy list. We love to see Goldman following The Bull Market Report into the stocks we like. This demonstrates the quality of our research and the sincere value we price it at to you our dear subscriber. In other words, it’s not $10,000 a year!
So why all the love for BlackRock right now? It really is as simple as this. The world of ETF investing is dominating the investment management business and BlackRock is the leading provider of ETF products.
BlackRock has $5.1 trillion of assets under management as of December 31, 2016. With employees in more than 30 countries who serve clients in over 100 countries across the globe, BlackRock provides a broad range of investment and risk management services to institutional and retail clients worldwide. The company’s flagship product line-up is the popular iShares exchange-traded funds (“ETFs”). These ETFs are used by everyone from tax-exempt institutions; to charities, foundations and endowments; official institutions such as central banks, sovereign wealth funds, supranationals and other government entities; taxable institutions, including insurance companies, financial institutions, corporations and third-party fund sponsors, and retail investors.
BMR Take: We think BlackRock is a compelling value trading at 17x next year’s consensus EPS estimate of $25. But don’t take it from just us. One of the world’s best hedge funds, Third Point, just bought the stock and believes BlackRock is a “misunderstood franchise” with a massive 38% market share of exchange-traded funds. Third Point’s CEO said he thinks this acceleration in ETFs is just getting started and BlackRock is valued like a traditional asset manager, but it has much greater potential for structural revenue growth and operating margin expansion. We stand by our $510 price target and have already made some good ground on the path here since our initiation to the stock in late August at $415.
Price too high for you? Just buy 20 shares. Just buy 50 shares. Buy 11 shares – but get some BlackRock. Remember, the “price” is irrelevant. What if BlackRock split their stock 10-1 next week? Would that change your thinking because you now have 10 times as many shares at $44 a share? You answered correctly if you said – NO. Of course. The price of the stock would change nothing.
Celgene (CELG: $146, up 1%)
Celgene recently announced that the FDA has placed a partial clinical hold on five trials and a full clinical hold on one trial of the FUSION program for Imfinzi (durvalumab). This is not the best outcome for Celgene, but remember the company’s portfolio is broadly diversified so we view the development as a minor set-back not a game-changer. In fact, most analysts had not yet even been considering the financial impact of these drugs into their estimates. The trials subject to the hold are studying drugs for leukemia and lymphoma. We emphasize that the decision by the FDA was based on safety data derived from other trials involving drugs in patients with multiple myeloma in combination with immunomodulatory agents.
BMR Take: We expect Celgene’s four blockbuster drugs (Revlimid, Abraxane, Otezla, and Pomalyst) to drive revenues of over $13 billion in 2017, and over $21 billion in 2020, while the recent acquisitions of Receptos and Delinia as well as investments in collaborators like Acceleron, Epizyme, Agios, and others will likely ensure growth in 2018 and beyond. We continue to view Celgene as a top large-cap pick in Healthcare. We continue to see our $150 price target as fair for right now, but admit there is upside to our target as the business executes on the revenue path we anticipate.
This is no small company, with a market cap of $115 billion, setting a new all-time high this week. Check out this 5-year chart:
Facebook (FB: $171, flat, after dropping like a stone on Monday to $162)
Instagram recently disclosed that it's added another 100 million monthly users. That brings the photo-sharing app to 800 million monthly active users, up from 700 million in April. This is the fastest 100 million the firm has ever added – five months. When do you think they will hit a billion? Let's see... August 2018?
Five hundred million of those are daily active users, or consistently engaged using the service. That means that Instagram is still far, far ahead of rival Snap in terms of users. Snap said in August that it had 173 million daily active users. The announcement from Facebook-owned Instagram further solidifies Facebook as one of the most dominant companies in online advertising.
Why does all this matter so much? Viewing photos on Facebook used to be very clunky. It was a muddled, buggy experience, yet it’s what most people use Facebook for the most. Over 250 million images are uploaded to Facebook each day, making it the most popular photo-sharing site on the internet. Facebook is without a doubt the YouTube of photos. So Instagram is a critical piece of technology, ensuring the health of the Facebook platform and the future growth and engagement activity of users.
BMR Take: Facebook is an advertising machine and the business is nowhere near mature. EPS is expected to grow more than 20% per year into 2020 bringing EPS close to $10. We hereby raise our target price from $178 to $190 and strongly recommend you get this stock into your portfolio. The Sell Price remains at $155.
UPS (UPS: $120, up 2%)
UPS has been doing all the right things for a long, long time. The latest out of the company this week is a new JV in China.
UPS and SF Express announced approval of their planned joint venture by China’s Ministry of Commerce. The JV enables UPS and SF to collaborate on development and provision of international delivery services from China to the U.S. and, in the future, to other trade lanes. The JV approval is a positive development for international trade and allows the two leading companies to leverage their complementary networks, service portfolios, technologies and logistics expertise.
UPS is the world’s largest express delivery company and a leading global supply chain integrator. SF is a market leader in express delivery in China, with extensive China-wide network coverage, comprehensive service capabilities, and the highest brand recognition in the Chinese small package industry. The newly approved joint venture is a continuation of UPS and SF’s collaboration that began in 2015, when UPS Worldwide Express service was made available at SF’s retail stores in Shanghai and Shenzhen.
BMR Take: This JV is highly symbolic of UPS’s confidence in long-term growth opportunities in China. With EPS growing high-single-digits on its way to $8/share by 2020, we think this stock is a reliable performer for any stock portfolio and stand by our $125 price target for the time being. We’d love to raise it when it hits that magic number.
Home Depot (HD: $164, up 2%)
The story here at Home Depot is that growth is soaring right now. Why? The underlying fundamentals show us one of the best housing markets seen on record. Imagine that after the sub-prime crisis not all that long ago!
Indicators of the housing market were strong in the first half of 2017. Construction starts were healthy for both single-family and multifamily housing. Home purchases were solid while the supply of homes for sale rose for both new single-family homes and previously owned housing. The Federal Housing Finance Agency’s and the CoreLogic Case-Shiller repeat-sales house price indices showed home values rising, with annual price appreciation stable in a reasonable 5-6% range. Based on its National Delinquency Survey, the Mortgage Bankers Association reported that measures of delinquency declined, so people are paying their bills!
BMR Take: A resilient housing market means great things for Home Depot and we sure are seeing that effect take hold. With EPS growing around 10% per year and heading to $10, we raise our price target from $170 to $180 and see even more upside ahead. How’s this for a 5-year chart:
Government Properties Income Trust (GOV: $18.77, up 2%)
Government Properties Income Trust is a real estate investment trust (REIT) focused on owning and operating properties mostly leased to government tenants. Government Properties is the U.S. Government’s largest landlord and owns 74 properties located in 31 states and Washington D.C. containing approximately 11.5 million square feet. Historically, government tenants remain in place significantly longer than private sector tenants, with U.S. Government tenants occupying the same space for more than 20 years.
Properties are 95% leased and occupancy has remained well above 90% since inception. The company is rated investment grade by Moody’s (Baa3) and S&P (BBB-). 88% of rental income is paid by the U.S. Government (on behalf of 37 agencies.)
BMR Take: Look, Government Properties is a niche REIT serving government clients unlike anybody else in the business. They own and rent some of the best properties to clients like the Department of Justice and the IRS. Yes, we need to keep an eye on Trump cutting out all of the fat from the government budget and reducing the size of government. But in reality he can’t vacate signed leases, so there is not much he can do. For right now, however, the outlook looks just fine, and the juicy dividend yield of 9.25% is very attractive.
Moreover, in June, GOV agreed to acquire First Potomac Realty Trust for approximately $1.4 billion. Upon completion, this acquisition will increase exposure to the metro Washington, D.C. market, and expand GOV’s acquisition strategy in that area. We like this catalyst to spur excitement for the stock and for the positive impact it will have on the business. We trim our price target to $24 ($27 previously) out of conservatism.
Update on PayPal Holdings (PYPL: $64, down 1%)
PayPal Holdings is likely to make a strategic acquisition in coming months, according to Bernstein Research and Loop Capital. Last week, the firm put out a note to its customers wherein they believe a purchase of a European payments asset is most probable, with top targets Adyen (private), Klarna (private), Square (SQ) and Stripe (private.) The have an outperform rating on the stock.
“Acquiring Square (SQ: $29) would help PayPal increase its offerings at brick-and-mortar retailers and bring in more customers for PayPal’s Venmo service, as the small business customers on Square could accept Venmo transactions as payment,” they said. “By having both consumers and retailers on its platform, the combined entity would have significantly increased strategic positioning and optionality,” they wrote.
BMR Take: Both PayPal and Square are within a whisker of all-time highs. Square is on a roll and as we have said many times, could be a takeout prospect, and we are only at the beginning stages of Square’s future as a disruptive company in payments. With a market cap of just $11 billion we see big times ahead for this innovative company. And they could be bought out for $15-18 billion in a whisker by one of the big boys. PayPal? We see no top to this amazing success story.
Note this about Jack Dorsey of Twitter and Square:
Dorsey has bought over 1 million shares of Twitter in 2017, while selling much of his position in Square. Dorsey has sold more than $31 million worth of Square stock in that time. After Friday’s purchase, Dorsey owns more than 16 million shares in Twitter. He still owns a big stake in Square, but he is obviously moving to up his investment in Twitter at this time.
Upcoming Economic News
ISM Manufacturing
Monday, October 2nd, 10:00 AM
Period: September
Consensus: 58.0
Prior: 58.0
Total Light Vehicle Sales
Tuesday, October 3rd, 8:00 AM
Period: September
Consensus: 16.3M
Prior: 16.0M
Trade Balance SA
Thursday, October 5th, 8:30 AM
Period: August
Consensus: -$42.9B
Prior: -$43.7B
What follows is not a recommendation, but an information piece on a Nasdaq stock that invests in bitcoin.
Bitcoin Investment Trust (GBTC: $702, market cap - $1.2 billion)
Bitcoin Investment Trust, the only exchange-traded product that offers Bitcoin exposure, is an exchange-traded note, backed by Bitcoin, and it trades at an astonishing 95% premium that has been as high as 125%. That means investors are paying twice as much, plus fees, to own Bitcoin - a premium that will probably disappear as the Bitcoin market matures and access becomes less of an issue.
That’s already happening. In July, the U.S. Commodity Futures Trading Commission unanimously approved LedgerX’s cryptocurrency-trading platform for clearing derivatives; it will start with Bitcoin options. CBOE Holdings and Gemini Trust, the digital currency exchange founded by the Winklevoss twins, announced a partnership to offer Bitcoin futures as early as this year. VanEck has filed to bring products holding Bitcoin “instruments” to market. Exchange-traded fund provider REX is planning two Bitcoin-based derivatives ETFs.
The SEC has rejected Bitcoin exchange-traded funds, citing a lack of regulation of the Bitcoin spot market; a derivatives market in Bitcoin would remedy that. It also doesn’t hurt that Dalia Blass, who hails from the law firm that represented the Winklevoss twins’ ETF, has been named director of the SEC’s Division of Investment Management.
Bitcoin, the cryptocurrency polarizing governments, banks, and investors alike, is currently trading at $4,330, down from its peak of $4,980 in early September, but up from its lows of $3,000 in the middle of September. The sell-off was largely driven by Chinese regulators formally shutting major Bitcoin exchanges. As you can see, it is quite volatile, rising from $600 a year ago.
It didn’t help that JP Morgan Chase CEO Jamie Dimon called Bitcoin a “fraud” and “worthless” and that Bridgewater’s Ray Dalio called it “a bubble” in the days following China’s crackdown. Fundstrat Global Advisors’ Thomas Lee disagrees, saying that China’s recent moves are a short-term head wind, given that the region represents just 20% to 25% of global trading volume. Lee, in a recent note to clients, wrote that Bitcoin was “increasingly representing the gold investment” for millennials and will ultimately displace the precious metal in portfolios. He contends that Bitcoin could reach $25,000 by 2022, given that it accounts for 5% of the $7.5 trillion alternative currency market, which is growing by 6% annually. By early 2018, he sees it hitting $6,000, a whopping upside of 60%.
Here’s an interesting commentary on the bitcoin world, and an interview with John McAfee, the founder of McAfee Associates, the anti-virus software company that was eventually sold to Intel. McAfee is a bitcoin miner now, and appears to be "all-in" on bitcoin.
https://www.cnbc.com/2017/09/13/john-mcafee-challenges-jamie-dimon-bitcoin-skepticism.html
McAfee has stated that bitcoin could go to $500,000. Wow.
Teva Pharmaceuticals Names New CEO
Seven months after Erez Vigodman stepped down, Teva Pharmaceuticals (TEVA: $17.60, up 2%) has appointed a new CEO - Kare Schultz. Schultz, who has served as CEO of Danish pharmaceutical company H. Lundbeck since 2015, will be tasked with reviving sales and reducing debt for the world’s largest generics manufacturer. According to Bloomberg, Schultz will likely face pressure to split the company - with one focusing on “patented specialty medicines and the other on cheap copycat drugs.”
Twilio Shares Drop after Amazon Text Messaging Announcement
Twilio (TWLO: $30, down 3%) is a communications company that uses a cloud-based software to help businesses insert "real-time" communication into their apps. Amazon announced this past week that its Pinpoint system now allows users to trigger 2-way SMS messaging.
Some on the Street think this is bad for Twilio, but Twilio management thinks this is a good thing. "This is a continuation of our technology partnership with Amazon. Two-way texting is another capability being utilized by Amazon Pinpoint as part of our existing relationship," said a Twilio spokesperson.
Twilio CEO Jeff Lawson, who used to work at Amazon, said in a tweet that he's "excited that Twilio is now helping to power engagement on Amazon Web Services Pinpoint."
BMR Take: We believe in this company. Watch revenues – revenues rule all. And revenues have been spectacular as you know, since we have reported on this company continually. The stock is way off its highs of course, but we feel the stock is putting in a strong base here at this level.
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
What's going on with the Fed and why should we care? Today, the Fed is sitting tight with rates of 1.0-1.25%. Two weeks it announced it would start reducing their balance sheet in October. So, what does that mean? For years the Fed has been buying trillions of dollars' worth of US Treasuries and mortgage backed bonds, and reinvesting all the earnings back into more of the same. Next month it will start "shrinking" its balance sheet by not buying (reinvesting, or as some call it, "normalizing") tens of billion worth of Treasury's and mortgage bonds. Going forward, the Fed will ramp up the amount "normalized" every three months, hoping that this stair-step approach will not create turmoil in the markets. However, everyone knows the US government has to issue bonds to raise the money needed to pay its debts, so who is going to step in and buy these bonds now that the Fed is gone? That is something that no one knows because it's never happened before.
Our take is that the Fed will continue to monitor the economy and if it senses trouble – either from rising interest rates or the shrinking of their balance sheets – they will back down by either leaving rates alone or even halting the balance sheet reduction strategy. Thus, if the Fed continues to raise and shrink, it means the economy remains on solid footing. If things begin to slow, the Fed will most likely keep rates low and start buying again, both of which should benefit the market. An optimist will see this as a win-win scenario for keeping the market's prospects of continued growth intact.
We tend to be optimists at this point even though we don't like the fact that there seems to be so much dependence upon the Fed. We are optimistic because the market seems to have been able to shrug off not one, but several things that normally would have had some sort of consequential impact upon it. When one considers that Hurricanes Harvey, Irma and Maria slammed into the United States and Puerto Rico, North Korea tested another missile (and have threatened more), President Trump upset the establishment at the United Nations, and London was hit by another terrorist attack – it is remarkable that the market didn't suffer a significant correction. All this tells us that the earnings growth story for the market is for real and, if we can actually get a tax reform bill from D.C. – well, that would conjure up images of Gene Autry back in the saddle singing "Happy Days Are Here Again".
The High Yield Corner
By Michael Foster
The week saw a small bit of volatility for high yield investments in a surprising divergence from the stock market, which has virtually no volatility, and which had yet another strong week.
Is this a cause for concern? To answer that question, let’s take a look at where the biggest weakness was, determine what was the cause of that weakness, and try to extrapolate the probability of that weakness continuing.
Several of The Bull Market Report's high yield picks saw a 1% drop in the last week, such as Omega Healthcare Investors, Inc (OHI: $32, down 1%). For those of you who have followed this Healthcare REIT for a while, you know that a one-week 1% decline isn’t really terribly unusual, so it isn’t something that should inspire any alarm. On top of that, the decline happened without any unusual spike in volume and without any significant news, so we can’t conclude that there’s any material public information driving this decline. Short-term volatility caused by random inflows and outflows of investor capital seem the driver of the 1% fall here.
Not the same could be said for Apollo Commercial Real Estate Fund (ARI: $18.15, up 4%), which announced a 46 cent dividend just two weeks ago - a payout in-line with its previous payouts. It was paid out Thursday, and as per usual, the stock opened up 46 cents lower. So with the stock closing the week up 21 cents, plus the dividend, the stock was up a huge 4% for the week. Remember that the Apollo Fund isn’t a Property REIT but a Mortgage REIT, meaning that the way it earns income and its structure are more like a loan fund than a company like Omega. As a result, Apollo Commercial Real Estate Fund is sensitive to interest rate changes and default rate trends more than on the market’s perception of the value of its holdings, its property cap rates and occupancy rates, and other real-estate specific metrics. And we are in fact seeing an increase in long-term interest rates as we get nearer the December rate hike that the Federal Reserve has strongly hinted is inevitable.
While that’s bad for the Apollo Fund and a justifiable reason for caution, it’s offset by the fact that commercial real estate defaults are extremely low and are not going up. Thanks in part to improving profitability for companies, rising sales, and a stronger GDP growth rate, companies’ ability to pay their mortgages is as strong as could reasonably be expected. That, at the end of the day, is an arguably more important factor in determining the safety of Apollo’s future cash flow.
Is Apollo’s 10% dividend worth investing in? We think so. Risks of a cut are far lower than a double-digit yield would suggest, so investors should consider holding this even if we see some more volatility in the next couple of months before the drama from the Fed plays out in December.
Municipal bonds, which started the week in solid recovery mode, are taking a bit of a break. We’ve seen the sector weaken slightly in the last couple of weeks, and that trend has continued this week. As a result, Nuveen AMT-Free Municipal Credit (NVG: $15.39, down 1%) and Invesco Municipal Trust (VKQ: $12.77, down 1%) both had a bit of softness. While a 1% decline isn’t a lot when compared to just about any other asset class, it is a lot for the typically sleepy muni market. These bonds rarely see big price moves, so a 1% decline is something to consider. We’re still in positive territory for 2017, but that may not last long. The Fed’s interest rate hikes spook muni investors more than perhaps any other group of investors - even if interest rate hikes don’t hurt munis all that much. For that reason, we can’t promise these funds won’t fall later in the year, and even fall into red territory. Looking further, however, there will be a recovery when the market realizes the mistake they made and they start buying back in. After all, that’s what we saw after the hike in December 2015 and the hike in December 2016.
Interestingly enough, the taxable bond world is shrugging off the upcoming Fed rate hikes in the most contemptuous way. Let’s start with AllianzGI Equity & Convertible Fund (NIE: $21, up 1%), which announced its quarterly results that didn’t yield any major surprises. NAV growth and investment income are more than sufficient to yield a strong total return for investors, and the dividend of 7.3% remains very sustainable.
The convertible bond part of the portfolio is rising in value despite the clear message of an interest rate hike. Why? Again, it goes back to the fundamentals. Economic growth is strong enough for companies to pay their bills, which helps bonds rise in value. A similar tailwind has also helped PIMCO Dynamic Income Fund (PDI: $31, up 1%) enjoy a NAV boost for a long time now, so its last week of strength is no surprise. This fund remains priced at a premium to NAV, albeit just 6.5%, which is admittedly a cause for concern.
Additionally, Pimco Dynamic is under-earning its payouts, which means the year-end special dividend is likely to be smaller than it’s been in previous years - if there’s one at all. Still, on a total return basis there is just too much upside still in PDI because of its focus on mortgage-backed securities and corporate bonds.
Good Investing,
Todd Shaver, Founder, CEO and Editor
The Bull Market Report
Since 1998
September 17, 2017
by Todd Shaver | Sep 17, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
Equity markets ended the week up, again! New all-time highs were set Friday (again) with all three indices. The threat of conflict with North Korea can’t stop the bull market. Gridlock in DC isn’t shaking confidence. The unemployment rate is low. GDP growth is fair though under pressure from severe weather. It’s really a “Goldilocks” economy and a market backdrop of not too hot and not too cold. The biggest threat might simply be the Fed’s Janet Yellen who must unwind a $4.5 trillion balance sheet. The September Fed meeting is upon us and nobody is expecting a rate hike because of the pressures on GDP growth from weather. Though pay attention to plans for the Fed balance sheet as these moves could be worth as much as three rate hikes depending on the pace of unwinding. We are as eager as you to see what happens.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks where we think you can still make good money, including: First Solar, Apple, Twilio, Bristol-Myers, Amazon, Google, and Square.
BMR Companies & Commentary
First Solar (FSLR: $51, up 8%)
First Solar caught a lot of press this week as Deutsche Bank upgraded the stock to a Buy and said the stock is heading to the mid-60s.
What is there not to like? First, US demand is so strong it is driving pricing higher. Beyond the typical demand there is something else happening. Customers are flocking to make purchases ahead of the ruling on the section 201 tariff.
What is this? There is a high likelihood of the International Trade Commission finding injury in the section 201 case. This case basically makes a determination on the safety of the product. A favorable decision is expected to result in 2018 margins between 20 and 30%, against a 2017 rate of 17.5%. This regulatory relief for First Solar is welcomed!
Lastly, monetization of the phase 1 California Flats Solar Project coupled with the anticipated sale of the company’s stake in 8Point3 Energy Partners (CAFD: $14.49) could result in upward revisions to EPS estimate.
BMR Take: Putting it all together, First Solar is in the right spot at the right time. We recognized it early. Now we see a big Wall Street investment bank get behind the name. Yea! With EPS running around $2.50, the stock is not expensive here considering the quality and future of the franchise.
Apple (AAPL: $160, up 1%)
Apple unveiled its latest slate of new products on Tuesday including a new $1,000 iPhone that is sure to bring out aficionados of the company's devices when they arrive in local stores later this month and again in early November.
In a live-streaming event, Apple introduced a new version of its Apple Watch and Apple TV set-top box, plus two new phones, the iPhone 8 ($700) and a larger iPhone 8 Plus ($800) version. But the highlight was the iPhone X (pronounced “10”), a thin, sleek phone that has 3D face-recognition technology, a state-of-the-art camera, and a $1000 price tag -- double the price of the first iPhone that Apple introduced 10 years ago.
The other products will be available for pre-order starting Friday and should hit stores a week later.
The $1,000 price tag is causing all sorts of buzz. Will consumers pay that much? Well, most think so because you just make monthly payments through a plan and not a lump sum. Is there new technology that is exciting? Yes, from face recognition for security to the largest screen yet. All in all, the timing of the launch could push sales from 4Q to 1Q, but we expect Apple to sell a lot of phones.
BMR Take: Apple is going to do over $250 billion of sales this year. This is a staggering amount of money pouring into the company’s bank accounts from consumers who love Apple. Remember, as long as Apple continues to be a fan-favorite for customers, we think there is a huge opportunity for the company to do more and more services on top of selling hardware. The future is bright!
Remember, 65% of Apple is now the iPhone. And every new user is going right to the App Store to buy apps, increasing the Services business incrementally. Recurring income, baby. That’s what it’s all about.
We have a few notes we made from a research report from UBS Securities.
Apple Price Target - $180 (We are at $170) with a $195 potential upside.
iPhone growth in F18/19 – UBS expects double-digit unit growth in F18 and single-digit growth in F19 driven by a growing installed base and high retention rate. They expect a bulge of F15 iPhone 6 owners to upgrade in F18, creating a strong year if not a "supercycle." Supply and pricing could affect the degree of growth.
“Apple innovation to drive long-term revenue growth?
“Augmented reality (AR) is an area where Apple could leapfrog competition in offering a superior user experience. Features will take time to be released as the technology must reach a level of maturity suitable for Apple's brand. Other products like the Watch and AirPods are slowly
becoming material to the business and represent another way to monetize a loyal base of customers.
“The installed base continues to grow double digits and retention rates remain high. The retention rate for Apple above 80%, at a seven point premium to the Android retention rate. There is pent-up demand for the iPhone 8, with over a third of the base consisting of handsets older than two years old, the highest ever.
“Around the world Apple is gaining share everywhere except China. China remains a wildcard. Encouragingly, shipments to Mainland China stabilized in June. Our survey indicates interest in the next iPhone is similar to last year.
“At a P/E of 15x, Apple is trading at near an all-time high valuation. This suggests the market is pricing in a strong product cycle in F18 with double-digit EPS growth. It's also possible investors are gradually re-rating the multiple to recognize the strength and stability of the brand.”
Twilio (TWLO: $31, up 4%)
Twilio is one of the most exciting growth stories out there. And the CEO’s recent Bloomberg TV interview re-ignited our conviction in the story.
As you have been following the growth of Twilio lately, you’ll know it’s an exciting addition to the communications space. Twilio is a developer platform that powers communications for more than 40,000 global companies, including Netflix, Airbnb, and Lyft.
Twilio has emerged as a simple way for companies and software teams to begin adding communications capabilities to their applications in the form of text, video, and voice, providing companies with the flexibility that they need to implement more engaging customer experiences into their daily operations.
Twilio was built around the growing desire to provide a better customer experience for end-users and companies alike. Across numerous industries, enterprises have begun to recognize that the only way to truly differentiate their businesses from other competitors in the marketplace, is to give their customers an experience that is seamless, integrated, and engaging. Unfortunately, it’s difficult to achieve that level of service when your communication technology is not all run from one central place.
BMR Take: Sometimes the daily news is just noise. You have to step back and do a simple fundamental analysis. What does this company do? Why is the value proposition a winner? What is the big picture story? Twilio has this nailed in spades and the CEO provided a great reminder of that to the equity markets this week talking on Bloomberg.
Look at revenues for the past three years. $89 million in 2014. $167 million in 2015. $277 million in 2016. (Note: they’ve already done $180 million in the first six months of 2017.) With revenue growing greater than 30% and nearing $500 million, the momentum is there and we are still early. Repeat, we are still VERY EARLY on this company. Where is this company’s growth going to stop? (Hint: it isn’t.) Take a hard look at owning this company.
Bristol-Myers Squibb (BMY: $62, flat)
At Bristol-Myers, patients are at the center of the universe. The company’s vision for the future of cancer care is focused on researching and developing transformational Immuno-Oncology (I-O) medicines for hard-to-treat cancers that could improve outcomes for these patients. The I-O opportunity is a breakthrough for cancer, and Bristol is a key player.
Bristol is in fact leading the scientific understanding of I-O through its extensive portfolio of investigational compounds and approved agents. The company’s differentiated clinical development program is studying broad patient populations across more than 50 types of cancers with 14 clinical-stage molecules designed to target different immune system pathways. Bristol continues to pioneer research that will help facilitate a deeper understanding of the role of immune biomarkers and how patients’ tumor biology can be used as a guide for treatment decisions throughout their journey.
This week Bristol announced some good data on I-O drugs. This reaffirmed the market’s confidence is Bristol’s ability to execute on the important I-O market opportunity.
BMR Take: Bristol is a top franchise is the Drug industry. The stock has been badly beaten down for about a year but now is coming back, as top franchises always do. With nearly $4 of EPS potential, this drugmaker is a screaming deal in our view.
Amazon (AMZN: $987, up 2%)
The future is here and guess what? Amazon created it! Alexa, Amazon's voice-activated digital assistant for the home, has learned a new skill -- dispensing medical information about first aid from one of the best-known names in medicine, Minnesota's Mayo Clinic.
The information is accessible by speaking to the Amazon device, which users appreciate if they're busy doing something with their hands, like putting aloe on a burn or examining someone who has stopped breathing.
The device advises in its robotic-female voice to begin cardiopulmonary resuscitation for one minute and then call 911 if the person is unresponsive from suffocation. If the user asks for it, the device will go on to discuss specific techniques for doing CPR on an adult, child, or baby.
BMR Take: Amazon is the innovation machine and to see Echo break through into the medical field is a just another key data point about the possibilities of the future. With over $20 of future EPS power or more, Amazon is unlike any stock ever in the history of the world. We are strong believers in the future of Amazon.
Google (GOOG: $920, down 1%)
There is talk that Google is considering making a $1 billion investment in Lyft to take on Uber. This could be exciting!
Google and Lyft can really help each other. With the possibility of autonomous driving being central to its future, Lyft badly needs a solution. Google is considering putting up to $1 billion into Lyft in a move that would see it become one of Lyft’s biggest shareholders at a crucial time.
Lyft is far smaller than Uber and when it comes to market places that can be fatal. For money to be made, generally, one player needs to have 60% share or be twice the size of its nearest competitor. In the US, Uber has already achieved this hallowed status and in theory should be able to crush Lyft simply by applying sustained competitive pressure until Lyft runs out of money.
Google could be the solution for Lyft to emerge as a fierce Uber competitor.
BMR Take: Google is a tech giant, a robust franchise, and reasonably priced versus EPS of $40. The all-time high is $988, set in early June, so it is off 7% from that high. With driverless cars a key part of the future economy, and Google paving the way, we are excited about what a Lyft investment could mean and think the general market will be too if the deal is announced. UBS Securities has a $1,080 Price Target with a $1,410 upside. We have $1000 as our Target, but will raise it when it hits.
Square (SQ: $28.50, up 7%)
Square is at all-time highs. Last week we talked about Square getting into banking. That was all the buzz. This week Jack Dorsey, CEO, is talking a hard look at blockchain technology and what it could mean for Square. This company is on the leading edge of innovation all the time.
You’ve been hearing or reading a lot about blockchain but you probably still aren’t entirely certain how to define it. You’re not alone. It’s something that Jack Dorsey, the CEO of Square (and CEO of Twitter), describes as the “next big unlock”.
Blockchain is often defined as a ledger that enables secure, encrypted transactions. Some financial and technical experts have described it as analogous to the early days of the internet: it’s a framework or backbone for transactions.
But Dorsey also went beyond that interpretation of it, adding that the ability to “distribute and decentralize the ledger enables proof of work, and proof of one entity, in an untrusted network.” “Even if there’s a hostile entity or a mistrust in the network,” Dorsey continued, “we can still account for value creation and the transfer of values as well.”
BMR Take: If Square can get blockchain right, the company could take on the likes of Visa and/or MasterCard to change the world of payments how we know it. How exciting. This is sending the stock to new all-time highs and we are only at the beginning stages of Square’s life as a publicly traded company. Note that JP Morgan and Bank of America as well as Goldman Sachs are experimenting with blockchain. With a market cap of just $11 billion we see very big times ahead for this innovative company. And they could be bought out for $15-18 billion in a whisker by one of the big boys.
Upcoming Economic News
Housing Starts
Tuesday, September 19th, 8:30 AM ET
Period: August
Consensus: 1,175,000
Prior: 1,155,000
Fed Funds Target Upper Bound
Wednesday, September 20th, 2:00 PM
Consensus: 1.3%
Prior: 1.3%
Leading Indicators
Thursday, September 21st, 10:00 AM
Period: August
Consensus: 0.20%
Prior: 0.30%
BlackRock Consensus Ratings on the Street
(BLK: $429, up 3%)
4 Hold Ratings, 8 Buy Ratings
Consensus Price Target: $448
9/08/2017 Barclays $475
8/18/2017 Jefferies Group $440
7/18/2017 Morgan Stanley $476.
7/18/2017 Deutsche Bank $455
7/14/2017 Keefe, Bruyette & Woods $440
6/19/2017 Bank of America Corporation $450
BMR Take: Market cap is $69 billion. Huge. They manage over $5.7 trillion of assets. HUGE. All-time high is $443 set in July. We think this is easily breakable. The Street likes this stock. We like this stock.
Cloudera Consensus Ratings on the Street
(CLDR: $18.38, down 12%)
4 Hold Ratings, 4 Buy Ratings
Consensus Price Target: $23
9/8/2017 J P Morgan Chase $24
9/8/2017 Morgan Stanley $19
9/8/2017 Stifel Nicolaus $24
5/24/2017 Bank of America $23
5/23/2017 Raymond James $23
5/23/2017 Deutsche Bank $25
BMR Take: Bad week for Cloudera. The stock got hammered. They announced a follow-on offering of shares from the IPO they did in April. This is normal stuff – some shares will be sold by insiders and some by the company. No details yet. We are not concerned, although it would be nice to see the stock at $25 where it ought to be. Remember, this is a tiny company. Market cap is $2.4 billion – a puppy. Very speculative. But we are believers.
Andeavor (ANDV: $102, up 1%)
We have a note we made from a research report from UBS Securities.
“The recent Western Refining merger is expected to generate $350-
$425 million in synergies.”
Their Price Target is $116, with an upside to $125. Ours is $110, but if it hits that we would consider raising it.
Cryptocurrencies Update
Bitcoin had a wild week, closing at around $3500 on Friday. Bitcoin doesn’t really “close” as it trades 24-7. Bitcoin began a colossal price reversal on Tuesday that finally culminated with the latest $2,972 weekly low, which ended up becoming the new monthly low as well. The massive 32% reduction, was followed by a flurry of negative news coverage with China shutting down the biggest bitcoin exchange in the country and Jamie Dimon of JP Morgan saying that this is the biggest bubble since tulip bulbs in 1637. He said that the cryptocurrency "won't end well." Dimon was speak at a conference presented by CNBC and Institutional Investor.
Bitcoin hit $4,980 all-time high on September 1st. It plunged about 13% Thursday after one of the biggest exchanges in China said it will shut down its operation. Bitcoin surged more than 10% on Friday, but was still on track for a big weekly loss during a tumultuous period of trading.
JPMorgan's global head of quantitative and derivatives strategy, said in a note on Wednesday that in addition to being volatile and difficult to value, "another worrying aspect of cryptocurrencies are some parallels to fraudulent pyramid schemes."
But to be sure, many see bitcoin as a huge opportunity.
Former JPMorgan strategist Tom Lee said the cryptocurrency could surge another 600% in five years. "It's not worth it to look at bitcoin two months, two weeks ahead," Lee argued, saying he still believes each bitcoin will be worth $25,000 in five years.
We at The Bull Market Report find this whole story fascinating and have been following bitcoin and Ethereum closely. If you would like to know more about it, please write us here: Info@BullMarket.com.
Opko Health Update
Opko (OPK: $5.97) had a wild week. It rallied the first three days of the week, closing at $6.47 on Wednesday. Then it got hammered on Thursday and was flat on Friday. We have seen no news to account for this, but please note that this one is quite speculative. Opko has had to deal with disappointment on multiple fronts, including less-than-encouraging results in clinical studies and slow starts for approved drugs. Yet even though several institutional investors have thrown in the towel and given up on the company, Opko has strong potential for sales of its chronic kidney disease treatment Rayaldee to pick up. Moreover, Opko's diagnostic testing business has good prospects as well. Although the company hasn't executed well yet, some are optimistic. We have high hopes for the company but it is testing our patience.
The High Yield Investor
By Michael Foster
After a lot of good weeks, we’ve had a week that was - well, slow.
Almost everything in the Bull Market Report high yield portfolio ended the week flat, as investors focused on the big headlines (North Korea, Irma, etc.), which actually had minimal impact on any high yield investment.
This might be surprising, so let’s talk a little bit about why the big macro events aren’t moving the needle. You’d be right to wonder why municipal bonds, especially bonds in Texas, Florida, and nearby weren’t negatively affected by the hurricanes that have caused still undetermined billions of dollars of damage and human misery. In light of that tremendous destruction, municipal bonds barely budged. Even bonds issued in the hardest hit areas were unaffected. To take one example, Miami’s transit authority issues bonds are backed by the revenue received from toll roads, parking lots, and so on. Surely less travel to the city and less use of parking lots by tourists due to the storm will hit revenue and thus put these bonds at risk - yet their prices barely budged.
The reality is that municipal bond issues use a combination of insurance and risk management to plan for major catastrophes, especially in catastrophe-prone areas like southern Florida. The storms were severe, but Florida financiers and civil servants plan for these things as part of their regular work. So while the timing of the storms was a bit of a surprise, the reality of hurricanes hitting Florida every once in a while is priced into the municipal bond market.
Thus muni funds continue to have a strong year after last week’s relatively small price movements. Nuveen AMT-Free Municipal Credit Fund (NVG: $15.70, down -1%) took a very slight hit, but that was counterbalanced by the small rise in Invesco Municipal Trust (VKQ: $12.96, up 1%). The most important lesson to learn, by far, is that big catastrophic events don’t really hurt muni bonds - at least, not in the way that the mainstream financial press would like you to believe (since, after all, they’re desperate for controversy and know fear-mongering headlines get clicks and pageviews).
Moving on to taxable income funds, we saw more quietness among AllianzGI Equity & Convertible Fund (NIE: $20, up 1%) and PIMCO Dynamic Income Fund (PDI: $30, up 0%). There are a couple of things to note about both of these funds with regards to their pricing. The income stream for both remains somewhat reliable, although the Pimco fund’s net investment income has dropped significantly in 2017 (this, however, is being counterbalanced by an increase in NAV growth). What investors should focus more of their time on is the pricing. The Pimco fund is now priced at a 4.8% premium to NAV, which is significantly lower than the 10% premium that it reached earlier this year. A big drop-off in the premium this summer has caused that pricing to go closer to its historical norm, and a small premium to NAV is a lot more tolerable than 10%. For that reason, investors who like the Pimco fund and have been waiting to buy more are finally in a position where they can seriously consider adding to their positions. However, if you can wait for a discount to show up, you might be wise to wait for a bigger market sell-off to provide that opportunity.
As for the AllianzGI fund - its discount to NAV has been steadily disappearing throughout 2017, and we’re now at slightly less than a 9% discount, which is a relatively high price for the fund relative to its historical average. That means investors should be a tad more cautious about adding to their position right now, but the fund is far from a sell. We’ll need to see discounts of 5% before offloading this fund makes any sense at all. In reality, the fund’s continued NAV appreciation (NAV is up 6% even after paying its 7.5% dividend consistently over the last year, giving a total NAV return of over 13%) demonstrates that the fund’s management knows what they’re doing and are able to provide a stable, reliable income by picking the right stocks and convertible bonds and handing profits to shareholders. At the end of the day, we can’t really ask more from a fund.
So with all of the humdrum, low level action of the last week, let’s discuss the two stocks that actually had pretty big moves. The first is Digital Realty Trust, Inc. (DLR: $118, down -3%), which closed its DuPont merger and proceeded to fall significantly thereafter. We’re pretty much off the 52-week high hit on Monday, so it’s hard to say whether the decline is a result of profit taking or a lack of faith in the value of the merger. We see no reason to be skeptical of the merger, so we are not changing our view on the stock.
There is, however, one other issue with cloud-based REITs like Digital Realty - earlier this week, a Silicon Valley venture capitalist gave a presentation arguing that server size was about to decline significantly due to semiconductor and other technological innovations. Obviously, this will be bad for datacenter stocks - or is it? Considering the explosive growth in data storage and users’ tendency to fill up datacenters faster than the space needed to store data shrinks, demonstrates that this is a pretty specious reason to be bearish on datacenter stocks.
Finally, AstraZeneca (AZN: $32.50, 1%) took a bit of a hit earlier this week on little news. Again, this seems to be a bit of profit taking, considering the significant rise in the stock from a month ago. There’s little news about the company’s product pipeline or balance sheet to indicate caution, so we’ll wait and see how the stock performs next week before concluding this price movement is anything more than noise.
Good Investing,
Todd Shaver, CEO, Editor and Founder
The Bull Market Report
Since 1998
September 4, 2017
by Todd Shaver | Sep 4, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
We sadly observed Hurricane Harvey devastate Texas this past week. 52,000 people are in shelters as thousands of homes are flooded. The state of Texas ranks as the 2nd largest contributor to GDP in the US trailing only California and ahead of New York. So the economic impact has yet to be fully seen. Real estate portfolios caught without flood and business disruption insurance may be seriously in trouble. Auto sales are already seeing a sizeable dip. Chemical plants are shut down. We could go on and on. What an unfortunately troublesome situation to watch and one with the potential for lingering negative impacts for months to come.
In other news, lawmakers decide to give bipartisanship a shot on healthcare. The Senate Health Committee will turn its attention to bipartisan legislation aimed at shoring up Obamacare markets for 2018. The drift toward compromise follows high profile repeal failures, but still faces an uphill battle as many Republicans have spent years railing against the health law. Staff has been working on it over the summer break and there is general agreement that insurer payments will continue, though specifics are sparse.
Separately, we have yet to see formal action following Trump’s opioid emergency declaration. No formal paperwork has been filed and no new policies have been announced. This appears to be new territory for the government as the national emergency designation is typically used for relief of temporary issues like natural disasters rather than chronic problems like opioid abuse. In addition, administration officials seem to have been caught off guard by Trump's statement. The White House has indicated that it is considering all options for action. Why should we care? This is a big deal for labor force participation, which is at historical lows. If we can get everybody back to work contributing to our economy and off drugs, that is the path to 3.0% GDP growth versus where we are now at 1-2%.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks where we think you can still make good money, including: Apple, Gilead, Bristol-Myers, Amazon, and PayPal.
BMR Companies and Commentary
Apple (AAPL: $164, up 1.5%, all prices are for the week)
Apple has officially scheduled its first-ever event in the company's Steve Jobs Theater, a September 12th invitation-only press conference expected to reveal the latest iPhones and possibly a revamped Watch and Apple TV. The company emailed invitations Thursday that read "Let's meet at our place," with an picture of an Apple logo in red, white and blue. The event, hosted at the company's new spaceship-style Apple Park headquarters is scheduled to start at 1 PM ET. For several years, Apple has revealed its latest iPhones in September, in time to promote them for the holiday season. This year, 10 years after the first iPhone hit the market, Apple is widely expected to reveal the iPhone 8, and the rumor mill has already churned out reports that the device will have a larger OLED* screen and a virtual home button. There are also reports Apple will reveal a Watch that has its own cellular connection and an Apple TV that adds 4K UHD. This is likely it—the big event for Apple’s new iPhone launch! We will all be watching closely.
* Organic light-emitting diode. An OLED display works without a backlight; thus, it can display deep black levels and can be thinner and lighter than a liquid crystal display (LCD). In low ambient light conditions (such as a dark room), an OLED screen can achieve a higher contrast ratio than an LCD.
The main risk to keep an eye on is prices. The argument is that costs are getting so high on new smartphones that customers will not be willing to keep paying up to get them. If this is so, we will see margin compression and perhaps fewer sales by Apple.
Apple Consensus on the Street
Apple was upgraded by analysts at Cleveland Research from a “neutral” rating to a “buy” rating in a report released on Tuesday, and they raised their price target to $197.
On the Street there are 10 Hold Ratings, 39 Buy Ratings, 1 Strong Buy Rating
9/1/2017 Royal Bank Of Canada Target: $180
8/29/2017 Cleveland Research Target: $197
8/24/2017 Bank of America Target: $180
8/24/2017 Drexel Hamilton Target: $208
8/22/2017 Canaccord Genuity Target: $180
8/14/2017 Sanford C. Bernstein Target: $175
BMR Take: Remember the big story for Apple is their services business. They have all these iPhones out there in use by a huge customer base. Can they now get more money from these customers through services? The iPhone 8 is a key part of the strategy. We note that Apple has $260 billion in cash now, which is the equivalent of $50 a share, and greater than 30% of the stock price. This is UNPRECEDENTED in the history of Wall Street. Apple remains an exciting investment opportunity. The services business is projected to double in revenue to $50 billion over the next several years. The Services business is much more profitable than hardware so the impact to earnings is even better. Don’t sell a share. We believe Apple has a lot more room to go on the upside.
Gilead Sciences (GILD: $84)
We removed Gilead from our Healthcare portfolio in February after holding them for a year with poor results. Things have changed dramatically since that time as management has tackled various issues head-on, so we give you an update as things have changed even more this past week.
Gilead announced a big acquisition. Gilead will acquire Kite Pharma for about $12 billion in cash; it was unanimously approved by both the Gilead and Kite Boards of Directors and is anticipated to close in the fourth quarter of 2017. The transaction will provide opportunities for diversification of revenues, and is expected to be neutral to earnings by year three and accretive thereafter.
The acquisition of Kite establishes Gilead as a leader in cellular therapy and provides a foundation from which to drive continued innovation for people with advanced cancers. We are greatly impressed with the Kite team and what they have accomplished, and believe they are on the cutting edge of cell therapy that will be the cornerstone of treating cancer. The field of cell therapy has advanced very quickly, to the point where the science and technology have opened a clear path toward a potential cure for patients. The two company’s similar cultures and histories of driving rapid innovation in order to bring more effective and safer products to as many patients as possible make this an excellent strategic fit.
BMR Take: Gilead is losing two major drugs this year with big revenues due to the expiration of their patents and was the reason we removed the stock earlier this year . Over the past several years they were among the largest sellers in the history of Healthcare so replacing them will be a tough uphill climb. Could Kite provide a way to do it? We will see.
Bristol-Myers Squibb (BMY: $60, up 3%)
This week Bristol-Myers will announce more than 60 presentations, including seven late-breaking abstracts, from its Oncology portfolio featured at the European Society for Medical Oncology 2017 Congress in Spain. Presentations of data from company-sponsored studies, clinical collaborations and research will explore the potential role of Opdivo (nivolumab) as monotherapy and in combination with Yervoy (ipilimumab) and with relatlimab, a fully human monoclonal antibody that targets lymphocyte activation gene-3 (LAG-3); or with chemotherapy in 13 types of cancer.
All this news matters a lot because healthcare investors love new data! We are seeing the stock pick up some momentum getting ready for what is likely to be a wave of good news.
BMR Take: We are still optimistic Bristol-Myers could be a take-out candidate. Activist investor Carl Icahn is in the stock and pushing for change. We believe we could see a 25-50% premium from today’s price if a sale gets done. Further supporting our view, we note Jana Partners is now also building a position in the stock. Jana had a big stake in Whole Foods, and was taken out by Amazon this past week as you know.
Amazon (AMZN: $978, up 4%)
Amazon announced 3,000 more jobs coming to Ohio. This follows news a few weeks ago about doing a major facility in New Jersey. We continue to highlight the Amazon machine because this single company alone is now a major driving force behind the economy.
The internet retailer received approval on Wednesday for state tax incentives for two distribution operations in Ohio. The project approved by the Ohio Tax Credit Authority will create 2,000 jobs. The company said it will invest $100 million at the site, which eventually will result in a 855,000 square-foot facility. The second distribution-center project, will result in an estimated 1,000 jobs if the company goes ahead with the project. Amazon had no presence in the state until recently.
BMR Take: The Amazon powerhouse is steamrolling the real economy and the stock market. With over $20 of EPS potential by 2020 according to analyst consensus estimates, we see a lot of potential ahead.
We noticed that the stock is on a little roll lately. The stock hit a closing high of $1052 a month ago in late July and then proceeded to drop over $140 to the low 900s. But this week the stock was up a little bit every day until Friday when it took a breather. We have watched these high-priced stocks for years and many times it is human nature to not be able to bring yourself to buy a stock that is almost $1000 a share. But we always mentally build in a stock split. Say 10-1 in Amazon’s case. If the stock were a $98 stock, would you buy 100 shares? Sure you would. So we just look to buy 10 shares for $980. Same difference. If you think the stock is going to $2000 a share in the future like we do, 10 shares here, 20 shares there, and 30 shares beyond, adds up to real money.
PayPal (PYPL: $61, up 2.5%)
PayPal customers in the U.S. can now earn cash back on every purchase online and in stores with the recent launch of the new PayPal Cashback Mastercard issued by Synchrony Bank. The PayPal Cashback Mastercard, designed exclusively for PayPal members, offers cardholders 2% cash back every day, on every purchase – everywhere Mastercard is accepted.
Unlike other rewards credit cards, there is no annual cash back limit, no minimum redemption amount, no restriction on how to spend cash rewards and no expiration. The PayPal Cashback Mastercard offers all the security and convenience expected from PayPal, plus all the traditional benefits of a Mastercard. All accounts are automatically added to the member’s PayPal wallet to simplify checkout and provide peace of mind.
The introduction of the PayPal Cashback Mastercard with Synchrony Bank continues PayPal’s commitment to provide customers with rewarding product experiences and a range of innovative credit options. By providing a simple way for people to earn cash rewards for the shopping they’re already doing, the PayPal Cashback Mastercard will give consumers yet another reason to shop with PayPal.
BMR Take: PayPal has 200 million customers on the way to over 1 billion longer-term (after all, Facebook has over 2 billion, showing the possibilities for a global internet-based business model). With EPS closing in on $3 by 2020, and EPS growth moving along in the mid-teens, we see growth at a reasonable price here in the stock and like it a lot!
Nutanix (NTNX: $22, flat)
We reported via News Flash on Friday on the stellar earnings report the company issued on Thursday. The stock shot higher on Friday, hitting $24, but settled at $22, flat for the week. We’re not traders as you know, but long term investors, and we have seen this many times in our career. We are going out on a limb here and will say that the stock will move higher from here over the coming weeks and months.
We mentioned the high level of sales that were booked but not reported as revenues – the backlog. Management indicated that billings growth was 40% year over year and that the company continued to build up a significant backlog of deals that booked but did not ship in the quarter. The sales transition toward large enterprise is progressing nicely. Management's next quarter guidance implies billings growth of 25% YoY compared to consensus of 17%, due to the significant backlog build.
To recap:
Fiscal 4Q 2017 Financials
Revenue: $226 million, up 62% year-over-year from $140 million in 4Q16
Net Loss: $50 million, compared to a net loss of $47 million in 4Q16
Operating Cash Flow: $6 million, compared to $2.5 million in 4Q16
Cash and Short-term Investments: $350 million, up 90% from 4Q16
Deferred Revenue: $525 million, up 77% from 4Q16*
Free Cash Flow: $(6.5) million, compared to $(6.5) million in the fourth quarter of fiscal 2016
Billings: $289 million, growing 40% year-over-year from $207 million in 4Q16
BMR Take: We added the stock in May at $17.45 and have a Target of $30. Our Sell Price at $14 is way too low, so we hereby raise it to $19. This was a great quarter and if Wall Street doesn’t wake up to the potential of this company, we would be very surprised.
Upcoming Economic News
Domestic Auto Sales
Monday, September 4th, 8:00 AM ET
Period: August
Consensus: 4.6 Million
Prior: 4.5 Million
Trade Balance
Wednesday, September 6th, 8:30 AM
Period: July
Consensus: -$44.5 billion
Prior: -$43.6 billion
Initial Claims
Thursday, September 7th, 8:30 AM
Period: 09/02
Consensus: 240,000
Prior: 236,000
Consumer Credit
Friday, September 8th, 3:00 PM
Period: July
Consensus: $15.0 billion
Prior: $12.4 billion
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
Over the previous weekend, these were the economic headlines:
--- Robust Retail Sales
--- Disappointing Durable Goods
--- Strong Business Inventories
--- Uneven Industrial Activity
--- Mixed Housing Data
Economic data suggests that things are good, but not great.
Fed Chair Janet Yellen's signaling of continued restraint on monetary policy at Jackson Hole triggered another rally in US stocks last week. This extends the current bull market to 102 months, surpassed in length only by the 113-month run leading up to the dotcom crash. Skepticism over valuations is even higher now with a record 46% of investors believing equities are overvalued.
While the bull market may be entering the later stages of the cycle, UBS strategists believe it can run further based on these observations:
--- The earnings yield on the S&P 500 is 4.8% compared with a yield of 2.17% for 10-year Treasuries.
--- At 18x, current market PE ratio is near long-term averages. Historically when valuations have been in an 18x to 23x range, the MSCI AC World Index has returned 6% over the subsequent six months (versus an overall average of 5%). And relative valuations of equities also suggest long-term outperformance versus bonds.
--- Corporate earnings growth remains robust, at 12% in the US and around 10% in the Eurozone in the last quarter. Synchronized global growth should continue to support this, with all 45 OECD economies on track to expand this year.
There are, however, some caution flags appearing here and there. We prefer to look at price-to-sales ratios rather than PE's, and they haven't been this high since the peak of the dotcom bubble in 1999. This means that new investors are paying more for every dollar of sales than at almost any time since the dotcom bust. However, if sales continue to grow as expected this ratio will normalize to some degree. Put another way, stocks are priced almost to perfection and if the earnings growth story were to falter, it could cause some real volatility.
VMware (VMW: $107, up 5%) Has 500,000 Customers
BMR Take: Think about this. Half a million customers. Can you imagine? We think this is just fabulous. We’re up 30% since we added them in January at $83. What a great company. Our Target is $108 which it hit Friday, an all-time high (not counting the euphoria 10 years ago when they went public). With a market cap of $44 billion, and Dell Technologies being the principal owner (80%+) we think very highly of this company. So we hereby raise our Target to $120 and raise the Sell Price from $90 to $100.
The Blackstone Group (BX: $33, up 4%) had its Target Price set at Credit Suisse Group at $45
A Few Wall Street research firm targets
8/30/2017 Credit Suisse Group $45
7/25/2017 Morgan Stanley $40
7/21/2017 Deutsche Bank $33
7/14/2017 Keefe, Bruyette & Woods $37
7/14/2017 Oppenheimer Holdings $38
5/28/2017 Citigroup $41
Blackstone Considers IPO of Gates Corp.
Blackstone Group is considering an initial public offering of Gates Corp. that could value the auto-parts maker at as much as $9 billion. Its products include belts, hoses, industrial power transmission, fluid power, and automotive. The company was founded by Charles Gates in 1911 and is headquartered in Denver. In 2014, the company was acquired by Blackstone in a deal worth $5.4 billion.
The private-equity giant is in the early stages of laying the groundwork for the possible offering, according to people familiar with the matter. The business could be worth $8 billion to $9 billion, one of the people said. It isn't clear whether that includes debt.
BMR Take: We can’t tell you how good this company is. Well, maybe we can: This company is great! Look at the wealth being created by this firm. In 3-4 years in this one deal alone, they have created $3-4 billion of equity. Absolutely amazing. Our Target is $35 but we are dying for the stock to hit this price so we can raise it to $42. This is a value stock like no other.
The High Yield Corner
By Michael Foster
Significant news came this week from AstraZeneca (AZN: $30, up 3%), helping the shares rise solidly by the end of the week. The biggest news is the company’s presentations at a conference in Spain that will demonstrate the company’s phase-3 study of imfinzi for non-small cell lung cancer and tagrisso for. EGFR cancers.* The science is complex and far for non-specialists to understand without a lot of deep reading, but the market is a great place because it prices in that knowledge instantaneously, which is why AstraZeneca shares rose 2% on the news.
* EGFR is short for estimated glomerular filtration rate. The EGFR is a number based on your blood test for creatinine, a waste product in your blood. It tells how well your kidneys are working.
Another intriguing tidbit from AstraZeneca: the company announced on Tuesday that it was recruiting Takeda Pharmaceutical to work on an antibody for Parkinson’s disease treatment. Again, more exciting developments that prove the mega-pharma company’s pipeline is very healthy. Remember a year ago when this was a primary concern on the company and thus the stock? Those concerns are gone now; instead, investors have finally realized that there is tremendous value in this company and it is still innovating; thus it’s no surprise shares are up 10% in 2017 so far. Paying a solid 3.1% dividend, we can see some dividend increases in the months and years ahead. We’ve got a $42 Price Target on the stock and would hope to see this level sometime next year.
Elsewhere in The Bull Market Report High Yield portfolio we see green across the board. There’s only one exception: Invesco Municipal Trust (VKQ: $12.93), which ended the week flat. No surprise; municipal bonds are a low volatility asset class, and there’s not really any news in the municipal bond market to warrant a massive jump. That includes the latest tragedy in Texas. While large storms and ecological disaster might intuitively seem like they will hurt municipal bond markets (lower economic activity should mean lower government revenue and thus higher default risks), it’s important to remember that this “common sense” is actually false. (Often, the common sense view doesn’t quite work in finance.) In reality, credit agencies do not downgrade bond issuers faced with economic disasters; furthermore, the lower revenue may make the state’s budget tighter in the short term, but the risk of that hurting municipal bonds is negligible. Additionally, natural disasters rarely result in massive new bond issuances to fund repairs, so it’s not like existing bonds will get priced out by new issues.
We saw Nuveen AMT-Free Municipal Credit Fund (NVG: $15. 64, up 1%) have a solid showing. Also a nice surprise from Nuveen this week: the company announced dividends for all of its closed-end funds, but did not lower dividends on NVG - although many other funds did see their distributions decline slightly. Again, good news for municipal bond investors long this fund.
The Bull Market Report’s other closed-end fund picks also ended the week in the green and announced distributions that were in-line with previous dividends. AllianzGI Equity & Convertible Fund (NIE: $20, up 1%) announced that its 38 cent quarterly dividend would continue at the same level, and PIMCO Dynamic Income Fund (PDI: $30, up 1%) also announced its monthly dividend would stay at the same level. These funds are paying 8% in income, year-in and year-out, while also seeing their share prices rise. Closed-end funds are typically income vehicles that aren’t often traded for short-term capital gains, but both funds have given investors that opportunity this year. AllianzGI is up 10% year-to-date and Pimco Dynamic is up 14% year-to-date - extremely impressive returns for such diversified funds. And the income does not look to be threatened anytime soon, so investors can continue to hold them with confidence.
Now, let’s turn to REITs. Digital Realty Trust (DLR: $118, flat) announced that its COO was leaving the company in September. Markets shrugged; while he obviously has done well for the company in the past, there’s no reason to assume he’s irreplaceable. We’re sure that his replacement will be skillful.
Despite little news elsewhere affecting REITs, we saw price gains for Omega Healthcare Investors (OHI: $32, up 3%), Government Properties Income Trust (GOV: $18.50, up 1%), Apollo Commercial Real Estate (ARI: $18.18, up 2%), Ventas (VTR: $69, up 1%), and Welltower (HCN: $74, up 2%).
Also, there wasn’t any real news on Kimco Realty (KIM: $20, flat), but it’s interesting to note that this retail-focused REIT has had a bit of a resurgence lately thanks to the surprising strength in retail. (Note that we removed Kimco from our portfolio in May, but we wanted to give you an update.) If you remember, several weeks ago in this column we wrote at length at how the “death of retail” cliché was really more about shock financial journalism trying to get clicks from disaster-starved readers and had little to do with the reality of our economy. Well, we were right. In addition to beats from Macy’s, Dollar General, Target, Wal-Mart, and several other retailers, even the near-death dogs like Sears Holdings and Abercrombie & Fitch impressed the market with their quarterly results, beating expectations. Retail is not the healthiest sector on Earth, but it isn’t dead or dying. But Kimco was priced for a dying retail sector. So what does that mean? Kimco shares are up 11% in the last three months.
We want to go on record with another prediction that drives bullishness on retail REITs like Kimco. Amazon’s recent acquisition of Whole Foods and their price drop at the supermarket is going to drive retail sales for two reasons. Firstly, Amazon Prime members will be incentivized to leave their computers and shop in person more. Secondly, more people can now afford Whole Foods and will shop there. That also means people are going to spend more time shopping at auxiliary stores adjacent to Whole Foods. This is a rising tide that is going to lift many boats, which is why buying retail REITs right now makes a lot of sense. Check back in after about six months and see if we’re right.
Good investing,
Todd Shaver, CEO, Founder and Editor
The Bull Market Report
Since 1998
August 13, 2017
by Todd Shaver | Aug 13, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
Talk of “fire and fury, the likes of which the world has never seen” aimed at North Korea spooked anybody listening. The markets have been calm for so long and then BOOM, the VIX (^VIX: 15.45) spiked 44% in one day and 60% in two days of trading this week. Our take is that we had been in an unsustainable lull of inactivity. These things happen and you have to be prepared for them. But in the long run, they work themselves out and things get better. Stay the course. If you are worried, consider dialing back your exposure to some of the more aggressive equities out there in favor of looking toward our REIT and High Yield portfolios, where the income stream of dividends offers greater downside protection.
But no matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks/funds: Shopify, Apple, The Carlyle Group, Sabra, AstraZeneca, AllianzGI Equity & Convertible Income Fund, Twilio and Amazon.
BMR Companies & Commentary
Apple (AAPL: $158, up 1% - all prices are for the week)
Apple is hard at work sublet shifting its brand. Everybody knows Apple. But Apple isn’t the name of its products. Apple's greatest hits over the past 30 years don't have "Apple" in their name: Macintosh, PowerBook, iTunes, iPod, iPad, iPhone, Siri. The newer stuff that does carry the Apple moniker -- Apple Watch, Apple Music, Apple TV-- have been either outright disappointments or solid but not wildly popular businesses.
But Apple is as good a brand as any. Think Proctor & Gamble, Ford, General Electric - you get the point. It's hard to transition from a corporate brand to additional brand franchises, but if you can do it, the future is bright!
CEO Tim Cook is working hard to make it happen. The Apple brand speaks to the firm's culture and reputation to employees, shareholders and governments. A product brand communicates a specific message about the item's quality, design, or function to consumers. There is so much potential.
BMR Take: Apple is just one of the companies that always figures it out - just as we are seeing them do now with the focus on services revenue and rethinking the brand.
We remain very bullish. The stock is trading at 17x this year’s consensus EPS of $9.00. The Services business is on pace to double over the next few years. Our Target of $155 has now been breached. Yea! We hereby raise our Target Price to $170. This will bring the company close to a $900 billion valuation, now at $813 billion. Our Sell Price remains the same: “We would not sell Apple.”
The Carlyle Group (CG, $21, flat*)
Carlyle is really a master of the universe. The company’s private equity investments are behind so much of the world’s underlining economic activity it’s ridiculous. The latest example is with McDonald's.
This week McDonald's announced the successful completion of a strategic partnership with CITIC Capital Partners and The Carlyle Group. Ramping up a new era of growth and innovation, the partnership will operate and manage McDonald's businesses in mainland China and Hong Kong, leveraging combined expertise and strength to drive an expansion strategy.
The transaction has obtained China's regulatory approval and was completed on July 31st, creating the largest McDonald's franchisee outside of the United States. The sale to the new McDonald's China franchisee includes McDonald's existing businesses in Mainland China (2,500 restaurants) and Hong Kong (240 restaurants).
The new partnership announced a series of development initiatives for mainland China. Termed "Vision 2022," this strategy aims to drive double-digit sales growth in each of the next five years by increasing the number of restaurants from 2,500 to 4,500 by the end of 2022, bringing unparalleled convenience to Chinese customers. The opening pace of new McDonald's restaurants in mainland China is expected to progressively ramp up from approximately 250 per year in 2017 to 500 per year in 2022 under the new partnership. Vision 2022 also includes an increase of "Experience of the Future" restaurants to over 90%, which will enable the brand to offer a digitalized and personalized dining experience to more customers.
BMR Take: We believe Carlyle is heading to $30. Consensus is looking for a solid dividend of $1.80 next year and $2.15 the following. EPS is running closer to $3. Few institutional investors can buy the stock because the K1 tax structure creates issues. But that will change and when it does, look out on the upside.
* The stock was down 40 cents this week, but CG paid a 42 cent dividend on Thursday and when a stock pays a dividend the stock always opens that day down the amount of the dividend. Thus Carlyle was flat this past week.
Shopify (SHOP: $92, down 5%)
Shopify’s plan is to let half a million merchants run their business via Alexa and bots. Shopify wants its 500,000 merchants to be able to run their businesses almost entirely through the use of bots or voice apps like Alexa.
At F8, Facebook’s annual developer conference, Shopify announced plans to launch a Facebook Messenger bot, named “Kit”, the first commerce platform to do so. Through conversations on Facebook Messenger or SMS, Kit can do things like place a Facebook ad or start an email marketing campaign.
The development roadmaps of voice apps like the Shopify Alexa* skillset and text bots like Kit will begin to converge, so that the same merchant analytics available today by voice will become available in a text interface, and the same actions to run your business available today through text will someday be available with your voice.
* Shopify Alexa is a partnership with Amazon to use Alexa.
The Shopify Alexa skill first became available in January, but was launched with no marketing or promotion in order listen to the queries put forward by merchants to better understand the kinds of questions they want the skill to be able to answer. Before merchants are given the ability to run business operations in a conversational interface, a few other features will be added first.
Based on merchant feedback, more long-term business performance insights are on the way, and work will continue with engineers to ensure the bot can handle the range of questions a merchant has and understands the variety of ways a merchant may ask a question.
BMR Take: When we look at the core building blocks of how this company is advancing its growth potential of Total Addressable Market (TAM) is expanding. In addition, we see opportunities in international, in new merchant solutions and apps, and building scale with Shopify Plus, the company’s enterprise-focused solution. In our view, the valuation is supported by the long runway and expanding TAM given Shopify’s lower relative market share, still less than 5%. We reiterate our bullishness on the stock. The stock is currently trading at about 9 times the estimate of next year’s sales. This valuation is rich but justified.
Sabra Health Care REIT (SBRA: $21.45, down 7%)
We have decided to take our chips off the table in Sabra. Two reasons. First, the core senior housing portfolio growth is essentially flat so it’s hard to see any organic upside from the business. Second, the pending merger with Care Capital is being fought creating noise and possibly more risk.
Regarding the latter, two activist investors are urging Sabra to drop the Care Capital deal. They say shareholders of the healthcare-focused real estate investment trust should reject the merger at a shareholder meeting next month. Why? Sabra was overpaying for Care Capital's assets by up to 30%, the hedge fund said in a presentation. Ouch.
Consensus for Sabra Healthcare REIT:
1 Sell Rating, 6 Hold Ratings, 1 Buy Rating
BMR Take: We like to listen to the market and to other shareholders invested in the stocks we own. Especially when the other shareholders do great research and make objective points. We added the stock at $24 in May and are down a bit, but with the dividend, it wasn’t a great loss. Let’s move on to the next one.
AllianzGI Equity & Convertible Income Fund (NIE: $19.79, down 2%)
This fund seeks total return with capital appreciation and high current income through investment in convertible equity, income producing securities and through utilizing an options strategy. It’s top holdings are Microsoft, Apple, Amazon, Facebook, and Google. It does not use leverage. It does not hold fixed income.
60% of the stocks it holds are in the largest giant companies, and 37% in large cap companies. The Funds PE ratio is 19 versus the 17.2 benchmark, but sales, EPS, book value, and cash flow growth is all better than the benchmark.
See more discussion in The High Yield Report later in this newsletter.
BMR Take: Sometimes it is nice to own a fund and have some help picking all the right places to be. We like AllianzGI with its 7.7% yield. You can buy right now at a discount to the net asset value of $21.75, a very opportune entry point.
AstraZeneca (AZN: $29, flat*)
Fierce pharma rivals collaborating on cancer treatments are increasing the competitive landscape, hurting AstraZeneca. But we believe we must stay the course. AstraZeneca reported disappointing results for its clinical trials examining Tremelimumab combined with Imfinzi for the treatment of lung cancer. The market has become crowded with checkpoint inhibitors and immunotherapy drugs, which means that the number of such potential combinations of treatments is growing. Pharma rivals are now cooperating -- last week Merck bought half the rights to AstraZeneca's Lynparza, and in July Eli Lilly said it would out-license or co-develop one-third of its oncology pipeline.
BMR Take: Healthcare has been a minefield for months now. AstraZeneca has been beaten down. Analysts have been upgrading the stock on valuation. It is very cheap versus expectations for around $2 of EPS for next few years. Consider the 3% dividend yield on top of that. It’s a classic value here as the stock is truly undervalued. Our Target remains $42, and our Sell Price of $32 has been breached, so please make a decision with your own portfolio as to whether you personally wish to stay the course. We are trying to be patient here to give the company more time to perform.
*A dividend was paid on Wednesday of 45 cents.
Upcoming Economic News
Retail Sales
August 15th , 8:30 AM
Period: July
Consensus: 0.40%
Prior: -0.20%
Housing Starts
August 16th, 8:30 AM
Period: June
Consensus: 1,220,000
Prior: 1,215,000
Initial Claims
August 17th, 8:30 AM
Period: Through August 12
Consensus: 240,000
Prior: 244,000
A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
Stocks finished mostly higher again the week before last, mainly because of good corporate earnings, a stronger-than-expected Jobs report, solid GDP performance, healthy Consumer Confidence and a little better than expected Export & Import numbers. Is it all "too good to be true?" [Well, indeed it was!]
According to the latest American Association of Individual Investors survey, individual investors are now holding their lowest cash allocation since 2000. They are now among the most invested in financial markets since 1988. The three other time periods with the lowest cash allocations were in 1998, 2000, and 2015, and all of these preceded times when investors probably wished they had more of a cushion.
We certainly do not think we're on the brink of another 1999 dotcom bubble or a 2008 financial crisis crater. But one thing's for sure, stocks don't always go straight up forever. There will be volatility and pullbacks as Fed-tightening continues. According to recent news reports, there is now a 50/50 chance the Fed will raise rates again in December. Whenever a pullback occurs, it is not going to be unexpected. It's overdue and as natural to the market as hot dogs are to ball games. With a backdrop of really solid earnings, we expect any pullback to be fairly brief in duration. If earnings keep growing and the job numbers keep getting stronger, pullbacks will just be setting up the next move higher. If Congress grows up and we get tax relief and corporate tax reform, investors will be saying, "Laissez les bon temps roulez".
Note what UBS has to say in their latest report on the Equity Markets: The bottom line: stocks are not cheap, BUT ARE NOT in "bubble" territory.
Amazon Update (AMZN: $968, down 2%)
The stock got hit last week as the rest of the market had some tough times as you know. There is an ongoing discussion over valuation with this company. We had a heated argument with a very astute investor who thinks the stock is overvalued saying that the company will NEVER report substantial earnings; that Bezos will ALWAYS have a new project in mind that will cause him to spend, spend, spend on new infrastructure.
We agree to a certain extent, but disagree with the profit story. As you know, we have said many times revenues are the key to all success in the market. Amazon had revenues of $89 billion, $107 billion and $136 billion in the last three calendar years. This year? Hard to say, but it looks like at least $175 billion? This is just huge of course. We remain bullish for as far as we can see forward.
We hereby raise our Price Target from $1000 to $1100 and leave the Sell Price at $900.
Twilio (TWLO: $31, up 7%)
Twilio had a huge week after reporting blowout revenues as we reported via News Flash on Tuesday. Total revenue – $96 million, up 49% from the second quarter of 2016 and 10% sequentially from the first quarter of 2017.
Loss from operations – $7 million, compared with a loss of $11 million for 2Q16.
And we love this stat: 43,000 Active Customer Accounts as of June 30, 2017, compared to 31,000 Active Customer Accounts as of June 30, 2016.
Profits are still at slightly below breakeven, but as you know, we are banking on the huge revenue gain.
Here is the consensus on the Street:
2 Hold Ratings, 15 Buy Ratings
Price Targets:
8/8/2017 Canaccord Genuity $38
8/8/2017 Robert W. Baird $39
8/8/2017 J P Morgan Chase $40
8/8/2017 Mitsubishi UFJ Financial Group $35
7/17/2017 Summit Redstone $36
BMR Take: We love this company and think it can be a monster. An Apple? A Microsoft? Hard to predict the next 10-15 years, but watch this one closely.
Wall Street Consensus for United Parcel Service (UPS: $111, up 1% in a very tough week, and after an 83 cent dividend on Thursday)
Consensus: 10 Hold Ratings, 5 Buy Ratings
Price Targets:
8/8/2017 Citigroup $128
7/3/2017 Sanford C. Bernstein $127
SNAP (SNAP: $11.83, down 13% - still at a $14 billion market cap)
Don’t buy SNAP
Don’t buy SNAP
Don’t buy SNAP
Revenues: $182 million up from $72 million
Loss: $443 million up from a loss of $116 million last year. WOW! (How is this actually possible?)
Don’t Buy SNAP
Don’t Buy SNAP
A Letter from a Subscriber about Netflix (NFLX: $171, down 5%)
From: Stan Makovsky [mailto:stan@stanxxxx.com]
Sent: Wednesday, August 09, 2017 3:11 PM
To: 'Todd at The Bull Market Report'
Subject: Netflix
Hi Todd,
Disney pulling out of Netflix seems to be a big deal for both stocks. Your thoughts please?
Best Regards,
Stan Makovsky
Our Response:
Hi Stan –
I am not really concerned too much. The market is getting slammed today as I write this [Wednesday] and Netflix is down just $4. If it were down $20 I’d be a little concerned. But I believe Disney needs Netflix more than Netflix needs Disney. Netflix is a force now and as you know is spending billions of dollars a year on programming. They will be just fine. The scary thing about Netflix is their profit level – which is tiny. This needs to change.
Todd Shaver
Founder and Editor in Chief
The Bull Market Report
A Powerful Financial Newsletter
Since 1998
@BullMarketRept on Twitter
The High Yield Report
By Michael Foster
Special to The Bull Market Report
It’s been a long time coming, but we finally see a bit of fear entering the market.
For high yield investors, this is a concern because downturns and mini-corrections tend to be amplified in high yield investments. The S&P 500 slid over 1% last week but many high yield investments fell much more, especially closed-end funds (CEF). The AllianzGI Equity and Convertible Income Fund (NIE: $19.80) fell nearly 2% over the last week due to a considerable decline in the fund’s NAV, which fell over 1% in a single day of trading last week. In many cases, a market correction will result in CEFs’ discounts widening as investors sell off the fund. Surprisingly, however, holders of the AGIC fund have been surprisingly calm, resulting in the discount staying less than 10% by the week’s end. Recently, the discount had shrunk to less than 9%, so this is definitely not as good as it has recently been. But it’s surprisingly not as bad as it could be.
Of course, if the selloff continues throughout the coming week, it would be more than reasonable to expect Allianz to see a larger discount as slower and more risk-averse investors finally get around to selling this and other closed-end funds. What does this mean for you? Well, we maintain a bullish outlook for the economy and for stocks, with corporate profits continuing to rise year-over-year and the Allianz fund in particular maintains a strong portfolio of respected and strong-performing stocks. There’s no reason to sell off amongst the fearful, but anyone with extra cash on the sidelines who wants a sustainable near-8% dividend stream could consider picking up some of this fund.
Similarly, The Bull Market Report’s second CEF pick, the Pimco Dynamic Income Fund (PDI: $29), had a rough week during the market’s selloff, falling over 4%, after paying out a 22 cent dividend on Wednesday. This has resulted in PDI’s premium price falling slightly, and now the fund trades at slightly over a 2% premium to NAV.
After the sell-off, investors may be eager to buy more of the Pimco fund and capture that 9% dividend yield plus the potential upside of special dividends at the end of the year. Before rushing to buy, however, there are a few things to consider. The fund’s NAV has risen 10% so far this year even after accounting for dividend payouts, which means the fund’s payout remains sustainable. However, this is a relatively weak performance compared to its past performance. Part of the reason for that is the growing burden of its promised payouts. Because it trades at a premium, it has been significantly harder for the fund to pay out dividends than to earn the comparable income in the open market. Since the fund’s premium rose to as much as 10% earlier this year, those dividend payouts were particularly burdensome for Pimco’s managers. Now that the premium is at its lowest point since November last year, that dividend is going to be slightly easier to pay.
Easier, but not easy. The real problem with this fund is that it has years and years of a solid track record thanks to its contrarian nature. The fund invested heavily in mortgage-backed securities (MBS’s) after 2008, when they were synonymous with financial ruin. In reality, however, many of these assets were extremely undervalued because of investor fear, and Pimco had the chops to find the good ones and buy them. Hence the fund’s massive outperformance.
However, 2008-2009 is becoming a fainter memory, and the market is finally realizing the huge mistake it made in avoiding many quite valuable MBS’s. As a result, more capital is coming into that market and creating more competition for Pimco. Ultimately, that means diminished returns for investors holding this fund.
Unfortunately, this has also happened as more investors have discovered the fund’s tremendous returns. Holding this fund has become a crowded trade. Back in 2013-2015, the fund almost always traded at a discount; in late 2015, shortly before The Bull Market Report recommended it, its discount fell to 11%. But now a flood of capital has come in and driven the fund to a consistent premium, while earning superior returns through MBS’s is getting harder for the fund.
This doesn’t mean you should sell the Pimco Dynamic Income Fund. But it does mean one has to wait before buying more and instead choose other strong dividend payers like the AllianzGI fund.
Finally, let’s briefly discuss REITs. These were a mixed bag, with pretty much all REITs down and some down much more than others. Omega Healthcare Investors (OHI: $30) fell 2% over the week alongside the broader market, with its greater volatility amplifying losses. Yet the similarly volatile Government Properties Trust (GOV: $18.13) fell about 1% over the same period, even beating the market. There are a couple of pretty obvious reasons for this. For one, Government Properties Trust’s big decline earlier this month means it’s found a bottom and can’t plunge much lower. Obviously this means buying now makes sense. Omega, however, hasn’t exactly found its bottom yet and only went negative YTD at the end of last month. There’s no fundamental reason for this – there is sustainable income, the dividend is still rising, and Omega’s expansionary plans are on track. But there is a lot of fear in the market, and that is reflected in the rapidly fluctuating price of this stock.
While buying Omega now is buying a bargain, investors should be prepared for more volatility. Government Properties, while not exactly strong, seems to have found a floor that is limiting further downside, making it a more appealing buy right now. But no matter what you do right now, selling is not a good idea. There is no fundamental reason to fear for the future of equities or high yield assets, so ignore the panic selling. It will be intense but brief-lived, as always.
Good Investing,
Todd Shaver, Editor, CEO and Founder
The Bull Market Report
Since 1998
