December 17, 2017
by Todd Shaver | Dec 17, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
Star Wars ‘The Last Jedi’ topped $100 million on opening weekend, only the second film to do it, the first being Star Wars ‘The Force Awakens’. Americans are feeling good right now watching movies and buying Christmas gifts, as all-time high equity markets have their portfolios in great shape. Mergers and acquisitions are popping off with Disney buying assets from Fox and several other big-name deals announced this week. These are great times. It has been an incredible bull market. In fact, they say this past year was the least volatile on record in a hundred years. From the depths of the Financial Crisis to today marks an amazing journey for the markets. We can’t help but keep stressing that it won’t always be this good.
We’re not worried – just watching. We heard a presentation from a research specialist from Citibank on Thursday and he talked about and gave us charts on where the market is historically. He said the PE of the market (S&P 500) is 26, way above the historical average of 16. He said the VIX (^VIX) is sitting at about 10, way below the historical average of 14 or so. And he said the market ALWAYS REVERTS TO THE HISTORICAL MEAN. We took this all in, have thought about it for days and much before that and we must say that we effectively agree with this analysis. Remember the phrase “the new normal”? They said this about Internet stocks in 1999-2000 – remember what happened. They said that about the bull market leading up to 2008. Remember what happened. And they are saying that about this bull market and the low interest rate environment that we have seen for decades, with the 10-year Treasury still at historic lows of 2.35%.
Again, we’re not worried – but we are watching. We think this bull can run for another two years at a minimum.
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: Bristol-Myers Squibb, Nutanix, Annaly, Tesla, Splunk, and asset managers (Blackstone, BlackRock, and Carlyle Group).
BMR Companies & Commentary
Asset Managers:
Blackstone (BX: $31, down 2%)
BlackRock (BLK: $512, down 1%)
The Carlyle Group (CG: $22, up 3%)
Asset managers sure look like a compelling place to put money to work. We highlight some of the key data points about current market conditions. The strong fundamentals point to more and more money being made on Wall Street, which means more money for asset managers, and in turn more money for the investors in asset managers, meaning you of course.
Investment banking data were mixed in the week. Equity underwriting volume was 12% above the 4Q17 weekly average, and announced M&A volume was 67% above the 4Q17 weekly average, while completed M&A and debt underwriting were 45% and 20% below the 4Q17 weekly average, respectively; debt underwriting is steady.
Equity trading volume was 8% above the 4Q17 weekly average level, while equity option volume was 10% below the 4Q17 weekly average.
Corporate bond trading volume was steady. The 10-year Treasury yield increased 1 bp to 2.38% (up 4 bps quarter to date (QTD)), the Bank of America U.S. High yield increased 3 bps (up 32 bps QTD), and MBS securities yields (15-year and 30-year) declined 3 bps and 0 bps, respectively (up 14 bps and up 4 bps QTD, respectively).
Equity fund outflows (on a one-week lag) persisted, totaling $3.6B ($36B QTD), while bond fund inflows (also on a one-week lag) continued, totaling $4.3B ($52.0B QTD). This is certainly not good and amazing that the stock market has been able to absorb this negative news and rally like it has.
BMR Take: Take your pick between Blackstone, BlackRock, and The Carlyle Group, or own them all. These companies make money from all of the fees, deals, and rising asset prices. They are a center of profits. We see opportunity for meaningful stock price appreciation if current fundamental trends persist, as we believe it will. They are WAY UNDERVALUED in our opinion.
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Bristol-Myers Squibb (BMY: $62, flat)
Bristol-Myers Squibb has licensed a phase 1 immuno-oncology drug from Japan’s Ono in a $40 million upfront pact. This geographically complex deal, which builds on a collaboration the pair have had for a number of years now, sees Bristol-Myers solely responsible for the development, manufacturing and commercialization of Ono’s selective Prostaglandin E2 receptor 4 antagonist. This program is aimed at targeting immuno-suppressive factors in the tumor microenvironment.
To improve long-term outcomes for more patients with cancer, Bristol believes more immuno-oncology-based combinations may be required, and they are pleased to continue the long-standing collaboration with Ono with this focus in mind. This new program offers the potential to develop targeted therapies that counteract the effects of an immunosuppressive tumor microenvironment. Researching Prostaglandin E2 receptor antagonists in combination with the oncology portfolio has the potential to result in an enhanced response in a broad range of tumors.
BMR Take: Bristol is going to generate $3.00 of EPS this year and around $3.25 next year, then growing toward $4.50 by 2020 as the immune-oncology drugs gain traction. That means the stock is dirt cheap and now is a great entry point. Remember, activist investor Carl Icahn is in the stock and we could see him push for a sale of the company resulting in a huge M&A premium some day in the future.
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Nutanix (NTNX: $36, up 3%)
Wow, Nutanix has doubled in recent months. Got your attention now? Let’s review what’s happening.
Nutanix started out as a hyperconverged (HCI) vendor. Starting in 2009, they created the market for HCI. They thought that HCI was a step in the journey to where organizations were headed, which was around becoming truly enterprise cloud software companies. This is what you hear and see Nutanix focusing all their energy on. Nutanix customers are looking at HCI as a critical step in this new era journey. They're looking at Nutanix as a full stack offering that allows them to build this platform, above, that's beyond storage and compute and includes virtualization. It helps them with networking, security, but most importantly now helps them with the transition that's happening in the market around the world of multiple clouds, where customers are trying to figure out how to handle a hybrid cloud environment, where customers want to put some of their workloads in the public cloud, but they also have a private cloud infrastructure that gives them the security that actually is probably even more cost effective for their enterprise apps like SAP, Microsoft and Splunk.
BMR Take: Look, we can’t explain all the finer details around the inner workings of HCI. However, we know that tech-savvy people are thrilled about what is going on at Nutanix. The company is on track to swing from losses to over $1 of EPS in 2021. The company’s customer base has doubled. The stock has doubled. We see all the elements of success and continue to like the stock at this level.
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Annaly Capital Mortgage (NLY: $12.24, up 2%)
The Fed raised rates and guess what, Annaly’s stock went up. What? The company is going to be able to navigate the interest-rate environment just fine. In fact, the Chairman of the Board just bought 125,000 shares this week at $12. At the end of the day, it’s been proven by numerous studies, that following insider buying from key business leaders is a way to make money in the markets. People sell stocks for all sorts of reasons, but they only buy stocks with one thought in mind, “I am going to make money on this purchase.” When that buyer is the Chairman of the Board with all that insight and industry expertise, you have to assume either this guy is a reckless idiot with his money or he is on to something.
Who is Denahan J. Wellington? She is Chairman of the Board of Directors and Executive Chairman of Annaly. Ms. Denahan is a co-founder of Annaly and has over 20 years of financial services experience. She was one of the co-founders of Annaly in 1994 and has been with the firm all this time. Ms. Denahan holds a B.A. in Finance from Florida State University and is the third-highest paid female CEO making over $26 million a year.
BMR Take: We see value in Annaly shares which are trading just above book value of $11.20 with a dividend yield of 10%. We think placing your capital alongside Ms. Denahan is a smart move. We have to say we love this company. We’ve loved them for about 20 years through high interest rate environments, through bull and bear equity markets, through negative naysayers both personally and on the Street, and they just keep coming through year after year. Sorry for gushing!
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Tesla (TSLA: $343, up 9%)
Tesla looks to be catching a break in Congress, as electric vehicle tax breaks appear to be maintained in the current legislation.
House and Senate negotiators have agreed to spare the electric-vehicle tax credit and wind production tax credit in their compromise package, according to a Republican familiar with the process. As part of the $1.5 trillion House tax bill, the $7,500 electric-vehicle tax credit would have been eliminated and the wind production tax credit would have been curtailed. The Senate bill didn’t do either, and that is part of the package set for release.
The vehicle tax credit, adopted as part of the 2009 stimulus bill, helps automakers from Detroit to Yokohama bet big on an electric future with plans to spend billions of dollars on new pure-electric models to be rolled-out in the coming years despite limited sales of the vehicles to-date. Availability of the credit has been capped at the first 200,000 qualifying vehicles sold by each manufacturer. No automaker has reached that cap yet. Tesla sold about 127,000 Model S sedans and Model X sport utility vehicles through August.
BMR Take: The tax credit is a nice incentive for sales of Tesla vehicles. More sales means more cash flow. More cash flow means a greater franchise value on the stock. We like what we see happening with Tesla, from innovation to DC policies. Keep this stock tucked away in your portfolio (but know that is one of your most speculative holdings.)
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Splunk (SPLK: $83, up 2.5%)
Kaminario, a leading all-flash storage company, announced a partnership with Splunk to demonstrate compelling performance gains for customers running Splunk Analytics on the Kaminario K2 storage platform. The K2 Splunk Enterprise app provides users with actionable insight into real-time operational infrastructure.
It is imperative for enterprise customers to gain real-time insight into their infrastructure and turn machine-generated data into usable intelligence to stay competitive, with information automatically streamed and visualized into dashboards, alerts and reports,
Additionally, by supercharging Splunk on the K2 platform, organizations have the ability to meet modern information technology infrastructure needs. Splunk has a modern architecture that can leverage next-gen hardware to eliminate bottlenecks for Splunk’s heavy machine-learning-based processing.
With the Internet of Things and connected devices gaining in popularity, companies have to process and analyze the mountain of machine-generated data super-fast and in real time. This collaboration will allow customers using Splunk and K2 to gain critical insight from their infrastructure backed by the industry’s best performing all-flash array, further enhancing the capabilities to run an autonomous and intelligent datacenter.
BMR Take: Splunk is right at the center of the hottest trend in tech - the Internet of Things. EPS is set to explode from $0.57 this year to over $2.00 by 2021. Grab your share of this stock.
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Economic Calendar
Housing Starts
Tuesday, December 19th, 10 AM ET
Period: November
Actual: N/A
Consensus: 1,240,000
Prior: 1,290,000
Initial Claims
Thursday, December 21st, 10 AM
Period: 12/16
Actual: N/A
Consensus: 235,000
Prior: 225,000
New Home Sales
Friday, December 22nd, 10 AM
Period: November
Actual: N/A
Consensus: 655,000
Prior: 685,000
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Update on Twilio (TWLO: $25, up 3%)
Twilio hosted its first-ever investor day two weeks ago. Despite many quarters of strong results, the stock has remained under pressure.
Twilio aims to be the "future of communications," the way other cloud platforms like AWS has reshaped compute infrastructure and Stripe has revolutionized payments.
Twilio addresses a huge marketplace and has the potential to scale into a much larger company than it is today. The company continues to grow at a 40% rate, even as it approaches a $500 million run-rate.
Twilio's gross margin is much lower than most software companies due to its position of being a "middleman" between developers and telecom networks. The rise of possible competition from services like AWS is a concern.
Based on research from Gartner, the leading software industry analyst, Twilio believes its opportunity in communications to be 40% of the global IT market ($3.6 trillion).
Twilio also reminded investors that its sales model is unique among enterprise software companies by focusing on software developers rather than enterprise CIOs, attributing to its lower spending on sales and marketing. In its most recent quarter, it spent just 23% of its revenues on sales and marketing. This is low compared to the majority of high-growth software companies, that can typically spend upwards of 50% of revenues on sales and marketing.
Twilio also plans to greatly expand its count of quota-carrying reps (QCRs). At the end of 2016, Twilio's sales organization only had 23% of its headcount as QCRs - indicating that the bulk of the company's new sales hires weren't fully ramped yet to the $1.5-$2 million in revenue that the typical QCR brings in. At the end of 2017, however, Twilio estimates that 46% of its sales organization will be QCRs. This will drive further growth in the company.
Revenue guidance calls for $104 million, a strong 25% growth rate. More good news is that active developer accounts are up 35% over last year, and customer retention rate is literally close to 100%.
The company has generated 56% in gross margins year-to-date, the company believes it can attain gross margins of up to 65% in the long term. Twilio is operating at near-breakeven now, but the company expects to attain an operating margin of at least 20% in the future.
BMR Take: We are hanging tough with this great company. Patience will win out in the end, as revenues drive all.
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An Update on iShares US Energy ETF (IYE: $38, flat)
This is an ETF that owns a basket of 20 or 30 Energy stocks. If you want to own Energy you should own this stock. It holds about $1 billion of these stocks and is paying a dividend of just less than 3%. 40% of the fund is in two stocks – Exxon and Chevron, which together are worth almost $600 billion.
But it certainly has gone nowhere fast. We added the stock in September last year and it up a whopping 2%. Our Target is $44 which we believe to be in reach, if crude where to move higher from here. But even with the strength in crude of the past few months the stock has been flat. But it is up from the low of $34 in August.
BMR Take: Again, if you want to be in Energy, this is an easy place to be instead of trying to pick one of the many Energy companies out there. Energy will come back some day, of that there is no doubt. But when is the ultimate question and that is something The Bull Market Report can’t tell you!
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Cryptocurrency Update
Bitcoin (BTC-USD, $19,000 Sunday – prices change by the minute and trade 24-7)
The bitcoin boom is raging. It’s being discussed on every news network, in every paper, and even in questions asked to the Chairman of the Federal Reserve. The bitcoin rage is best exemplified by the following tale, which is a true story. Erik Finman invested a $1,000 cash gift from his grandmother into bitcoin six years ago. He was 12 years old. Erik is now a millionaire at 18. There are dozens and dozens of these situations being reported. Bitcoin has turned into a full-blown frenzy. It is said that the wealth created in bitcoin has served as an economic stimulus for millennials. Many feel that it going much higher The future of digital gold is here. The end of government controlled fiat money manipulation is upon us. That is what they are saying. But some more cautious investors are saying we will look back and call this the obvious bitcoin bubble. Will we? Only time will tell. Either way the frenzy is an exciting dynamic rarely seen in the markets. Place your bets wisely on the future of cryptocurrencies.
If you wish to learn more about bitcoin and other cryptocurrencies, go to bitcoin.com and sign up for their daily newsletter. Also, CoinTelegraph.com has a great one. For info on the 1300 ICOs – Initial Coin Offerings – go to CoinMarketCap.com.
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A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
The year is basically over and we will leave it with the following comments on what may lie ahead. The only thing we can be sure of next year is that the vast majority of predictions or forecasts will end up missing the mark to one degree or another, as the market never follows a predictable pattern or does what everyone, especially the experts, expect. The bottom line to all the following information is simply this - Investors should not get all worked up about the numbers or economic forecasts for 2018. We believe the single most important economic fact that investors need to know is that the world is doing OK.
The current UBS "technical" forecast:
[Be prepared for some serious technical jargon.]
“It is remains our contention that the confusion within the US equity markets, pitting the bulls against the bears, lies in the lack of understanding by investors and traders about the significance of the two current powerful but competing market trends. That is, there is a maturing/aging cyclical bull trend (March 2009) operating within a newly confirmed structural bull trend (secular bull markets last an average of 8 to 20 years in length) that began in earnest in May 2013 via a breakout above 1,576/1,600, which was further validated in 2016 by a positive outside year. As with all cyclical trends, the current 9-year cyclical bull will likely end as early as the second half of 2018 and possibly into early 2019. This will be followed by either a deep correction (10–20%) or by a cyclical bear decline (20–30%) rather than by another structural bear decline (30%-plus). Since the current structural bull trend is only four years old, this long-term trend can sustain for another four years (2021) and possibly extend for another 16 years under ideal conditions. This would imply that the S&P 500 may quickly achieve our technical target of 2,850 as early as the first half of 2018 and possibly overshooting to 3,000 before sustaining a major drawdown. Under the backdrop of a structural bull trend, the S&P 500 can reach an optimistic technical target as high as 3,685 in the years ahead."
Thus, under a worst-case scenario where this new secular bull market which began in 2013 only lasts the minimum 8 years instead of the maximum 20 years - therefore lasting another four years - the technicians are forecasting the S&P 500 could reach 3685 over that 4 year period. This would equate to about 40% upside or 10% annually. However, trying to time this projected correction or cyclical bear decline in later 2018 or the first half of 2019 (or reaching the level of 2994-3045) will be nearly impossible, and could cause timers to miss an important move higher.
Keep in mind that this is a "technical" forecast based on charting and technical historical patterns. It is one of many tools used by money managers in reaching their final investment strategy and asset allocation decisions.
The UBS "fundamental" forecast also offers a positive outlook:
“US stocks rarely experience a sustained downturn outside of economic recessions. In fact, since 1960, the median S&P 500 calendar year total return is 15% in non-recession years. While gains in 2018 are unlikely to match the advance of this past year, US equities should continue to rise and outperform bonds as the US and global economic expansion continues. Historically, stocks rise 88% of the time in non-recession years.
2017 review: Solid S&P 500 EPS growth of 10% underpinned US equities in 2017. Market gains were amplified by higher valuations driven by strengthening and synchronized global growth and inflation generally undershooting market expectations.
2018 outlook. We forecast 2018 S&P 500 EPS to rise another 8% to $141 if tax reform is not passed. With expected tax reform benefits, profits could get an additional 6-10% boost. Solid and steady economic growth and still-low interest rates should continue to support above-average market valuations, although we are not assuming further multiple expansions. Putting it all together, we expect that the S&P 500 will end 2018 between 2,850 and 2,950 if tax reform legislation is enacted. Should tax reform efforts fail, 2,600-2,700 is a more likely base case."
At this point we are going to assume that tax reform happens. Thus, the read we get on the economy is overwhelmingly positive. Maybe it's the Christmas Spirit, but it seems there’s so much going on right now that investors should celebrate. We just had two consecutive quarters of 3%+ GDP growth. We have historically low interest rates which make it cheaper for consumers and businesses and the government to borrow and spend. Inflation, which is a great enemy of both bond and stock investors, has been kept in check through many things such as demographics and technology innovation. We have cheap energy thanks to the technological revolution in fracking and horizontal drilling, and, most importantly, we have rising corporate profits. Ultimately, as they have for all of history, share prices will follow earnings.
So, if you look at this confluence of events: strong economic growth, strong corporate profit growth, low inflation, low interest rates, cheap energy – it’s almost ideal. Several noted stock "gurus" even refer to it as a “Goldilocks economy” where things could hardly be much better. We remain positive about 2018.
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The High Yield Corner
By Michael Foster
We need to spend this week discussing one our favorites - Pimco.
For nearly two years, The Bull Market Report has recommended PIMCO Dynamic Income Fund (PDI: $30, down -3%) for two reasons. The first and most important is the income. The Dynamic Fund has a sustainable 8.9% dividend yield, and it has earned that dividend solidly for as long as the fund has been around. Such a high-income stream is hard to find anywhere - but finding one that is as sustainable and high as this is near impossible. So there has always been good reason to buy and hold the fund.
The second reason to hold this fund is the underlying trends that are good for the main asset class in this fund: mortgage-backed securities. Without getting into a slew of data, the U.S. economy is improving and Americans are paying their mortgages on time more frequently than they did a decade ago. That has translated into a solid run-up for MBSs, many of which were bid down to absurdly cheap levels shortly after the housing crisis in 2007-2009. That, by the way, is what caused Pimco to start the Dynamic fund in the first place; they saw a ton of attractive assets in the mortgage market that were discounted to as little as pennies on the dollar, and they knew those mortgages were a lot safer than the market expected. So they launched the fund to capitalize on that unusual inefficiency in the market, and the Dynamic fund has benefitted healthily since then. It’s up 18% per year on average since its IPO nearly 6 years ago.
That massive run-up is the result of two things: strong income from the portfolio and capital gains from the value of the bonds in the portfolio. In years past, one or the other caused extra upside. In 2017, the upside was from capital gains: the value of the bonds went up. Income, on the other hand, did not exceed expectations. The reasons for that are complicated, but it largely is the result of the MBS market getting crowded. Back in 2011-2013, many people were so terrified of the MBS market that they wouldn’t touch it with a 10-foot pole. Yet it was the absolute bottom of the market. Pimco realized this, and bought when the assets were cheap. They were cheap because the market was expecting net investment income (NII) to be a lot lower on those bonds, but in reality, the income turned out to be higher because defaults were going down. Pimco benefitted handsomely in excess NII.
Closed End Funds tend to return excess NII to investors in the form of a year-end dividend. That’s why at the end of 2016 there was a special $1.45 dividend payout. The fund paid an extra $1.00 in 2015. In 2013? An eye-watering $5.00 in extra income! The special payout in 2013 was so high because the market just wasn’t expecting MBSs to be as safe as they were, so the yield on those bond prices was extremely high. Over time, MBSs in the fund’s portfolio have matured, and Pimco has been buying MBSs at a higher price and lower yield. So NII has declined - but there is still less demand in the MBS market than an equilibrium would assume, so there are still NAV gains in the Pimco fund.
It’s a little complicated, but the moral of the story is this: 2017 saw the Dynamic Fund's NAV total return at 21% and an 18% total price return. PDI’s fundamentals are still outperforming the stock, which is very good. It also means PDI’s NAV is going up. NAV started 2017 at $25.90 and it’s now at $28.70 (11%). The Dynamic Fund is both an appreciating asset and a sustainable high yield asset - both things that The Bull Market Report looks for in its high yield portfolio.
There is just one problem: The lower NII means there isn’t extra income to pass out to investors in the form of a special dividend. We had been saying earlier this year that we did not expect PDI to pay out a special dividend, and it looks like we’re right. Last week on Friday, the company announced that one of its other funds would issue a small special dividend, and the Dynamic Fund would issue no extra dividend at all. This means its yield is going to stay at 8.9% instead of the huge double-digit yields we’ve seen in the past. But the normal dividend is going to remain, and NAV gains could continue throughout 2018 and beyond.
Is it time to sell? No. Although the fund’s special dividends may have come to an end, and with it the near 18% annualized returns, this fund is still good for 10% or more annualized for at least a few years. There will come a day when the MBS market is overbought and it’s time to sell this fund. That day has not come yet. The lack of a special dividend might be a slight disappointment now, but the long-term gains this fund has provided are not going to stop. Enjoy the 8.9% yield and sleep well at night knowing it’s not going to get cut anytime soon.
Good Investing,
Todd Shaver
Founder and CEO
The Bull Market Report
Since 1998
December 10, 2017
by Todd Shaver | Dec 10, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
The countdown to Christmas is underway, which means this year is coming to an end and the focus is turning to the outlook for 2018. This bull market has been nothing short of spectacular. We expect high-single digit returns in the stock market again in 2018. Our view is supported by rigorous analysis from Guggenheim Research, which points to the US not reaching a recession until late 2019 or 2020. Specifically, they say, the business cycle is one of the most important drivers of investment performance. It is therefore critical for investors to have a well-informed view on the business cycle so portfolio allocations can be adjusted accordingly.
At this stage, with the current U.S. expansion showing signs of aging, focus is now just gradually shifting toward the timing of the next downturn. Using history as a guide, however, you will find that it is possible to get an early read on when the next recession will begin by analyzing the late-cycle behavior of several key economic and market indicators. Together, they have provided advance warnings of a downturn. The best indicator is the Leading Economic Indicator Index, which compiles all the various indicators into one data set. The 10 components of the index cover weekly hours worked, manufacturing orders, initial jobless claims, building permits, new private housing units, interest rate spreads, and consumer sentiment. An analysis of these metrics suggests that the current expansion won’t end until late 2019. So keep your foot on the gas!
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: Tesla, Twilio, PIMCO Dynamic Income Fund, Amazon, Google, First Solar, and more.
BMR Companies & Commentary
Tesla (TSLA: $315, up 3%)
Anheuser-Busch has placed an order for 40 of Tesla’s new all-electric Semi trucks. The maker of Budweiser seeks to reduce fuel costs and vehicle emissions, along with other companies across sectors through the Tesla revolution.
Anheuser-Busch plans to use the trucks for shipments to wholesalers within 150 to 200 miles of its brewery locations - well within the 500-mile range that Tesla Chief Executive Elon Musk has promised. The vehicles would be deployed among the brewer’s dedicated fleet of 750 trucks, which bear the company’s branding but are owned and managed by outside carriers.
Anheuser-Busch’s preorder is still tiny relative to the broader heavy-duty-truck market, which produces 250,000 to 300,000 big rigs a year. Anheuser-Busch spends about $120 million on fuel each year for its dedicated fleets and long-haul transportation by for-hire carriers moving beer between breweries and wholesalers. The company wants to cut its carbon footprint by 30% by 2025, and has invested in alternative-fuel vehicles, such delivery trucks that run on compressed natural gas. This is big stuff!
BMR Take: Tesla is currently losing money, but the consensus 2020 EPS outlook is over $10. At some point we see all the innovation, like electric trucks, turning into major profits. Tesla remains one of the most exciting businesses in America.
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Twilio (TWLO: $25, down 5%)
Twilio hosted its analyst day in San Francisco this week. It was a good day. Twilio did a nice job of conveying the momentum in its business and how it plans to continue to drive rapid revenue growth at scale, but it did not guide to gross margins for 2018, and suggested that near term, gross margins may still move around a bit, even though management is confident in its longer-term target of 60-65%. The stock was under modest pressure accordingly.
Twilio provided three new disclosures to help investors better understand these gross margin dynamics, including: 1) gross margins have consistently been around 60%; 2) gross margins are negatively impacted by the international mix, which was 53% in 3Q17 for core voice and messages, far higher than the 24% figure Twilio discloses for the international revenue breakdown by account location; and 3) gross margins are positively impacted by application services revenue, which was $10 million in 3Q17, up 100% from a year ago and representing 9% of total revenue.
The company reinforced that demand is not an issue for Twilio. For example, the COO shared a story about how one sales representative was “drowning in leads.” He also disclosed that Twilio receives more than 7,000 “data-driven alerts,” or leads per month.
Twilio claims that it won 80% of new business opportunities against the top-five competitors in the first three quarters of the year. According to management, the top reasons customers select Twilio include: 1) trust; 2) omni-channel capabilities; 3) flexibility; and 4) innovation.
Twilio Investor Day tone was positive, says Baird. They remain positive on the company's competitive position and long-term growth opportunity fueled by increasing cloud communications use cases. They also remain positive on its stronger revenue growth and ability to improve margins long term. Baird reiterated their Outperform rating and $37 price target on Twilio shares.
BMR Take: Twilio currently trades at a big discount to where comparable high-growth cloud communications companies trade. We think this valuation disconnect will correct itself, leading to strong stock appreciation. With revenue exploding at greater than 60% per year towards $600 million by 2019, we see a compelling value here. The stock has been painful to watch but one of these days, Wall Street will take notice (again) and we will all be rewarded with our patience. If you can't take the pain, then you may just want to switch to some of the larger, safer investments like Apple or Google. We’re going to be right on this. Eventually. Watch and wait.
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PIMCO Dynamic Income Fund (PDI $31, up 1%)
With rising geopolitical tensions and good money been made in the stock market, we stress the importance of increasing your bond allocation. Pimco Dynamic Income is a great way to do it.
The portfolio maintains moderate exposure to US interest rates, where Pimco continues to emphasize the intermediate portion of the yield curve. However, due to historically low yield levels and continued flattening of the yield curve, the fund has some exposure to the long end of the US Treasury curve. Outside of the US, Pimco also has modest exposure to UK rates and an underweight to Eurozone rates.
Pimco maintains a focus on non-agency Mortgage-back securities (MBS) purchased at discounts to par, which provide a potential source of income and capital appreciation, as prices in this asset class continue to be supported by limited new supply and a strong US housing market. Pimco maintains exposure to corporate credit, including an allocation to high yield bonds in the Financial sector. The banking exposure is focused on slightly more risky opportunities that are more lucrative, given how stable the banking system is at this moment. PDI has exposure elsewhere in corporate credit, including allocations to select attractive names in Retail, Media, and Telecom. Pimco’s exposure to emerging markets remains highly selective and is focused on issues offering attractive spread premium and real yields coupled with strong underlying fundamentals, such as select Brazilian and Russian corporates, as well as Argentinian sovereign debt.
BMR Take: Pimco is offering just less than a 9% yield. And the fund is up over 20% this year. For fixed income this is amazing. This fund is a great place to increase your fixed income exposure and protect against unexpected drawdowns in the stock market.
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Amazon (AMZN: $1,162, flat)
The road is not always easy. Not even for Amazon.
Maine has canceled Amazon’s application to become a pharmaceuticals wholesaler. Their applications were canceled because they did not contain all the required information, and no action had been taken by the applicant to complete them, according to the state Department of Professional & Financial Regulation.
Amazon had submitted three pharmaceutical applications in October – all three expired on Friday, Dec. 1, according to the board’s online license check. Analysts are trying to decide whether Amazon merely stumbled and missed a local deadline, or if Amazon abandoned the license applications because it realized they were unnecessary if all it wants to sell are medical devices, not pharmaceuticals.
We have confidence Amazon will get it right!
BMR Take: The innovation machine is disrupting the globe. EPS estimates are now up over $20 by 2020. Amazon continues to have a long way to run. Our Target is $1200, but in our heads we are looking for $1500 and then $2000. We can’t tell you when the latter will occur, but we sure would like to see the former happen sometime next year.
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Google (GOOG: $1,037, up 3%)
Google is about to launch a small but useful update to Google Maps that will give you live guidance and interactive real-time notifications during your journey. The idea here is to give you real-time updates while you are traveling.
To get started, you search for your transit directions in Google Maps as usual. So far, so good. What’s new here is that you’ll soon be able to tap a “start” button at the bottom the screen with the details about your route and get live updates as you walk or ride on your local buses and trains.
Our understanding is that Google Maps will even remind you to get off your bus or train when you get close to your stop. That’s definitely useful when you’re traveling somewhere new. The notifications on the lock screen are also new. One nifty feature here is that they are interactive, so you can scroll right through your journey’s steps.
While Google Maps always did a good job of giving you detailed directions, the process generally involved keeping track of your own progress along the route. With this update, transit notifications become a bit more like using Maps for walking, biking and driving. This update is to go live soon.
BMR Take: Google is always advancing the world and this is just the latest example. When you can make the world a better place, revenue and profits follow. Google is expected to earn $57 of EPS by 2020 up from $32 this year. What a great place to invest!
The information here isn’t earth-shattering – (it’s hard to come up with earth-shattering news every single day (but we try)), but we’re trying to make a point here and that is that this company continues to innovate every day. A little here and a little there and eventually it goes to the bottom line. Revenues for the past few years look like this: $55 billion in 2013, $66 billion in 2014, $75 billion in 2015 and $90 billion in 2016. What about 2017? They’re on track for $105 billion. They made $19 billion after tax last year and they are going to better that for 2017, and with $100 billion in cash on the books and virtually no debt, we can’t think of a better place to put some of our hard-earnings savings.
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First Solar (FSLR: $70, up 16%)
A lot of bad press is confusing the outlook for renewables. Don’t get confused. Renewables are the future and First Solar is going to play a critical role.
What is being said? Less than a year into President Trump’s time in office, clean energy developers face a slew of unanticipated threats from the White House and Republicans in Congress that could slow the industry’s growth in ways unimaginable just a year ago. During Trump’s presidential campaign, energy analysts were skeptical of his promise to preserve the coal industry at the expense of wind and solar. Even the most aggressive attempts at regulatory rollback couldn’t reverse the market forces driving the decline in coal, they reasoned.
But the administration has not stopped at mere deregulation. From the threat of a subsidy for coal-fired power plants to a tax bill that hurts the financing of clean-energy projects, Republicans in Washington have launched a campaign against renewable energy that includes market interventions that alarm other industries, including Oil and Gas. Even if these measures never come to fruition (advocates of transitioning from fossil fuels are pushing back) the changed mood in Washington threatens to undermine the confidence of companies planning to invest in renewables.
BMR Take: First Solar is taking the Energy sector forward with the most sustainable technology on the market. Expected EPS of nearly $4 by 2020 is up from $2.50 this year, but the 10-year outlook is where the real money is. This company is just getting started. Our Target is $65, but the stock has blown through this. So we hereby raise our Target to $78 and our Sell Price from $45 to $61.
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Economic Calendar
JOLTS Job Openings
Monday, December 11th, 10 AM Eastern
Period: October
Actual: N/A
Consensus: 6,100,000
Prior: 6,093,000
PPI ex-Food & Energy NSA
Tuesday, December 12th, 8:30AM
Period: November
Actual: N/A
Consensus: +2.3%
Prior: +2.4%
Initial Claims
Thursday, December 14th, 8:30 AM
Period: December 9th
Actual: N/A
Consensus: 240,000
Prior: 236,000
Capacity Utilization
Friday, December 15th, 9:15 AM
Period: November
Actual: N/A
Consensus: 77.2%
Prior: 77.0%
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Some Tidbits – Apple, Home Depot, Cloudera, Bitcoin
Apple (AAPL: $169, down 1%) is confident that apps removed from the China app store will be reinstated, Reuters says. Apple's CEO Tim Cook said the company is optimistic that apps that were pulled from its China App Store will be reinstated.
Also, Dialog Semiconductor is losing staff to Apple, Business Insider reports. Apple is continuing to hire away designers and engineers from Dialog Semiconductor (DLGNF), one of its suppliers. Around 28 Dialog engineers and designers have moved to Apple between March 2016 and now.
Also, the new tax plan would cut $47 billion from Apple's tax liability, The Financial Times reports, if Republicans push through their current tax plan, making it the biggest beneficiary of the legislation now working its way through Congress.
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Home Depot (HD: $183, up 2%) set a new all-time high this week. It is now worth $215 billion. Wow. The company announced a $15 billion stock buyback, and the initial reaction on the Street was a slight sell-off. Silly.
How’s this for a 6-month chart?
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Cloudera Reports Strong Revenues
Cloudera (CLDR: $16.84, up 6%) reported that revenue rose to $95 million from $67 million in the year-ago period, a gain of 42%. Profits were in the negative, so although we are pleased with the revenue growth, we’re not happy with the losses. The stock had a little bump last week and it may go a bit higher, but it is not going to $30 or higher where it ought to be until it starts actually making money. We love this company but realize this is a multi-year investment from here. Patience is key here. But our patience is certainly running thin. The quarter was strong, so that gives us hope.
Bitcoin (BTC-USD: $14,840) has a market cap of about $250 billion, about the size of Visa. It was quite a week, as it rose from the $11,000 just one week ago. In the interim it hit $17,000 or so, and futures trading starts Sunday (the 10th).
Bitcoin Chart for the Past Month
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The High Yield Corner
By Michael Foster
While the stock market went nowhere fast last week, high yield investments were a bit more mixed. We saw strength in municipal bonds for the first time in a long while, as this was overdue. The uncertainty regarding tax reforms caused some selling, but now the market is realizing that muni bonds are vastly oversold, which is helping to bring some money back into the market. Additionally, the slightly more risk-averse market is helping some money flow into muni bond funds, driving them up again.
As a result, Nuveen AMT-Free Municipal Credit (NVG: $15.68, up 2%) and Invesco Municipal Trust (VKQ: $12.57, up 2%) both had a good week, meaning the strong buying opportunity is mostly over. It’s not entirely over, however. Both funds are trading at about a 6% discount to NAV on average, a bit lower than the 5% discount we saw for much of 2017. What’s much more encouraging is the positive change in NAV we’ve enjoyed throughout 2017 - these funds are up about 5% on average on their net asset value even after their 5% dividend payouts. That means these dividend payouts remain sustainable and investors can expect a strong total return in addition to the tax-free income stream these funds provide. We wouldn’t be surprised if we saw more investors jump into the muni market, driving these funds higher and their discounts lower.
Elsewhere in the high yield world, we saw growing discontent. Specifically, Government Properties Income Trust (GOV: $18.29, down 3%) had a challenging weak on no news. This is largely a result of continued concern that Government Properties is overly levered and highly dependent on government agencies who are squarely in the majority Republicans’ crosshairs when it comes to cutting expenses wherever possible.
Of course, neither of these facts have changed in the last week, but admittedly the 8% and 7.5% yields that this stock offered earlier in the year were too low to compensate for the risks that the fund’s portfolio afforded.
Some context is important here. The Bull Market Report first recommended this stock back in April of last year when it was yielding 9.5%. Since then, the stock has given a near 14% total return to investors thanks to a slight bump in price and a consistent 43 cent quarterly dividend payout.
The Bull Market Report did not recommend selling this fund during its run-up earlier in 2017 for one specific reason: income sustainability. The most crucial metric to look at with REITs is FFO* and its relation to dividend payouts. Over the last 12 months, this REIT’s FFO was $2.15, while the dividend is an annualized $1.72. That’s a 125% dividend coverage ratio, slightly short of our preferred 130% dividend coverage target. But that shortfall is compensated for by the higher yield.
* Funds From Operations
To put that into context, let’s think about another beaten-down REIT: Omega Healthcare Investors, Inc (OHI: $28, up 1%), which has around a 130% dividend coverage ratio and a 9.4% dividend yield. With such a strong and sustainable income stream and a high yield, these are ideal contrarian income plays despite the justifiable concerns about the fundamentals. With Omega, the worry is that there are too many skilled nursing facilities and lower-than-expected demand. With Government Properties, the worry is that there is going to be depressed demand from a belt-tightening government.
These concerns are well compensated for by yields over 9%. When you get to double-digit yields (which is very unlikely with Omega but not impossible with Government Properties), you’re getting paid too much for the risks. We believe there is a chance of seeing its stock drop to a level where yields are 10%, which makes it a hold right now but not an absolute great buy. But when it comes to the sustainability of the dividend, we clearly see no risks at all to the dividend for a long time - in fact, possibly for several years.
How many years? To answer that, we need to look at the duration of outstanding leases in Government Properties’ portfolio. At 5.1 years, 28% of the company’s leases will expire before 2020. And in the next 5 years, almost 60% of the company’s leases will expire.
This is a double-edged sword. On the one hand, there is a risk that the company won’t be able to lease those properties to new tenants, causing occupancy rates to fall, income to fall as well, and the dividend to be increasingly at risk. On the other hand, there’s an opportunity for the company to lease those properties to those tenants or new tenants at the same or higher (possibly much higher) rents. This latter scenario is how we feel. The government needs the space and the record of the government in cutting down its size is, as you know, abominable.
So what is the likelier scenario - falling occupancies or rising rents? Bears are arguing for the former, and we would argue that that scenario is already priced in. However, falling occupancies is more unlikely than the market is expecting for a couple reasons.
Firstly, commercial leasing activities are going up. According to Jones Lang LaSalle, one of the biggest commercial leasing firms in America, leasing activity is at its highest point in 2 years and it’s trending higher. Government Properties has been shifting away from government leasing to office leasing, so it will benefit more and more from this trend. Thus the chances of finding new tenants paying higher rents is actually pretty good.
Secondly, there’s a paradoxical market lockup in commercial real estate REITs despite strong rent growth. Office-space REITs are one of the most heavily discounted (infrastructure and data centers are the most premium priced) in large part because of the market jitters about future occupancy rates, which paradoxically is forcing more conservative fiscal decisions among office REITs like Government Properties. But we have clearly hit a bottom in terms of pessimism, and when enthusiasm comes back to office space REITs, which will likely come as soon as the market notes the strong growth in leasing activity and rent growth, companies like Government Properties will be able to expand even more.
That means patience is in order. Expect more negativity and worries about Government Properties in the short term. But the fears about its soon-to-expire portfolio are overblown, and when the market realizes this, more capital will flood into the stock. It may take until 2019, when 18% of the company’s portfolio expires. If those spaces are re-leased at the same or higher rates (which seems inevitable given the strength in the commercial real estate market), expect the stock to rise. Best to hold the stock now, collect the income, and wait for that bump in a couple of years.
Good Investing,
Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998
December 6, 2017
by Todd Shaver | Dec 6, 2017 | 7am News Flash
Square (SQ: $38, up $1) had a good day yesterday, after a rough week last week. We wish we could say the same about Twilio (TWLO) which was down 2% to $25. These are two of our favorites (plus Nutanix, makes three) and Square has been a home run while Twilio has been a strike out. We still believe in Twilio but the market is telling us another story. We can’t quite believe it as revenues for the past few years have been stellar. We saw $90 million in 2014, $165 million in 2015 and $280 million in 2016. And they did $100 million in the 3rd quarter of 2017. We don’t get it. Revenues always win in the end, but Wall Street is making us suffer for the time being.
As to Nutanix (NTNX: $34), the stock is up $2 from where it was at the beginning of November. Yes, it had a run to $38 on Friday, but the stock was at $23 in the beginning of October for heaven’s sake. We’re not worried in the slightest.
Apple and Facebook are doing just fine, with both hovering around the $170 mark. Apple was at $151 in late September, just a little over two short months ago. Facebook was at $148 in July. Things are really quite OK out there.
But if you are afraid of the world at large and concerned about your investments (and not willing to climb a wall of worry with the rest of the market) then take some profits and put your money to work in Annaly Capital Management (NLY) paying over 10% or Government Properties Income Trust (GOV) paying over 9%. Or Pimco Dynamic Income Fund (PDI) paying 8.6%.
Relax – It’s almost Christmas!
December 3, 2017
by Todd Shaver | Dec 3, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
Before we tell you the big news for the week. Let’s just remember: The politicians in our country still have a lot of room for improvement. Let’s not praise them for accomplishing something they should be doing. With that said, Senate Republicans narrowly approved the most sweeping rewrite of the U.S. tax code in three decades, slashing the corporate tax rate and providing temporary tax-rate cuts for most Americans. It was a close vote of 51-49 that was placed just before 2 AM Saturday. Trump expects to sign the bill before Christmas but before that, there are a number of discrepancies to resolve, which could cause a lot of commotion in the weeks ahead. All in all, tax reform is a major milestone and had this not happened we could have seen a jolt to the markets. But the Bull Market remains alive and well!
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: WageWorks, Blackrock, PayPal, Square, Nutanix, and Annaly.
BMR Companies & Commentary
WageWorks (WAGE: $64, up 2%)
WageWorks is catching a bid as they say, when a stock starts to work. What is happening recently? Well, the company has published its latest update for “The Definitive Guide To HSAs”. This is the best blueprint on the planet for how to run your business for your employees. Most employees are not prepared to handle unexpected medical expenses. A recent survey from Aflac found that 65% of respondents have less than $1,000 to pay for out-of-pocket expenses related to an unforeseen illness or injury. So, how do you offset rising healthcare costs, while keeping employees happy and healthy? For many organizations, the answer is a high-deductible health plan (HDHP) paired with a Health Savings Account (HSA). All of this detail is covered in the updated guide just published. The key takeaway is that December is the point in the year where all of WageWorks’ clients renew and many new clients come onto the platform. Revenue will be strong, and we will get an updated client count in the next earnings release, which will give us great visibility into just how good business will be in 2018.
BMR Take: The consensus EPS is currently $1.80 this year heading to almost $2.00 next year. We expect upside to next year’s EPS estimate to be evident on the upcoming earnings call, as the company announces a number of new client wins during this year’s selling season.
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BlackRock (BLK: $502, up 5%)
BlackRock and Citibanamex, a subsidiary of Citigroup, announced a definitive agreement for BlackRock to acquire the asset management business of Citibanamex. The two companies will also enter into a distribution agreement to offer BlackRock asset management products to Citibanamex clients in Mexico. Through its network of 1,500 branches in Mexico, Citibanamex provides wealth management products and services to more than 20 million clients. The transaction involves approximately $31 billion in assets under management of Citibanamex, across local fixed income, equity and multi-asset products, primarily for retail clients. The transaction is part of Citi’s emphasis on expanding access to best-in-class investments products, rather than on manufacturing proprietary asset management products. BlackRock’s business in Mexico currently focuses mostly on institutional clients, offering international investment and risk management products and services across asset classes, strategies and geographies.
BMR Take: This is why we like BlackRock. The company’s reach globally is unbelievable and getting bigger. Consensus calls for EPS to grow from $22 this year toward $33 in 2020. This ride is just getting started.
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PayPal (PYPL: $75, down 4%)
PayPal has had to suspend operations and that has weighed on the stock. PayPal announced an update on the suspension of operations of TIO Networks (TIO), a payment processor PayPal acquired in July 2017. A review of TIO's network has identified a potential compromise of personally identifiable information for approximately 1.6 million customers. The PayPal platform is not impacted in any way, as the TIO systems are completely separate from the PayPal network, and PayPal's customers' data remains secure. As announced on November 10th, PayPal suspended the operations of TIO to protect customer data as part of an ongoing investigation of security vulnerabilities of the TIO platform. This ongoing investigation has identified evidence of unauthorized access to TIO's network, including locations that stored personal information of some of TIO's customers. As a result, PayPal is taking steps to protect affected customers.
BMR Take: While this isn’t great, we applaud PayPal’s swift and serious preventative measures. So many other companies, like Equifax, have done it all wrong. This is why PayPal is a market leader in payments as they set the example. With EPS set to grow from $1.90 this year to over $3.00 by 2020 there is more room to run in PayPal’s stock, unreal considering how much the stock has already appreciated.
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Square (SQ: $38, down 22%)
Square has been red hot, moving straight up from below $10 since the summer of 2016. We added the stock at $17 in March of this year and are still up over 120% even after last week. We saw a big pullback last week but are not overly concerned. One of the reasons was that an analyst at BTIG (who?) came out with a Sell rating on the company saying the bitcoin rally was speculative, overdone, and ripe for a correction. (The company created a buzz announcing the Square Cash app that will buy and sell bitcoin.) It is not optimal or correct for the company’s fortunes to be tied to cryptocurrency. This is just a small experiment which we applaud, but if it doesn’t work out we’re not worried and it certainly won’t impact the company materially. Shares dropped about 16% on the release of this report. All in all, we like what Square is doing.
BMR Take: The major takeaway is not getting caught up in the volatility of cryptocurrency, but that Square is pioneering payments in a manner not seen at its major peers. This makes Square the innovation leader in the space and a must-own stock for the long haul, like a Tesla or Amazon, where it’s not that the numbers don’t matter, but just not yet and won’t for a long time. Revenues are growing dramatically and ultimately the Street believes in revenues first and then profits.
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Nutanix (NTNX: $36, up 5%)
Nutanix absolutely crushed the quarter and the stock went flying higher. Revenue of $276 million grew 46% year-over-year. Billings of $315 million grew 32% year-over-year. The loss per share of $0.39 compares to a loss of $1.89 a year ago, but recall that if the company stopped marketing heavily tomorrow, EPS would increase over $1.00. We don’t want this to happen as we want long term marketing investments for future revenue growth. The cash balance ended the quarter at $365 million, a healthy figure. Nutanix ended the first quarter of fiscal 2018 with 7,800 customers, adding over 760 during the quarter. First quarter customer wins included ConocoPhillips; Toyota Motor North America, and Trek Bicycle Corporation. Nutanix increased the number of $1 million+ deals in the quarter, up 36% from last year.
BMR Take: Nutanix delivered a great quarter. The stock is a great investment opportunity and we have seen a massive move since we added the position to our portfolio in May at $17. From here, we look for more steady revenue performance in 2018 and believe this can continue to push the stock higher. We see the company clearing the $1.0 billion revenue milestone for the first time next year! Revenues for the past three years ending July were $765 million last year, $445 million in 2016 and $240 million the year before. Now that’s called growth! At $6 billion in market cap the company has reached the medium-time (in other words not the big-time! Yet.) but they are moving swiftly in the right direction. Of course, the company remains a buy-out candidate as $6-10 billion is chump change for the big boys. Now wouldn’t it be nice to have this one bought out at $50 a share sometime next year. Our Target is $42, recently raised, but we sure wouldn’t mind raising this Target to $50 if the stock hits $40 in the next few months.
Upgrades this week: Nutanix price target raised to $51 from $39 at Maxim and kept their Buy rating after this week’s earnings beat. The company's latest guidance looks to improve the sales productivity metric from 32% to 39% in FY19.
Nutanix price target raised to $40 from $34 at Oppenheimer saying the company reported another strong quarter ahead of expectations. The "clear highlight" was management's commitment to a software-focused model going forward. The research company is bullish on the transition and looks forward to a "large gross margin boost over time." He maintains an Outperform rating on Nutanix.
Nutanix price target raised to $40 from $28 at Piper Jaffray saying the company's transition to a software model highlighted its "solid" Q1 results. The transition will result in "significant" gross and operating margin expansion, and should ultimately drive a "re-rating of the multiple." They have an Overweight rating on the stock.
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Annaly (NLY: $11.80, flat)
Annaly is worth a close look right here. The company is a leading diversified capital manager. The yield on the stock right now is greater than 10%. They are the largest Mortgage REIT in the world with a market cap of almost $14 billion, which is 20x the market cap of the median Mortgage REIT. Their diversified business model has them investing in agency loans, residential credit, commercial real estate, and middle marketing lending. Let’s review these:
--- The Agency group invests in agency Mortgage Backed Securities collateralized by residential mortgages which are guaranteed by Fannie Mae or Ginnie Mae. These are the safest government bonds around, but do carry interest rate risk.
--- The Residential Credit group invests in non-agency residential mortgage assets. This area is more complex because there is no government guarantee, but the opportunity for enhanced investment returns is greater.
--- The Commercial Real Estate group originates and invests in commercial mortgage loans, securities, and other commercial real estate debt and equity investments, which is a great way to pick-up real estate exposure in your portfolio.
--- The Middle Market Lending group provides financing to private equity-backed middle market businesses across the capital structure, which can be quite lucrative. The company is very well run, in fact the best in the industry, and the Board of Directors appointed Chief Executive Officer and President Kevin G. Keyes as Chairman effective January 1, 2018.
BMR Take: With a 10% dividend yield, and sturdy fixed income investments across asset classes, we see compelling value in the stock. If we see a volatile equity market, their portfolio of mortgage-backed securities should provide steady income to support the $1.20 dividend that is covered by earnings. Higher interest rates could cause some near term volatility, but Annaly will be able to reinvest at the higher rates ultimately driving higher dividends that should appeal to any high income seeking investor.
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Upcoming Economic Calendar
Factory Orders
Monday, December 4th, 10 AM ET
Period: October
Actual: N/A
Consensus: -0.40%
Prior: 1.4%
Trade Balance
Tuesday, December 5th, 8:30AM
Period: October
Actual: N/A
Consensus: -$47.0B
Prior: -$43.5B
Consumer Credit
Thursday, December 7th, 3:00 PM
Period: OCT
Actual: N/A
Consensus: $16.5B
Prior: $20.8B
Unemployment Rate
Friday, December 8th, 8:30 AM
Period: November
Actual: N/A
Consensus: 4.1%
Prior: 4.1%
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A Word from Gary Jefferson
First Vice-President, Investments
Jefferson Financial Group
UBS Financial Services, Inc
I remember riding as a kid over the desolate highways in west Texas and every now and then you would see a great big billboard with the ominous message "The End Is Near". Well, as investing goes in the year 2017, the end really is near, except the message thus far is extremely positive - although it still contains a slightly menacing element. We haven't had the almost obligatory 5-10% market correction after such a strong run-up. That's because through today, there is still a little bit more than just "hope" that tax reform will happen. Should tax reform fail, then we would be in the shock-and-awe camp if the market treated it as a non-event. Whatever the result, the year-end should be a net positive one.
As we approach the new year, we do not see a scenario that would involve making major changes to our asset allocations or investment strategies. First and foremost, we don't see a recession anywhere on the horizon. It is just the opposite – we see continued expansion in both US and global corporate earnings. It is that simple and we don't see any reason to try and make it any more complicated. We will certainly keep an eye out for the accepted early warning signs of potential trouble ahead such as an inverted yield curve or runaway inflation. And, there is always the proverbial geopolitical risk and the energy wild card. At this time, however, the energy card looks to be fairly stable, as do the Mideast and North Korean tensions.
We think Technology will still be a leader because we are right in the heart of the 4th Industrial Revolution and it is all about technology – artificial intelligence, augmented reality, the Internet-of-Things, the "Cloud", driverless cars, e-commerce and the list goes on and on. The first Baby Boomer is only 71 and 10,000 people turn 65 every day now, which will continue for another 10 years. Healthcare can't help but be a tremendously important sector for years to come because of its unstoppable momentum. While we continue to like these two sectors, we also see a lot of potential in many other areas. That is why we continue to use diversification as the cornerstone of our investment strategy. For several years the large-cap S&P 500 stocks were about the only positive area in worldwide markets and diversified portfolios lagged their performance. Today, however, Europe, Asia, Emerging markets, small caps and alternatives are finally participating in the overall success of global markets, allowing traditional diversification to reward investors. We, along with most major firm analysts, expect this broad-based positive performance to continue into 2018, albeit at a lesser pace than this year's torrid rate.
One thing we are sure of is that a market correction will happen – we just don't have any idea as to the timing (nor does anyone else, so run away as fast as you can whenever you hear someone specify the time and date). Unless the fundamentals that got us here collapse, we will view a correction as a normal market event, not as a reason to panic but rather more likely as an opportunity to seize. Bearing that in mind, while the "end is near" for investing in 2017, we think of it as a useful billboard alerting us to plan and prepare for investing in 2018. Diversification, with some emphasis on Technology and Healthcare, remain solid portfolio choices.
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Amazon (AMZN: $1162, down 2%) price target raised to $1,525 from $1,430 at Wells Fargo to reflect increased outer-year estimates for Web Services as well as a higher sum-of-the-parts valuation. The research firm highlighted the "very successful" five-day Amazon Wed Services conference in Las Vegas, "record-breaking" early holiday sales data, and another Healthcare industry development with CNBC reporting* the company is in talks with generic manufacturers Mylan (MYL) and Novartis (NVS). They see an increasing likelihood that Amazon "ultimately becomes a disruptor" in Healthcare, with generics representing a potential point of entry. The Wells Fargo Healthcare team sees generics as a "simple entry point" in Pharma as it involves many players with ready supply and a price competitive market. They keep an Outperform rating on Amazon.
* CNBC reports that Amazon has held preliminary talks with generic drug companies, including Mylan and Novartis' Sandoz, regarding the ecommerce giant's possible entry into the pharmacy market. It is unclear whether Amazon is planning to enter the space as a drug wholesaler or as a retailer but Sandoz said it does not expect the move, which could potentially disrupt the drug distribution industry led by McKesson (MCK), AmerisourceBergen (ABC) and Cardinal Health (CAH), and which could have a "major impact' on its business.
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Visa (V: $111, down 1%) remains solid as a rock. This company is BIG, at $250 billion in market cap. The dividend is not worth mentioning, but the company is all about growth. Revenues the last three years were $14 billion in fiscal 2015 (ending September), $15 billion in 2016 and $18.4 billion in 2017. With after-tax income of $6.7 billion, this company is a cash machine. 36% after tax? Simply astounding. The company has $10 billion in cash and $16 billion in long-term debt, a good ratio. We sure would like to see a higher dividend, but we’ll settle for our Target Price of ….. Wait a second. It just hit our Target of $110. So we hereby raise it to $123. Our Sell Price is: We would not sell Visa. Invest in this puppy for the grandkids. They'll be happy you did.
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The High Yield Report
By Michael Foster
There are a couple of big-picture items to talk about. One kinda big and one really, really big.
Let’s start with the kinda big item. Pimco. The Bull Market Report has recommended the PIMCO Dynamic Income Fund (PDI: $30, up 1%) for nearly two years now, and in that time the fund’s distributions have remained constant. But what really has pushed this fund over that period has been its special distributions. In late 2016, this fund gave out an extra $1.45 in a special end-of-year payout that boosted its annual dividend to over $4, which makes the return a whopping 13% on stock. And the fund’s net assets have actually grown while paying those distributions. This kind of performance is the thing dreams are made of.
Now we’ve come to the end of 2017, and we’re wondering if that same lightning will strike again. If you were reading our columns last year, you know that we were expecting an end-of-year payout of over $1, and Pimco crushed our expectations with nearly 50% more cash to shareholders than what we were hoping. So what about this year?
Unfortunately, this is the weirdest year in the history of this fund. Keep in mind that the Dynamic Income Fund specializes in mortgage-backed securities (MBS’s), which are one of the few asset classes to be Hollywood famous. In the movie-adaptation of Michael Lewis’s The Big Short (and, if we may say, the book is much better than the movie and definitely worth a read), the public was given an insight into these derivative investments that, frankly, were one of the primary weapons of the 2007-2009 financial crisis.
That big crash is, paradoxically, why Pimco spun off this fund in 2012 and why it’s done so well since. With a focus on MBS’s, the fund looked to find assets in the marketplace that were trading at absurd discounts to their NAV. Pimco found MBS’s that had been discounted to trade for 20 cents on the dollar, and then they did an analysis to see if more than 20% of the underlying mortgages would avoid defaulting. If so, they bought the MBS.
They did a lot of this in 2012 and 2013, which was really the bottom of the MBS market. Since then, Pimco has been collecting the income from those mortgages, and that massive interest payment (since those assets were bought at a huge discount) has resulted in a high yield for investors.
It’s been a decade since the crisis began, which means the total number of distressed mortgages has declined as a result of payoffs, refinancing, and so on. That means there are fewer distressed mortgage-backed securities in the market. At the same time, more investors have realized how oversold the MBS market was in the aftermath of the financial crisis, and a lot of competition to buy these assets began in 2013. That has heated up extremely in 2017, which means the Dynamic Income fund has been buying fewer and fewer MBS’s at those big discounts and buying more at much smaller discounts.
As a result, the Dynamic Income fund has been earning a lower yield on its investments - but its dividend has remained constant. That has translated into a lower dividend coverage ratio that actually fell below 100% in 2017 for the first time in years.
This has worried a lot of investors, but it shouldn’t. We are still years and years away from this fund being a sell. It does mean that it is harder to earn the massive income stream that it has had in the past, but it is still very easy to earn capital gains by identifying underpriced MBS’s in the market. Pimco is particularly good at this, so the fund is seeing its NAV rise at a faster pace than any other time since 2012.
But all of this puts the special dividend at risk. Will Pimco give out a special distribution from capital gains? We simply don’t know. In the past, the fund has paid out a special distribution from investment income, which makes sense (this is the structure many Closed End Funds and mutual funds follow). PDI can choose to give a special distribution from capital gains or not give a special distribution at all. No one knows whether they’ll choose to give a special distribution from cap gains or no special at all.
So, sadly, we cannot predict an end-of-year payout this year. It could be anywhere from $0 to $2.00 (the amount the fund’s price has gone up in 2017). Personally, we would like to see Pimco offer no special dividend and use that cash to get better returns - but, then again, investors would’ve been well-served had Pimco done that in previous years, and they didn’t. So the future of the fund’s special dividend is in question.
The normal dividend is not in question, however, and the NAV growth is strong enough to keep holding the fund in your portfolio.
The second really big issue is a lot bigger but also a lot simpler: the tax code.
Municipal bond funds Nuveen AMT-Free Municipal Credit (NVG: $15.31, down 1%) and Invesco Municipal Trust (VKQ: $12.30, down 1%) have taken a hit alongside all municipal bond funds on the uncertainty of municipal bond tax credits. Specifically, there is worry that the new tax plan will remove the tax-free status of “private activity bonds,” or PABs, which tend to be used by local governments to provide funding for private entities that will develop a new building or piece of infrastructure that has a broader public use (for instance, a new hospital). There remains uncertainty as to whether munis will maintain their tax-free status. The tax plan from Congress eliminates their tax-free status, and the Senate retains them. That split indicates to us that this is a battleground for quid-pro-quo politics, and we may see a last-minute reversal as a result of a back-door deal.
Nonetheless, the municipal market is assuming this is just plain bad for municipal bonds. The reality is much less clear. This may result in fewer bonds in the market, and that would mean higher prices for bonds (especially older bonds). That would be very good for existing muni bond funds. But it really depends on the final legislation, which no one knows yet.
We don’t believe munis will be stripped of their tax-free status. We see this as a buying opportunity for municipal bonds, since the potential upside is something the market isn’t focusing on. The market is too big and too important for such a major change to occur.
Good Investing,
Todd Shaver
Founder and CEO
The Bull Market Report
Since 1998
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.)
