January 14, 2018
by Todd Shaver | Jan 14, 2018 | Weekly Newsletter 7pm Sunday
The Weekly Summary
Everybody has an opinion. Go search the internet and you’ll hear one fellow say the market is going to crumble, the next person say new highs are on the horizon, and the third individual tell you something that doesn’t make sense because they don’t even know what they are talking about. Accordingly, we feel the need to break it all down this week. No fluff. No spin. No wild opinions. Just a little ‘telling it like it is’ as a reminder that this The Bull Market Report. We aren’t like what you see on TV. And we aren’t like what you read elsewhere. We are just like you. Looking for the cold hard honest facts.
US equities ended the week higher in a quiet Friday of trading. Cyclical and value plays were among the better performers. The equity market is already up over 3% this year with some of our stocks like Amazon and Nutanix up more. Bonds are down this year and Treasuries were mostly weaker as investors realize the Fed is serious about raising rates. We saw more flattening of the yield curve indicating caution. In fact, the two-year T-note rose and hit 2.0% for the first time since 2008. Gold was higher for fifth straight week. Crude ended higher for the fourth straight week.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight: Cloudera, Blackstone, Amazon, Google, Eli Lilly, and Home Depot.
BMR Companies & Commentary
Cloudera (CLDR: $18.14, up 5%)
Cloudera met with investors this week at Citi’s Global TMT West Conference. The CEO discussed all that they are doing in terms of new technology. Let’s recap. Remember, understanding the big picture of what the company is doing is how you build real confidence in your investments.
First it is important to understand the backdrop of why Cloudera is such an exciting company. Everything right now is going through a major technological revolution. Look what is happening in cars, health, and virtual reality. Everything is getting connected. This newly-created connected world is creating a backdrop for data that is unprecedented. And in this area of the economy is where the world’s most valuable companies reside—Apple, Google, Facebook, and Amazon. They are all data driven. Economists say the world’s most valuable resource is now no longer oil, but data.
So where does Cloudera fit it? Cloudera helps enterprises enter this new world of machine learnings and artificial intelligence. Cloudera gives them access to this data to transform their business to become data dependent. The old days of just working with a database storage provider and some simple analytics are gone. Today, companies turn to Cloudera to build best-in-class artificial intelligence solutions that optimize all the available data out there, not just their own.
BMR Take: Machine learning and artificial intelligence are megatrends for the next 5 years. Get involved. Cloudera is a great opportunity. Revenue will explode from $360 million this year to $570 million in 2 years. We see Cloudera breaking the $1 billion revenue mark possibly as early as 2020. We added the stock at $22 in June so it has certainly been an underperformer for us. But we are very confident in the success of this company and continue to have a $28 price target on the stock. Sometimes one has to be patient to see the big gains that we expect. Cloudera is still tiny with a market cap of $2.5 billion. But they are growing 40% a year. We would expect to see this little gem grow to the $10 billion level at some point and then get plucked up by one of the big boys. And this might even happen sooner than you think.
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Blackstone (BX: $35, up 7%)
Blackstone is on a roll and caught an upgrade from JP Morgan. We love it when the professionals come around to our side of the table!
The reason to be excited at this point is that there is going to be a major fundraising cycle for Blackstone over the next two years. The company is expected to raise over $200 billion. The way the company makes money is through these massive fundraisings, then deploying the capital, and then getting a share in the profits from the investments.
The fundraising will happen in two funds. The first is Flagship Real Estate BREP-IX in 2018. The second is Flagship Private Equity BCP-VII in 2019.
BMR Take: Blackstone has been an underperformer relative to its peer group. And the peer group of these private equity companies hasn’t done too well. The entire space is relatively new to the public equity markets. Retail investors just don’t have the comfort level they have with other financials like AIG or JP Morgan. But we think that will all change. These companies print money. Blackstone will do over $3.00 of EPS in 2018. The stock is very inexpensive right now.
We’re up 30% on the stock since we added it in early 2016. Good but not great. The dividend has helped though, as that 5% a year adds up. But we expect more from this great company. Our Target was just reached this week, so we are going to go out on a limb and raise the Target to $42. If things go right, we would expect to see this by year end, but perhaps sooner.
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Amazon (AMZN: $1,305, up 6%)
Amazon Fresh prices are up to 20% cheaper than major UK supermarkets.
Look out! We are going to see Amazon really shake-up the grocery market this year. Amazon's online grocery service Amazon Fresh is selling some products up to 19% cheaper than major supermarkets, new research suggests.
Amazon Fresh is a subsidiary of the Amazon.com. It is a grocery delivery service currently available in some U.S. states, London, Tokyo, Berlin, Hamburg and Munich. It will also launch in Australia soon.
The cost of a shopping cart from Amazon Fresh turned out to be 11% cheaper than the same online shopping from Tesco, and up to 19% cheaper than other competitors. The study was done by the consulting firm Oliver Wyman. The geography was in London.
Amazon Fresh is still relatively small but the internet giant has very serious ambitions in the grocery sector, suggesting that it may be looking at more acquisitions.
BMR Take: Amazon is a never-ending innovation machine; essentially a massive start-up. Look, the company will do $177 billion of revenue this year and we could rant and rave about the revenue growth outlook. But nobody knows what businesses Amazon will even be in over the next 3 years. They are knocking down doors and running through walls into new markets. Grocery will be tens of billions of dollars for Amazon in a market that the firm has been in for less than a year.
The stock had a banner week and hit our $1300 Target, setting a new all-time high. We believe we will see $2,000 someday in the future, but obviously not right away. But we can see $1,500 in the not-too-distant future, so we hereby raise our target to that level. The Sell Price is raised from $1,030 to $ 1,225.
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Google (GOOG: $1,122, up 2%)
Apple came under massive scrutiny this week. Parental oversight organizations said Apple should take more responsibility over how children use their devices in particular addition to the technology. We think Apple, Google, and Facebook in particular are making so much money they are likely to be the target of increased scrutiny by governmental authorities. In fact, we saw this week similar outcries against Google. We keep an eye on this risk but would not let it shake us out of any of these holdings.
Google has been profiting from a practice in the United Kingdom but banned in the US, in which brokers secretly reap millions of pounds from addicts seeking treatment in the UK. An undercover investigation by the Sunday Times has discovered a large fraud in this area. As a result of an in-house investigation, Google pulled all addiction-industry-related advertisements from its UK platforms.
BMR Take: Without question, Google and its peers will have to invest more in meeting social responsibilities and being a good corporate citizen. That said, Google can manage through this. We are looking at EPS going from $32 this year to nearly $60 by 2020. We can live without $1 or $2 of EPS if the company addresses these social issues and spends money to prevent thing like this advertising scheme being run through the platform in the UK. In fact, we encourage it, as it could result in a premium valuation.
Google set a new all-time high this week and is now worth $780 billion, closing in on Apple at $900 billion. (Of course, Apple set a new all-time high this week as well, so it’s certainly a good race!) Our Target has been $11,00 which was hit this week, and we expect a continued strong stock market which should proper Google higher. Thus, we hereby raise our Target to $1,450 and our Sell Price to $1,010.
Don’t like high-priced stocks? GET OVER IT. Buy some Google. Buy some Amazon. Buy 7 shares. Buy 23 shares. Just own these fabulous companies!
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Eli Lilly (LLY: $87, flat)
Eli Lilly caught a big upgrade from Argus Research. Again, we love it when the professionals come around to liking our holdings!
What’s the excitement? Tax reform is a major positive for the company. Additionally, the company is working to sell its Animal Health business. The combination of these two events will create a cash windfall. Now the CEO is talking about doing a large acquisition.
Previously, big time M&A was just a distraction for the company as Lilly could not be competitive due to its balance sheet. However, now there is some real interest to move bigger into immune-oncology. Could we see them try to buy Bristol-Myers? (BMY: $63) Maybe; but that’s a big bite to chew off – around $120 billion.
BMR Take: Lilly is going to do $4.65 of EPS in 2018. They have $4.5 billion of cash. They have more cash than debt. They could do a mega-deal and this could get really exciting. We see why Argus upgraded the stock with a $115 price target.
We at The Bull Market Report have a Price Target of $88 on the stock at the moment, but we expect mid-90s by summer, so we hereby raise our Target to $96. Our Sell Price moves higher too, from $76 to $82.
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Home Depot (HD: $196, up 2%)
To be honest, we are frankly a bit upset at Home Depot right now. We expect a lot from our companies - we wouldn’t recommend them to you otherwise. Home Depot put out this official statement on tax reform back in November, “The Home Depot is very supportive of tax reform that would fuel the economy by putting more money in the majority of Americans' pockets while improving the competitive position of companies so they can create more jobs. We applaud Congress for its efforts in moving tax reform forward.”
What is it missing?
Where is the minimum wage hike? Where is the $1,000+ bonus to employees. Walmart, some big banks, and many other companies took additional actions. All Home Depot did was issue a press release of encouragement.
We will get over it. But Home Depot missed an opportunity to demonstrate its corporate leadership in this country.
BMR Take: Home Depot is going to do nearly $9 of EPS in 2019. EPS should grow at least mid-single digits. The housing market is doing great and we expect ongoing favorable tailwinds for Home Depot. The stock is still going to go higher, but it could go much higher if they would not miss opportunities to build goodwill with the market as an exceptional corporate citizen.
Our Price Target is $205 which we will leave here for the time being. The Sell Price of $178 is hereby increased to $186.
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Economic Calendar
Capacity Utilization
Wednesday, January 17th, 9:15 AM
Period: December
Consensus: 77.3%
Prior: 77.1%
Housing Starts
Thursday, January 18th, 8:30 AM
Period: December
Consensus: 1,278,000
Prior: 1,297,000
Michigan Sentiment
Friday, January 19th, 10:00 AM
Period: January
Consensus: 97.0
Prior: 95.9
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Time to Take Our Profits in Tesla?
Tesla (TSLA: $336, up 6%) had a great week, but the more we think about it, the more worried we become. They have orders for 400,000 Model S cars and said last year that they would be delivering 5,000 a week starting in October, 2017. Well, guess what, this 5,000 number has slipped a number of times so that now they are talking about the 2nd quarter of this year. That’s a big slip. Maybe there is something seriously wrong here. No one seems to know and the company certainly isn’t helping us with solid information.
The company is going to need massive amounts of cash this year. They are bleeding money each day, each week, each month, so we expect more secondaries this year, diluting existing stockholders. And more bond sales as well.
Can the company survive and thrive? That’s the question that we are wrestling with.
We love the company; the world loves the cars. We love Elon Musk, but he is a promoter for sure. A loveable genius with a $56 billion market cap company.
The more we think about it and the more we write about it, we just have to book our profits. We are up 69% since we added the company two years ago at $199. OK, wait a minute. We’ll let the market tell us when to sell: If the stock goes to $320, we are OUT.
It’s tough to invest in a visionary. The vision always takes longer than the genius or the masses of followers expect.
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Apple's App Store Broke Records this Holiday Season
Apple’s App Store started off 2018 by breaking app purchasing records on New Year's Day. Consumers spent $300 million in app purchases on January 1, 2018, marking the highest sales day for the App Store since its launch in 2008.
This outstrips last year’s record-breaking figure of $240 million in purchases on New Year’s Day. Customers spent $890 million on apps from December 24th-31st. Insights into app spending during the holiday season are indicative of the strength of the iOS platform for the year to come, as many consumers receive smartphone devices and purchase new apps, games, and subscriptions over the holiday period.
Apple’s App Store revenue gets bigger each quarter and each year. Developers received $26.5 billion for the year, up 30% year-over-year, and is now over $86 billion since 2008. For 2017 the $11.4 billion in revenue was almost 5% of the company’s projected $237 billion in total revenue.
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A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
Earnings season officially kicked off last week with the big banks leading the way. We expect decent to good numbers, but the big thing to watch for will be forward guidance, particularly on how much tax cuts will impact the bottom lines. Some sectors like Energy will likely benefit more than others which traditionally have been able to pay lower effective rates such astech.
Last week, Bank of America analysts raised their earnings forecast for the S&P 500 by $14 to $153 per share, as a result of the new lower 21% tax rate. (Source: Merrill Lynch). In market-speak, that means that if corporate earnings for 2018 reach $153, and the market's trailing PE is 18, the S&P 500 will be trading at 2754. Today it is trading at 2786…………………….oops, that doesn't sound very promising. For the market to reach 3029 (a 9% gain), the S&P 500 would need to trade around 20X trailing earnings. That is of course doable, and not outside the realm of just being a high-priced market rather than a bubble, but it would be a lot better from a fundamental standpoint if the market could see fit to earn a higher number this year. We should have a better grasp on a projected year-end earnings target after earnings and guidance are announced over the next several weeks.
Meanwhile, what a week the market enjoyed two weeks ago. It was one of the best first weeks of any new year in history. There are plenty of historical stats which show that if the market has a good January, most of the time the year will end up with positive numbers as well.
Even though the jobs report missed expectations for 191,000 new jobs being created last month by coming in at 148,000 instead, the great big story was that this number had 146,000 private sector jobs versus only 2,000 public sector ones. Always remember that government doesn't create jobs – it only takes away from the private sector when it grows, and because it is the private sector that creates jobs, a growing government is the worst case scenario for a growing economy. So "hip, hip hooray" for this ratio of jobs because it is just what the doctor could order for a healthy and robust economy.
The biggest winners for job creation were in Healthcare with 31,000 new jobs (300,000 for 2017), Construction with 30,000 new jobs (210,000 for all of last year), and Manufacturing with 25,000 new jobs (196,000). We also saw gains in Food Services & Drinking Places (government-speak for restaurants and bars), and Professional & Business Services. Thus, these are not part time or low paying jobs for the most part, which is equally important for a growing economy.
Again, we have to keep everything in perspective. The following stats are from Pension Partners:
"From August 18th to November 29th, the Dow went 72 straight trading days without an intraday move greater than 1%, by far the longest stretch in history.
“The S&P has now risen for 14 consecutive months, the longest run in history.
“The Dow closed at an all-time high 71 times during the year, the most in history.
“There was a sharp flattening in the yield curve throughout 2017. At 0.51%, the spread between 10-year and 2-year yields on the last day of trading was the flattest level of the expansion. (This is a "flag" we are watching).
“In spite of this backdrop, the Fed only hiked rates 3 times in 2017, to a year-end range of 1.25 to 1.50%. After subtracting inflation (core CPI of 1.7%), this leaves the Real Effective Fed Funds Rate in negative territory for the 9th year in a row – another longest stretch in history.
“On the flip side:
Unemployment rate (4.1%) – lowest since 2000
Jobless Claims – lowest since 1973
Consumer Confidence – highest since 2004
ISM Manufacturing Index – highest since 2004"
Our take is that we should expect a correction along the way this year to keep this market from reaching the dreaded "bubble status", but we should also not be scared out of the market due to the length of this bull market. All good things eventually come to an end, but all records are also made to be broken. We have no idea when this earnings growth cycle will come to an end, but we simply do not see earnings growth stuttering or falling at this time - just the opposite, in fact, as corporations become ever so more competitive with the reduction of what had been among the world's highest and most onerous tax rates. (35% now cut to 21%). In this environment, we believe earnings will be the game changer – i.e., we are in the proverbial market of stocks, not a stock market. Companies with outstanding earnings growth will continue to provide outstanding returns.
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PayPal Holdings (PYPL: $80.50) was upgraded by analysts at Cowen from a "market perform" rating to an "outperform" rating. They now have a $88 price target on the stock, up previously from $79. They must be reading The Bull Market Report. Interesting: Our price Target is $87, because that’s the price at which the company will be worth $100 billion. The stock set a new all-time high on Friday.
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The High Yield Corner
By Michael Foster
Vice President, High Yield
Let’s start with a stock that fell below an important number and then quickly recovered.
Omega Healthcare Investors, Inc (OHI: $26, down 3%) has been The Bull Market Report’s big contrarian call for a while now. If you’re a regular reader, you know that we’ve frequently discussed the issues regarding Omega’s tenant insolvency and current negotiations. This has spooked a lot of investors and turned a once 8% yielding stock into a 9% yielding one. At the start of last week, the stock dipped below $27 for the first time since 2014 - a significant development.
There’s no news to drive this. No insider selling announcements, no updates on the ongoing negotiations with Orianna, which could result in a small decline in income or a protracted dispute in bankruptcy court. In either case, Omega is very likely to get paid out something. In both cases, though, Omega’s cash flow is going to suffer.
And what of that cash flow? Again, it’s helpful to look at the numbers. FFO for the last 12 months is $3.40, while annualized dividends are $2.60. In other words, the dividend coverage ratio is 131% - just above the important 130% level that we demarcate as the start of the safest REIT distributions. At its current level, Omega will maintain its payouts with ease.
But what about the haircuts? Orianna provides 5% of Omega’s FFO, so if Omega lost all of that money (a virtual impossibility), the FFO would fall to $3.23, leaving Omega with a 124% coverage ratio. That’s lower than we like, but it’s still over 100%, meaning we aren’t anywhere near a cut.
Let’s project into the future to see exactly when the dividend would get risky. If Omega lost 5% of its portfolio every year, 2019’s FFO would fall to $3.07. The next year’s would be $2.92…and in fact, it would take until 2023 (i.e., 5 years from now) before Omega’s FFO would fall to less than its current payouts. Then, it would hit $2.50.
Keep in mind that we’re playing with the worst possible case here - but let’s play with the math and see what happens to our income stream.
If the future was as bleak as this, 2023 would result in a 3.8% dividend cut to make payouts sustainable. At current prices, that would make Omega Healthcare yield 9.2% (instead of its current 9.6%).
If this is our worst case scenario, it looks pretty rosy. Getting a near 10% dividend over 5 years before a dividend cut that then brings your yield to a still impressive 9% - that’s not much downside.
There is one other consideration. Omega increases its dividend by a penny per quarter. We’ve have written in the past about this; it’s good for investors in the short term, but it will expedite the schedule for when Omega will have to cut its distributions. For that reason, we think it would be best for Omega to stop its quarterly hikes and telegraph to the market its plans to do so many, many months in advance.
We are disappointed that Omega hasn’t done that yet, but we also wouldn’t be surprised if they did this sometime this year. The recent price action demonstrates that the market is expecting the dividend hikes to stop relatively soon. That gives Omega a nice window to make the move without hitting the stock too much further - but we are not sure they will actually make this move at all.
And the reason is simple. We on the outside see a very slow demise of the dividend - management does not. In the last earnings call, CEO Taylor Pickett addressed the issue with some promising numbers:
"We are hopeful, we can develop an out-of-court plan, which if successful, would likely result in cash rents of $32 million to $38 million per year, as compared to the current annual contractual rent of $46 million.”
If successful, that would lower FFO by 1.5% - in other words, hardly anything at all.
Additionally, Omega continues to expand. The company invested over $300 million in the third quarter of 2016, which on its own more than covers the lost FFO from the Orianna issue. By how much? Pickett noted that Omega targets a 9% capitalization rate for investments, meaning that $300 million investment will be almost twice that of the lost cash rents from Orianna.
What about the properties currently occupied by Orianna? Omega is currently working to sell or rent to new operators who are in a better financial position. If successful, this could cause FFO to grow significantly in the next 2 years - and that will make Omega shares skyrocket.
We have faith that Omega’s managers can navigate this admittedly complicated and tricky transition, and that’s why we remain constructive on the stock.
Finally, let’s quickly turn to some other high yield assets: Municipal bonds and closed-end funds. Nuveen AMT-Free Municipal Credit (NVG: $15.65, down 2%) and Invesco Municipal Trust (VKQ: $12.65, down 1%) had a decent showing for the week, in no small part thanks to a seasonal and rather predictable trend. Retail investors sell municipal bonds at the end of the year and buy again in January. This is classic tax loss harvesting at work, and any year where losses in munis are to be found, this trend is noticeable. So far, 2018 has been good to munis - and that is likely to continue. Thanks to the investors looking for their tax-free income streams, both the Nuveen and Invesco funds are seeing positive inflows - something that we are also seeing across the municipal bond market.
Good Investing,
Todd Shaver, CEO and Founder
The Bull Market Report
Since 1998
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 26, 2017
by Todd Shaver | Nov 26, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
The big story this week was Jeff Bezos breaking the $100 billion level in net worth. Unreal! Bill Gates was the last person to attain the 12-figure fortune in 1999 but then the stock halved and didn’t reach its peak again until 2016. (Take a look at Microsoft’s 5-year chart just below this paragraph.) It’s a very relevant event as we head into the holiday season. Every retailer has been hard at work not to get “Amazoned” this holiday season. Expectations are moderate and the data out for Black Friday shows consumer demand is healthy. With this healthy spending, the economy should grow 2-3%, which means new Fed Chair Jerome Powell is about to take the world for a ride of at least seven rate hikes over the next 24 months. Hmmm. When it comes to interest rates we always get the good with the bad and the bad with the good.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks where you can still make good money, including: Facebook, Apple, Tesla, and PayPal.
This issue will be slightly shortened from our normal newsletter as the week was a short one with the Thanksgiving holiday and a very quiet market. We will be back to normal next week.
BMR Companies & Commentary
Facebook (FB: $183, up 2%)
Italy is bracing for an electoral season of fake news and demanding Facebook’s help. We think this is just the beginning of major future reliance of governments on Facebook.
With critical national elections only months away, anxiety is building that Italy will be the next target of a destabilizing campaign of fake news and propaganda, prompting the leader of the country’s governing party to call on Facebook and other social media companies to police their platforms. What can Facebook really do though? They are between a rock and a hard place. Where is the line between free speech and mal-behavior? Facebook could potentially get this really right or really wrong. There will definitely be a significant impact to the user base over the long haul from all this.
In a global atmosphere already thick with suspicion of Russian meddling in elections in the United States, France and Germany, as well as in the British referendum to leave the European Union and the Catalan independence movement in Spain, many analysts consider Italy to be the weak link in an increasingly vulnerable European Union. Hopefully Facebook could catch a few bad actors and look like heroes!
BMR Take: You know, we’ve thought this for years now but haven’t said it and we believe Facebook knows this to be true but they haven’t said it either, and that is that Facebook is like the phone company. People use Facebook like they use a phone. They use it for good and they use it for bad. Same with a phone. If a terrorist calls up a bank and says to look out, you can’t come down on the phone company for this offense. Same with Facebook. But you don’t hear the company complaining about this because they don’t want to be REGULATED like the phone companies are. So we won’t talk about it any more!
Facebook is closing in on earnings of $6 of EPS with revenue soon to exceed $50 billion. The numbers the company is posting are massive and we are still far from the end of the growth cycle for Facebook. Our $190 target is within reach.
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Apple (AAPL: $175, up 3%)
Apple typically sells tens of millions of iPhones each holiday season, regardless of whether the company offers holiday discounts. But with its HomePod smart speaker officially delayed until next year, a limited supply of the iPhone X and no virtual reality headset yet, Apple faces intense pressure this shopping season. This is not the normal expansive product line-up we see from Apple. They have some challenges this holiday season.
But the super-hot iPhone should get the job done. While they were a bit late in their deliveries, and Apple's iPhone X may be popular, it's behind competitors like Samsung in adding features like bigger and brighter screens. The good news is the Apple users are very loyal and unlikely to switch to Samsung for a screen.
BMR Take: Apple is about to do over $12 of EPS, over $275 billion of sales, and sell millions of iPhones. This stock is a core holding for any portfolio. We continue to closely watch the company generate new services revenue from the massive customer base of iPhone users. Our Target Price of $194 is coming into view and our Sell Price of “We would not sell Apple” tells you our conviction in this great company. Note that at $194 Apple will reach the $1 trillion market cap threshold.
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PayPal (PYPL: $79, up 3%)
The biggest thing happening this holiday season is mobile purchases. And mobile purchases don’t get paid for with cash. They get paid for with PayPal much of the time. According to PayPal, people will spend $630 billion during the holiday shopping season, of which 10-12% is done mobile.
The story is just getting started for PayPal.
In China, 60-70% of sales are done online and mobile. PayPal is making strategic deals and partnerships to build out a global platform that touches every corner of the world including China.
We expect explosive growth in mobile shopping this holiday seasons. We anticipate PayPal and all its various entities to experience robust business in the fourth quarter.
BMR Take: EPS is closing in on $2.50. With a few hundred million users, versus Facebook’s 2.1 billion, this is just the early innings. Our Sell Price is “We would not sell PayPal” and as noted last week, we have just blown past our prior target of $77 and have raised the bar to $87.
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Bitcoin Continues Its Huge Run
The chart just below here was produced on the 21st, just six days ago and is already obsolete. Bitcoin was up over $800 just this weekend and is now over $9000. The market cap of bitcoin is $155 billion, up from $100 billion earlier this month. The market cap of all cryptocurrencies is now $290 billion, up about $100 billion in just two weeks. This is not a fly-by-night scenario. It is real and the market is exploding.
If you want a good site to explore, go here:
https://CoinMarketCap.com
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The Significance of the New Tesla Roadster and Tesla's Main Intention in Unveiling It
We got this letter from a subscriber who just loves Tesla (TSLA: $315, flat).
Hi, Todd. A member of the Tesla Motors Club wrote us his thoughts on the new Tesla Roadster, which I'm pasting in below.
Wishing you a happy Thanksgiving,
Janice
From: jmgnyc@aol.com [mailto:jmgnycx@gxxx.com]
Sent: Wednesday, November 22, 2017 9:36 AM
To: info@bullmarket.com
Subject: A Roadster Thought
“Last night I was able to attend the Tesla Semi-truck event at Tesla’s Design Studio in California. As usual, gobs of Tesla enthusiasts cheered and were blown away by what Elon Musk and his team shared about the Tesla Semi and the unexpected new Tesla Roadster - which came as a surprise to many. I can say that the car looks even better in person than in photos or video. It’s truly a gorgeous and stunning car, and also the specs are insane. Not only can it do 0-60 mph in 1.9 seconds (which is hard to fathom) but it also has a 200kWh battery that can go over 600 miles. This is stuff that most didn’t think was even possible.
“I don’t expect Tesla to sell tens of thousands of these annually and I don’t think Tesla thinks they will also. I think their main intention is to show a proof of concept that the ICE (internal combustion engine) car is truly dead. In no way can an ICE car be better than the new Roadster. Basically, last night Elon and Tesla gave the ICE their farewell. Sure it will take many years before ICEs stop getting produced, but last night was the final reason why - because ICEs stink compared to what electric can do for cars. And that’s the significance of the new Roadster.”
BMR Take: We must say that this new Roadster could be a good source of funds for Tesla since it costs $250,000. If a couple of thousand enthusiasts order it, there's half a billion dollars coming into the company. The big test for Tesla in 2018 will be cash. They are burning through it like there is no tomorrow. But with a market cap of $53 billion, selling new shares of just 3% dilution will raise over $1.5 billion in fresh capital. We would expect investors to jump to be first in line to send the company money. With that said, if the money markets are tight next year, there may be issues for the firm.
Again, this one is not for the weak-hearted. Want to sleep at night? Buy Microsoft. Want to have some fun with funds you might lose? Jump on board with the Elon Musk and hang on for the ride.
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The High Yield Corner
By Michael Foster
Let’s deal with an interesting development hitting Omega Healthcare Investors (OHI: $27). Two different legal firms have filed suits against Omega Healthcare. The first lawsuit, filed by Brower Piven, accuses Omega’s management of "violations of the Securities Exchange Act of 1934 by virtue of the defendants’ failure to disclose that financial and operating results of certain of the Company’s operators were deteriorating, certain of the Company’s operators were experiencing worsening liquidity issues that were significantly impacting the operators’ ability to make timely rent payments, and certain of the Company’s direct financing leases were impaired and certain receivables uncollectible.”
The second, by Rosen Law Firm, is very similar (although more succinctly worded). This was announced Monday and accuses Omega’s management of failing to disclose that “financial and operating results of certain of Omega’s operators were deteriorating” and that these operators "were experiencing worsening liquidity issues that were significantly impacting the operators’ ability to make timely rent payments.” Finally, the lawsuit claims that "certain of Omega’s direct financing leases were impaired and certain receivables were uncollectible”.
What are these firms accusing Omega of? In short, Omega’s big tenant Orianna Health System is struggling to pay its rent because of disappointing occupancy rates and high costs. We’ve spoken at length here about the difficulties of the skilled nursing facility sector (SNF), and how growing revenues by increasing rents is extremely difficult because of the limited incomes of tenants. Furthermore, Medicare reforms could threaten Omega and other SNF-focused Healthcare REITs to grow their incomes in the future, which limits expansion plans and makes growing the base operations risky. On top of that, the lower than expected demand and higher than expected competition in the SNF sector make it difficult for a company like Omega to expand. It’s a triple-whammy.
That sounds really, really bad. And, as we have said here repeatedly, it does mean that Omega Healthcare is not a “buy and hold forever” stock. There will come a time when Omega’s expansions will reach their limits, where the cash flow cannot keep up with the dividend growth, and the stock will have to fall to reflect the structural challenges Omega has.
But here’s the other thing to consider: We all know this to be the case.
In fact, we also knew about the problems with Orianna; Omega has publicly discussed issues with this tenant in the past, and the SNF industry has been well aware of cash flow issues. The company has faced legal challenges in Idaho and scrutiny elsewhere in the country. Investors who didn’t do their due diligence may have been surprised by Omega Healthcare’s recent revelations -but those who did knew that this was a problem.
However, we also knew this was a problem that was priced into the stock. That’s why Omega yielded 8% upon Bull Market Report’s recommendation and competitors in the SNF REIT space were yielding less than 6%. It’s also why we demanded a higher dividend coverage ratio upon recommendation. Keep in mind that the REIT’s FFO-to-dividend ratio is now 130%, meaning it is still well out-earning its dividend. There is no cash flow issue to worry about here.
There also is not a debt issue. Total liabilities are $5.3 billion on $8.9 billion in assets, a 59% debt-to-asset ratio. This is low by REIT standards. The company’s annualized income was $900 million in 2016 and total operating expenses were $390 million for the same period. That’s a massive operating margin thanks in large part due to the lease conditions that Omega hammers out with tenants - conditions that are extremely favorable to shareholders.
So let’s go back to the lawsuits. It’s true that operating income took a dive because of the write-downs related to Orianna, and the future is uncertain because we don’t know what kind of deal is going to be hammered between the two firms. As we’ve discussed in previous weeks, it could be very ugly or it could be amenable, and we’re expecting the latter as the likelier result. But the real issue is this: the market has priced in the worst possible outcome. You just don’t get 8% dividends that grow a penny per quarter with a 130% or higher dividend coverage ratio every day. Omega Healthcare is one of a handful of such companies. Of course with such metrics there is risk, and that risk has been priced into the stock since The Bull Market Report first recommended it in March of last year. Now, obviously, it’s underpriced, and we expect that the stock will be re-priced early in 2018 when a settlement or agreement is reached between Omega and Orianna.
Omega’s portfolio is composed of 85% senior nursing facilities and 15% senior housing facilities. Omega operates approximately 1,000 properties, which in turn are run by 77 independent operators.
So where does that leave shareholders now? Holding and collecting these well-covered dividends makes sense. Growing more exposure to the stock also makes sense. What doesn’t make sense is freaking out because of these lawsuits, which are quite vaguely worded in and of themselves.
To give a bit of context, note that shareholder lawsuits are a pretty common thing on Wall Street. They sometimes have merit, and sometimes are levied by legal firms who smell an opportunity. Facebook was sued in 2012 after its IPO because of how disastrous its early performance was. look at what Facebook stock has done since then.
In short, it’s unlikely that these lawsuits will come to much. What’s much likelier is that Omega’s mounting pressure to reach a settlement with Orianna is going to result in a faster settlement, which will in turn result in investor relief and a boost to the stock. We don’t expect a massive price spike, but we do expect the stock to come back to an 8-handle on its dividend yield when an announcement is made. After all, the financial picture hasn’t changed and, with the massive price decline of late, there’s little downside priced in and a lot of upside available for investors who understand the risks.
Good Investing,
Todd Shaver, CEO and Founder
The Bull Market Report
Since 1998
November 19, 2017
by Todd Shaver | Nov 19, 2017 | Weekly Newsletter 7pm Sunday
The Weekly Summary
The big story this week was the sale of a Leonardo da Vinci painting for $450 million. Leonardo da Vinci’s Salvator Mundi went to auction Wednesday night at Christie’s in New York and the selling price broke sales records. Watching the top part of the market is an interesting tell. It is noticeable when the luxury art market hits fresh highs. We further note that luxury apartment prices in New York City are down 10% to an average of $8.1 million this month compared to a year ago.
Construction is under way setting new height records of high-rise buildings in cities like Los Angeles and Philadelphia. What does this mean? Things are good, though often new peaks signal a top. We must watch very closely. When the luxury market starts hitting new records, you have to step back and realize trees don’t grow to the sky, and that this bull market is not guaranteed to last forever.
Don't get us wrong. We're still very bullish and expect a strong earnings year in 2018. But it never hurts to be a bit cautious.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight some of our favorite stocks/funds where we think you can still make good money, including: VMware, Annaly, Shopify, Tesla, Nutanix, and Celgene.
BMR Companies & Commentary
VMware (VMW: $123, up 1%)
Singaporean communications company M1 Limited and software and services provider VMware announced a new cloud offering made for digital start-ups, and small-and-medium enterprises. The service will enable budding tech businesses to develop software-based products quickly in addition to growing their business without an expensive infrastructure expenditure.
M1 said it is improving its next-generation software-defined data center, which is powered by the VMware cloud provider program, with shipping support from Pivotal Container Service. The new cloud offering provides advanced technology that allows businesses to run faster and introduce new products quicker.
BMR Take: It is great to see new product development! VMware is expected to produce earnings of $5 per share this year and $6 by 2020. With such a solid market presence and brand, we see additional upside in the stock.
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Annaly (NLY: $11.49, up 2%)
CEO & President Kevin Keyes bought 300,000 shares of stock this week in the open market. There is nothing like insider buying to signal a stock is a good buy. Who is Mr. Keyes?
Kevin Keyes serves as President and Chief Executive Officer of Annaly and is a member of the Board of Directors. Prior to joining Annaly in 2009, Mr. Keyes worked for 20 years in senior Investment Banking and Capital Markets roles in the Real Estate and Financial Institution Industries among others. From 2005-2009, Mr. Keyes served in senior management and business origination roles in the Global Capital Markets and Banking Group at Merrill Lynch. Prior to that, he worked at Credit Suisse First Boston from 1997-2005 in various Capital Markets Origination roles and Morgan Stanley from 1990-1997 in the Mergers and Acquisitions Group and Real Estate Investment Banking Group. Mr. Keyes holds a B.A. in Economics and a B.S. in Business Administration from the University of Notre Dame.
BMR Take: Mr. Keyes is a smart businessman. Annaly is currently producing earnings of about $1.20 and pays this out in a dividend yielding over 10%. Follow the smart money here. The company has been successful over 20 years through bull markets and bear. With a market cap of $13 billion, this stock is rock steady.
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Shopify (SHOP: $105, up 5%)
Shopify is just not the ‘short’ some of the naysayers say. The best way for the company to prove it and crush the shorts is by building the underlining business. The truth is that while the stock market is a voting-machine in the short-term, over the long-term it is a weighing machine. You build a great business with earnings and the stock goes higher, every time. This is just what Shopify is doing.
Just in time for the holiday season, UPS and Shopify are unveiling a platform integration that make UPS's premium services available to small businesses. Shopify’s hundreds of thousands of small U.S. business customers will now receive competitive, pre-negotiated domestic and international rates that save on list prices, along with a streamlined shipping and fulfillment solution.
By embedding UPS natively into Shopify’s platform, merchants will get the breadth and reliability of UPS’s services to more than 220 countries and territories, while easily managing all aspects of shipping and fulfillment in one place
BMR Take: The consensus outlook calls for Shopify to put up EPS of $0.05 this year, $0.27 next year, $0.75 the following year, and over $2.00 in 2020. Look up “earnings growth” in your financial dictionary. We suspect you might find a picture of Shopify’s logo!
We wonder if Andrew Left knows when to throw in the towel? Remember, Mr. Big Short has to BUY BACK his stock to get out of the positions. MY OH MY we can’t wait to see him get SQUEEZED with this amazing company.
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Tesla (TSLA: $315, up 4%)
Tesla made a huge announcement this week. Electric semi-trucks. They go 500+ miles and cost $1.26/mile to operate, and can haul 80,000 pounds. It might even one day drive itself. Companies like Walmart, JB Hunt, and UPS all immediately placed orders. This is going to be huge and change the entire infrastructure of the trucking industry.
Environmentally, the impact is massive. Every truck you move with electricity instead of diesel has an outsize effect on the health of the planet and everything living on it. Eighteen-wheelers are the ultimate force multiplier. This green effect is worth real money to the world.
BMR Take: Yes, Tesla is losing money. Specifically, they will lose almost $9 per share this year. But recall that the list of other companies down this path include Amazon and Netflix. Elon Musk will go down in history as a visionary. Let the man build a better world. There will be surreal profits for shareholders over the course of time.
ANOTHER TAKE ON TESLA
In case you missed it, here are a couple of views of the new Tesla semi-truck. Gorgeous! Unbelievably awesome features!
https://www.tesla.com/semi - Just view and scroll down for a brief video and beautiful photos.
This one is a 9 minute condensation of the 51 minute presentation. It shows all the outrageously wonderful features of the truck.
https://www.youtube.com/watch?v=5n9xafjynJA
And how about the new Roadster that they announced with speeds of just 1.9 seconds for 0 to 60 and 4.2 seconds for 0 to 100. It can handle a quarter-mile in 8.9 seconds. And it’s only $200,000!
(Funny – Porsche announced the new 911 two days before Tesla had this big PR event and said their Porsche was super-fast, going from 0 to 60 in 2.9 seconds. And then Tesla comes out and blows them away!)
This will be the fastest production car ever produced.
Check this out here:
https://techcrunch.com/2017/11/16/tesla-unveils-the-new-roadster
BMR Take: Are these new vehicles going to help the bottom line this year? No. How about next year? No. Is a lot of these new announcements hype until they actually start producing these new vehicles? Yes. But if you believe in Elon Musk it may just make you want to own more stock in this amazing company. We personally believe he will make it work. The losses will be stemmed next year as the Model 3 is delivered (500,000 orders are on the books. At $45,000 each, that’s $22 billion in revenue for just the orders on the books. Can you imagine the new orders they will receive when your best friends get one delivered and they RAVE about it?)
Is this stock an investment for the conservative investor? Not really. But for money that you can afford to lose, some say Tesla could be worth $1000 a share by 2020.
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Nutanix (NTNX: $29, up 1%)
This stock is on fire. Let’s review why.
Nutanix closed its fiscal year with a bang recording 62% Q4 revenue growth year over year, exceeding analyst expectations. For the 2017 fiscal year, Nutanix grew revenue 72% from 2016. Other notable highlights from the most recent quarter include a record number of large deals, 75% growth in adoption of the AHV hypervisor product that is the future, and 875+ new customers added. The company guidance for its fiscal 1Q18 was above Wall Street expectations.
Other notable metrics highlighted:
• 96% increase in software-only bookings in fiscal 2017
• Closed the quarter with a strong balance sheet with approximately $350 million in cash and NO debt
• 4th year in a row with a customer satisfaction score of 90+
• Total customers of 7,000+, with enviable repeat purchase metrics of 4.1x for all customers greater than 18 months, and 8.1x for the Global 2000 greater than 18 months
• 404 customers that have purchased greater than $1 million lifetime to date; 39 customers that have purchased greater than $5 million; and 11 customers with greater than $10 million in business lifetime.
BMR Take: Nutanix could be the stock of the next decade. The company could cut marketing expenses and deliver earnings of over $1.00 per share tomorrow versus $0.05 expected by analysts. But why do that when you are adding new customers like mad and generating 50% revenue growth? Invest in the future with this company. One of our favorites.
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Celgene (CELG: $104, up 2%)
Scripps Research Institute hopes for a royalty windfall from the potential blockbuster drug, ozanimod. If the new drug achieves blockbuster status, it could generate tens of millions of dollars a year in royalties for Scripps, and provide relief from the ongoing financial challenges facing the nonprofit lab. Scripps won't say how much it stands to receive from sales of this drug, a drug that slows brain atrophy in patients with multiple sclerosis. Scripps discovered the drug, then partnered with Celgene to shepherd the medicine through clinical trials. Celgene expects to begin marketing the drug to multiple sclerosis patients in late 2018.
The drug is expected to generate sales of $4 billion, all but 2% of that would go to Celgene. Dr. Hugh Rosen, a Scripps researcher who's the co-inventor of ozanimod, said the institute's agreement with Celgene calls for royalty payments through 2033.
BMR Take: Don’t lose faith in Celgene. This business is a core part of the Healthcare sector and is not going anywhere. The company will continue to find big opportunities as highlighted above. Celgene is still likely to double revenue and deliver over $12 of earnings by 2020. Look out - this stock can roar back!
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Upcoming Economic News
Leading Indicators
Monday, November 20th at 10:30 AM Eastern
Period: October
Consensus: 0.80%
Prior: -0.20%
Existing Home Sales
Tuesday, November 21st at 10:30 AM
Period: October
Consensus: 5,440K
Prior: 5,390K
Durable Orders
Wednesday, November 22nd at 8:30 AM
Period: October
Consensus: 0.30%
Prior: 2.0%
Initial Claims
Thursday, November 23rd at 8:30 AM
Period: 11/18
Consensus: 240,000
Prior: 249,000
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A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
In the UBS 2018 Market Outlook report we discuss "What worries us the most?" UBS answer: "Inflation - a sudden return that is independent of growth (e.g. persistent oil-price spike,
supply-side bottlenecks) is one worry. We show that, at least in the context of labor-market dynamics, this risk is still reasonably low. The flip side of the same coin reflects the risk of policy "overtightening" despite stale inflation. Low inflation, however, allows policy makers the optionality to reverse course and stabilize markets……"
As we mentioned last week, there seems to be a lack of broad-based inflation with respect to the sizable gains in stock valuations and the rise in earnings growth rates. Yet, UBS believes the markets need to worry for two reasons: first, a sudden surge in inflation without matching earnings growth, and secondly, a lack of inflation accompanied by continued Fed rate hikes. While UBS rates the inflationary risks as low, we believe the bond markets (and yield curves) will help alert the markets to the occurrence of any substantial inflationary problems on the horizon.
Meanwhile, the good news is that UBS believes that the markets still have room to grow in 2018.
With that said, bonds are not signaling "full speed ahead." When President Trump was elected, the yield on the 30-year Treasury bond surged from 2.60% to almost 3.20%. This was probably because the bond market reassessed the likely influence this political shock would mean for the markets.
As a reminder, there were three key pieces to the accelerating economic growth argument: Increased infrastructure spending, deregulation (mainly the repeal of Obamacare), and most importantly, tax reform.
Unfortunately, the once-in-a-lifetime Republican trifecta is 0-3, and right now the 'smart money' in the bond market is not impressed with how things are going in both D.C., and the broader US economy.
The 30-year yield has retraced almost all its post-election move higher and is now only slightly higher than it was pre-election, and the 10-year yield curve has flattened rather than steepened.
Meanwhile, progress on tax reform, the real engine behind the stock rally, has been pretty slow. As we have said numerous times, the market needs tax reform to happen or we can expect a correction. At this moment in time, our best guess on tax reform getting passed isn't any better than a coin flip.
Bottom line, while stocks climb to new highs due to optimism about tax reform and the subsequent improving uptick in growth, the bond market continues to display doubts about the health of the economy and the general outlook for risk assets, both medium and longer term. Maybe that's another wall of worry that the market likes to climb. It is, however, very much worth monitoring.
For now, though, most stock gurus still give the benefit of the doubt to the stock bulls based on momentum alone. Today, the stock market is in the hands of tax reform. But tomorrow, next year, and as it always is for the long-term, it will be in the hands of earnings growth.
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PayPal (PYPL: $76, up 3%) Gets a Target Upgrade
Jefferies ups PayPal’s target. After rolling forward their valuations to reflect 2019 estimates, Jefferies raised their price target for PayPal to $86 from $80. The market cap is now $92 billion. Most people have no idea this company is so big. With the stock setting a new all-time high Friday we are going to jump on the band wagon and raise our Target. Wait. They are jumping on OUR band wagon as we added the stock in January of last year at $31, so we are up 145% on the stock. We hereby raise our Price Target to $87.
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Square (SQ: $44, up 13%) Gets Some Target Upgrades
What a week for our favorite payments company, Square. Wait a minute – what about PayPal? Ah yes, we love them both. But Square is a pipsqueak compared to PayPal. Just $17 billion (up from $10 billion a few short months ago.) Jefferies raised its target for Square to $47 from $44
The Square price target was raised to $48 from $45 at Nomura Instinet saying the company is "well underway to becoming a major disruptor in the payments ecosystem." After speaking with Sarah Friar, Square's CFO, the company raised its long-term estimates for the company. They see Square's revenue and profits being lifted by its "intuitive and cohesive software ecosystem."
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The High Yield Corner
By Michael Foster
After tons of big news stories coming at us hard and fast, it was nice to have a bit of a quiet week with little news relating to The Bull Market Report’s High Yield portfolio. A lot of picks remained flat over the week as a result, such as Nuveen AMT-Free Municipal Credit (NVG: $15.43), Welltower (HCN: $68), and Government Properties Income Trust (GOV: $18.85).
Government Properties’ dull week was a bit of a sea change. We wrote about the intense reaction to the REIT’s slightly disappointing earnings results a few weeks ago, predicting a recovery. We’re now at price levels we saw in mid-October, so it seems that the market has realized its initial shock was overblown. Furthermore, growing stability in the credit market and the realization that REITs are already positioned for next year’s interest rate hikes has also helped this and other REITs stabilize. For instance, Apollo Commercial Real Estate (ARI: $18.41, up 1%) had a healthy albeit somewhat quiet week, and we fully expect the market to slowly pour back into REITs in the coming weeks thanks to a better understanding of the robustness of the balance sheets throughout the sector. This is a good time to sit back and wait for capital gains to continue to roll in.
Of course, there are exceptions to the quiet in REIT-land. Most notably, Omega Healthcare Investors, Inc (OHI: $27, down 3%) continued its protracted sell-off. This was partly to be expected. As we wrote a couple of weeks ago, the market is going to panic about this company’s cash flow in the short run until they realize their mistake in the long run (probably in early 2018 after the company’s next earnings report).
This is a good buying opportunity, and staging into the fund if you have cash on the sidelines would be a great way to secure this stock’s now 9.6% dividend yield. We’re approaching 10% yields - an unthinkable feat, but not impossible. We can’t imagine the market being that horrified about a company that is out-earning its dividend by a large margin. But the market’s short-term irrationality has surprised us before.
Another Healthcare REIT handpicked by The Bull Market Report did a bit better, but still didn’t do great: Ventas (VTR: $64, down 1%) dipped again slightly for a simple and silly reason: contagion. The worries about Omega Healthcare Investors is spreading to other REITs in the sector, because Omega’s problem stems from the fact that skilled nursing facilities (SNFs) are struggling to generate revenue and thus pay their rent. We’ve already discussed how Omega has positioned themselves to weather that storm, so let us discuss Ventas. Long ago, Ventas saw the dangers in the SNF sector and slowly but steadily worked to get out. They did so by diversifying into life science research facilities and medical office buildings. These buildings have a higher rent tolerance threshold, which is good for Ventas.
What we mean is that they can easily push rent hikes over time, because their revenues are significant thanks to growing demand and the deep pockets of the tenants. Universities have big endowments, and doctors have large profit margins from expensive short-term visits from patients. Both put Ventas in a very financially healthy position. In fact, the company’s dividend coverage ratio is 134%, which is above our 130% threshold. This remains a solid hold, and we dismiss the slight downturn this week as noise due to an irrational fear of the SNF market, which affects Ventas less and less over time.
Another REIT with a bit of a bad week was Digital Realty Trust (DLR: $118, down 2%), which has been a fascinating stock to track over the year. Almost all of those losses happened on Friday on little news, but we suspect the sell-off is a result of the continued fear that server space demand is going to decline over time as servers themselves get smaller, which in theory should mean less square footage will be necessary to hold those smaller servers. We discussed this weeks ago when the controversy first came up over a Silicon Valley investor’s vague prognostications, but let us reiterate the most important point: demand for server space is growing at a breakneck pace. All those Millennials uploading selfies to Instagram, sending short videos on Snapchat, and having political debates on Twitter increase the demand for server space. So we are not worried in the slightest.
We’ve also seen a growing trend in social media away from deleting previous data to lower storage space. Instead, these companies realize that more data gives them advantages they cannot ignore. Hence more demand for server space. Can this growth outstrip the technological advancements that make servers smaller? So far it has, and there’s no semiconductor or other tech development lately to suggest this trend will end anytime soon. For that reason, Digital Realty is a great buy on weakness, although we want to see dividend hikes increase radically next year.
Finally, let’s discuss AstraZeneca (AZN: $33, up 2%). A ton of news has hit the company since it beat revenue and earnings expectations on November 9th. This week, the FDA approved expanded use of the company’s new breast cancer medicine Faslodex and approved its asthma medicine Benralizumab. The company is also presenting to medical experts on clinical trials for its cancer drugs at a conference in Singapore this weekend. Little news has come out about those presentations so far, but if they are strong enough we could see the market react on today, Monday. Holding this stock remains advisable considering its tremendous and improving track record when it comes to research and development. We’re already sitting on 23% price gains in the last year. More is likely to come.
Good Investing,
Todd Shaver, CEO, Founder and Editor
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.)
