May 9, 2024
by Todd Shaver | May 9, 2024 | Instant News Flash
Shopify (SHOP: $63, down $15 yesterday) reported mixed results for Q1 2024 Tuesday evening. Revenue grew 23% year-over-year, exceeding analyst expectations. However, the company posted a net loss due to increased expenses, a shift from the previous year's profit.
Highlights:
- Revenue: $1.86 billion (up from $1.51 billion)
- Gross merchandise volume (GMV): $61 billion (up 23%)
- Monthly recurring revenue: $151 million (up 32%)
- Gross margin: 51.4% (up from 47.5%)
- Strong cash flow position: $5.2 billion cash, $1.1 billion debt
Concerns:
- Net loss: $270 million (vs. $60 million profit in Q1 2023)
- Management transparency: We have concerns about the company's communication during the earnings call.
- Increased competition: The e-commerce landscape is competitive, and Shopify faces pressure to maintain its market share.
BMR Take:
Shopify's core business remains healthy, with strong growth in revenue, GMV, and recurring revenue. The company's focus on AI solutions holds promise for the future. However, the net loss and questions about management transparency are causes for concern. We are removing Shopify from our portfolio, but the long-term potential remains. We are generally displeased with the company. We loved this company and they have let us down. The comments from management are in many cases hyperbole and we don’t believe many of them. Once you start to disbelieve a company’s management, you lose trust in the company. It is hard to get trust back.
We thought we had a company for the ages, like Microsoft or Google. But they have let us down. We added the stock at $73 in 2017 and it rose to $1,763 in 2021, a 24-bagger, but the stock has faded to its current level of $620. Of course, after the 10-1 split in 2022, you can divide all these numbers by 10. We still have an 8-bagger, which is not bad in the whole scheme of things. But the company has let us down, so we are removing the stock today.
Where will the stock be in a year or two? Perhaps right where it is now; perhaps higher, as the platform they have built is second to none. But competition is heating up and if management can screw up like they have in the past year, then the whole franchise could be in trouble. We’d rather have our money in Amazon.
July 31, 2019
by Scott Martin | Jul 31, 2019 | 7am News Flash
Netflix (NFLX: $362, down 3% earlier this week) disappointed last night and the stock's precipitous overnight decline provides us with a different kind of wake-up call. Whether you're in Netflix or not, you're going to want to read this flash.
On the surface, Netflix delivered a quarter almost entirely in line with what investors told themselves they wanted to see. Revenue of $4.92 billion was only 0.1% below guidance and reflects healthy 26% year-over-year improvement. Even quarter-to-quarter, the company squeezed 9% more cash out of its subscribers than it did three months ago.
Furthermore, despite profit being a lower priority while management invests vast amounts in original content, it was nice to see that Netflix carried $0.60 per share across the bottom line, $0.04 better than we expected.
But the market found fault as Netflix missed its subscriber growth target, losing 126,000 paid U.S. accounts and only adding 2.83 million new viewers overseas. Management told us to expect the audience to grow by an even 5 million accounts, so it's a clear disappointment.
There are some compensating factors like the way revenue hit guidance. Netflix raised prices in many markets and this is apparently where the pain point is. We know that now. Furthermore, management has doubled down on its aggressive growth forecasts and now expects subscriber adds to accelerate again in the current quarter.
We've had it with Netflix. We've warned throughout that it's going to be a volatile ride. The stock is now down 20% since we started covering it this time around, after making 65% back in 2016-17. We're worried about competitors like Disney and Apple starting to crowd into the space. With a negative $3.5 billion of free cash flow this year and next, we'd rather be invested in a company that actually makes money. We hereby remove Netflix from our High Tech portfolio. We added them on July 16th last year. We're gone now on July 18th, 2019.
However, even for a volatile stock, the reaction to so-so numbers was so extreme that we now suspect that the market as a whole is getting overheated. It's not Netflix. It's Wall Street. And an overheated market can lurch lower as fast as it soars. Even counting the stocks that fizzled and left our list under a cloud, the BMR universe is up a dramatic 33% YTD. This is a great time to lock in some of that profit before a moody market can take it away.
Is It Time to Take Some Profits?
Why are we asking this question?We can’t predict the future. You may think we can, but we can’t. And we want YOU to think about where YOU are and where you are going with your investments. We have made some amazing stock picks and we’ve made you a lot of money in many of these. (We’ve had a few losers too.) Roku is now a triple since we added it last year. Shopify is up 350% in two years. Square is another quadruple play. PayPal, Twilio, Paycom, Microsoft, Apple, Visa: all strong performers.
Is it time to take some of that off the table? There are a lot of things to worry about in the world today: Trump, Chinese tariffs, Iran, immigrants, global slowdown, flat earnings for the past quarter and next; negative interest rates in Europe and Japan . . . can they happen here? If so, will the Fed run out of ammunition if short rates go to zero? What about the attacks on Big Tech by Congress and the European Union? Can Facebook, Amazon and Google survive this onslaught? Of course they will, but why sit around with someone hitting you on the head with a hammer. Maybe it’s better to step a little away from the scene.
Lots of questions. No solid answers. Irrational exuberance was proclaimed by Alan Greenspan on December 5, 1996 after an amazing bull run in the preceding few years. But the bull market continued to skyrocket until the Spring of 2000. That’s almost 3½ years after Greenspan’s call. So is it too early to start taking profits now?
Again, we don’t know, but we do know that there are things you can do. You can sell some calls against your stocks. This brings in cash and cushions you on the downside a bit. But if Roku, which was at $32 at the start of the year goes from $110 now to $90 or even lower, it’s not going to cushion you much with $5 of call option income. So perhaps you can take some profits off the table. Maybe you should put some stops in place. Sell some at $104. Sell some shares if it hits $96. Sell some more if it hits $90. Then if it goes to $70, which is a distinct possibility in a nasty bear market, you’ve protected your profits and have cash in the bank.
And don't forget, we’ve got 17 stocks in our High Yield and REIT portfolios that are paying from 3% to 11% dividends. (Be wary of Annaly and New Residential, though.) These stocks are just waiting for you to place some cash in them so that you can sleep better at night.
This content is for our beloved subscribers and anything you see on this page is just an excerpt!
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February 18, 2018
by Todd Shaver | Feb 18, 2018 | Weekly Newsletter 7pm Sunday
The Weekly Summary
US stocks rebounded to have the best weekly gain since 2011 - how do you like that for a turnaround? So it turns out the bull is still running after a quick breather. Now all the talk on TV is “don’t worry about volatility. That markets had been abnormally calm for years. That we should now just expect more noise.” We concur. We adhere to the old adage: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” This means that bear markets are born on euphoria and grow on pessimism. Frankly we just don’t see that much euphoria in the markets. For example, while bank stocks are up 50% since the election, profits are up more, which suggests gains in bank stocks are honestly tied to the realities of profit levels. As another example, GDPnow suggests first quarter GDP is above 3.0%, again meeting the growth targets underpinning recent stock market gains. All in all, wake us up when you see broad-based euphoria, because until then this bull market is on cruise control, the ride might be a bit more bumpy going forward.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight: Twilio, Shopify, Square, Splunk, Amazon, and AstraZeneca.
Key Market Measures (Friday’s Close)
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BMR Companies & Commentary
Twilio (TWLO: $33, up 35%)
Twilio crushed the quarter. We mean absolutely crushed it. Revenue was $115 million up 41% from a year ago. EPS was a loss of $0.03 versus breakeven a year ago. There were so many good things that happened we can’t cover them all, but we will share a few.
The tone of business at Twilio continues to be exceptional. Founder/Chairman/CEO Jeff Lawson commented, “We feel we are poised for a great year ahead.”
The big focus for investors was on Twilio’s gross margins. Specifically, after Twilio’s gross margin declined for three consecutive quarters from a peak of 59% in 4Q16, investors were concerned it might continue to trend downwards into the 40s. Twilio’s 4Q17 gross margin of 53.5% was up sequentially from 3Q17. In addition, CFO Lee Kirkpatrick said, “For 2018, you should expect gross margins around this level or better.” That’s a relief!
Uber has been the biggest area of concern for investors. After peaking at $14 million in 4Q16, revenue from Uber declined sequentially three quarters in a row to $5.0 million in 3Q17, but ticked back up to $5.8 million in 4Q17. Despite the drop off in Uber revenue, the company continues to grow the top line greater than 40% and we haven’t seen any other big customers leave, which is a major reassurance.
BMR Take: Founded in 2008, Twilio is the leading cloud platform for communications. Similar to Amazon Web Services, Twilio plays a critical role for software developers by allowing them to easily and securely build communications services, such as voice, messaging, video, and authentication into their software applications and then scale those services elastically and globally. This stock has a bright future and the current valuation of 5x sales is still at an unwarranted discount to the peer group of high-growth cloud communication companies trading for 7x.
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Shopify (SHOP: $138, up 15%)
Another stock crushed earnings for us this week. Shopify. Revenue of $223 million was up 71% from a year ago. EPS was a loss of $0.16 versus a loss of $0.12 a year ago.
2017 was undoubtedly the company’s best year yet. There was exceptional top line growth, but also immense learnings that will drive meaningful progress in terms of product and geographic expansion in the future.
The proof is in the pudding. Fourth quarter is the seasonally strongest of the year with the holidays. Shopify’s merchants sold more in this fourth quarter than in all of 2015, in fact doing $1 billion of sales over just a 4-day period.
For all of 4Q, Shopify’s merchants sold $9.1 billion, an increase of 65% or $3.6 billion from a year ago. This is the definition of sales flying off the shelf. The more Shopify’s merchants sell, the more opportunity there is for Shopify shareholders to make money.
BMR Take: Shopify is a clear leader in commerce, that is building scale, realizing strong growth consistently, and the firm is now considering additional product and geographic expansion to sustain these explosive growth rates for a long time. Revenue is set to double from $675 million in 2017 to $1.4 billion in 2019.
Our Target has been $125 and we wanted to make sure it smashed this target before we raised. Well, “smashed” is the right word here, as the stock shot higher to $140, before dropping a tad on Friday. Yup – an all-time high – never been higher. The company is now worth $14 billion and anyone buying the firm would have to pay $20 billion and we think that management would probably fight any buyout at that level. Why? Because they feel like we do that the company will be worth $30 billion someday. What? Yes. You heard it here first - $250 a share. (We didn’t say when!)
We hereby raise the Target to $160 and the Sell Price from $105 to $122.
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Square (SQ: $44, up 11%)
The one and only CEO of two publicly traded companies at the same time, Mr. Jack (Billionaire) Dorsey tweeted this week that Square’s Cash App is now up and running for instant buying and selling of bitcoin. We’ll cover the product below, but first the most important point needs to be made.
CEO’s like JP Morgan Jamie Dimon called bitcoin a fraud. Countless more expressed dissent or caution about the new sector. Regardless of what is the truth and what you or we think, the question to ask is what did Jack do? Well, he is already out with a product. It is undeniable that wherever the world is going in payments, Jack and Square are the NextGen warriors that are moving … and moving fast. The innovation is impressive.
According to Square’s Cash App, you can buy and sell bitcoin right from your Square Cash App. You have to fund it with a cash balance and have to read and agree to Square’s virtual currency terms of service, prior to proceeding. Interestingly, the terms of agreement are very onerous giving Square the right to withhold payments if fraud is suspected, for example.
BMR Take: We see Square growing revenue from just under $1 billion 2017 to $1.3 billion in 2018 driving EPS growth from $0.25 to $0.45 over the period. To be honest, we care a lot more about the long run revenue growth than the EPS picture. Visa’s market cap is $275 billion. MasterCard’s is $185 billion. Square is only worth $17 billion today and we believe the company can easily chip away at these giants to find strong growth over the next 10 years.
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Splunk (SPLK: $93, up 7%)
Splunk was up but did not participate in the broad equity market rally as much as it should have. What’s the deal?
The big news was selling by key stakeholders. Activist Jana Partners was a large 5% holder. They exited completely. It was also reported that a Senior VP sold a big block of his stock. Several other prominent investors sold out, like Sands Capital, Clearbridge, and Winslow Capital.
You just have to take note of insider selling. There is no reason to fall in love with any stock. When money has been made, recycle it into the next idea when the time comes.
BMR Take: Splunk is covered by 43 Wall Street analysts. 80% rate the stock a buy. However, the average price target is only $92. (Our Target is $95 which it just hit this week.) With the stock up about 50% over the last year, we are taking a closer look at rotating into a new idea. The risk we see is that with big owners selling, and analysts not raising target valuations higher, we could be in a big correction in sentiment.
So, with that said, we are hereby raising our Sell Price from $83 to $88. If it falls to this level, we are out. Having added the stock at $46 in 2016, we are up exactly 100%. We want to make sure we don’t lose these gains.
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Amazon (AMZN: $1,449, up 8%)
Amazon seems to announce a new disruptive business idea every week. This week Amazon is looking to expand its medical supplies Amazon Business marketplace offering to serve the Healthcare industry. Amazon is pushing to turn its nascent medical-supplies business into a major supplier to U.S. hospitals and outpatient clinics that could compete with incumbent distributors of items from gauze to hip implants.
Amazon has been making moves and dramatically disrupting the Healthcare industry over the last year. In October, analysts and the media noticed that Amazon was granted wholesale distribution licenses for medical devices in several states. CVS Health announced in December it will acquire Aetna for about $69 billion in cash and stock. Many Wall Street analysts said the merger was triggered by concerns Amazon will enter the drug business. Last month, Amazon, Berkshire Hathaway and J.P. Morgan Chase announced a partnership to cut health costs and improve services for employees. The announcement was light on details, but said three top executives from each company will take the lead on the project.
BMR Take: The stock was up $110 this week to another new all-time high! It’s leader is the richest man in the world by far, at $121 billion. Amazon just won’t stop. The company is an innovation machine. They are disrupting new industries seemingly every week. Essentially the company is the world's biggest start-up. There could be $50 billion or more of revenue down the road to come from Healthcare. We say you just have to have Amazon in your portfolio. We know it can look expensive on current revenue and earnings, but we don't know who Amazon will grow up to be yet. It's all still developing.
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AstraZeneca (AZN: $34, up 4%)
There was a big drug development this week. According to the FDA, AstraZeneca has been granted Orphan drug designation for selumetinib (MK-2206 & AZD6244) for the treatment of Neurofibromatosis Type 1 (a disease causing tumors on nerve tissue). AstraZeneca and Merck collaborated to investigate the combination of the two compounds. All development costs are shared jointly. FDA orphan drug designation is primarily a function of the disease not the drug - drugs that target diseases with fewer than 200,000 US patients will be granted orphan designation, and in some cases drugs targeting more than 200,000 patients can be granted the designation when the FDA judges that costs could not otherwise be recovered.
The bigger driver right now is the oncology business. While the company has gone all-out in immuno-oncology, there is more work to be done. The potential of the broader cancer portfolio should see growth in 2018, in part by acquisition. We are excited to see new data and potential acquisitions related to immune-oncology this year. Remember, we are in a new era of fighting cancer that is honestly more exciting to think about than just simply what it means for stocks. It’s a big deal for the world.
BMR Take: We feel AstraZeneca is a strong value here. Revenues are steadily running around $16-17 billion annually. EPS is closing in on $3. Many argue the stock could be worth 20x EPS or more. And you get a 4% dividend yield while you wait. This feels like a profitable situation to us. And if we are wrong, it is hard to see the stock trading too much lower as the dividend yield should hold the stock up.
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Economic Calendar
Existing Home Sales
Wednesday, February 21st, 10:00 AM
Period: January
Consensus: 5,600,000
Prior: 5,570,000
Initial Claims
Thursday, February 22nd, 8:30 AM
Period: 2/17
Consensus: 230,000
Prior: 230,000
Leading Indicators
Thursday, February 22nd, 10:00 AM
Period: January
Consensus: 0.65%
Prior: 0.60%
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A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
Let’s talk about the recent volatility and what happened, why and what's next, and put it all in a historical perspective. The bottom line is that, from peak to trough, the S&P 500 fell 10.2% this month, while the VIX volatility index (^VIX: 19, down 33%) spiked to multi-year highs. We believe that the selloff itself was largely technical in nature, driven by forced selling among investors employing systematic strategies. These strategies are compounded (negatively, in our opinion) by the fact that there are now 5,025 exchange-traded funds (ETFs) trading globally and 9,510 publicly traded mutual funds that are all tied to computerized systems causing redemptions and liquidations of stocks during a market free fall. Yet, there are only about 4,000 companies that are actively traded on the NYSE or Nasdaq. Thus, ETF's and mutual funds outnumber available domestic stocks to own by nearly 4 to 1.
Whether the lows of this correction are in or not, volatility is baked into the cake – the numbers simply won't allow anything less than extreme moves whenever these "systems" are triggered. This brings to mind a quote from Peter Lynch, made nearly 30 years ago: "Everyone has the brainpower to make money in stocks. Not everyone has the stomach." Keeping emotions in check and sticking to the philosophy of being a "long-term" investor are more important today than ever before.
That said, from here, provided the fundamental economic and earnings growth picture remains unchanged (UBS forecasts 4.1% global GDP growth and 16% US earnings growth), we should still be confident that the market will eventually regain its footing.
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Square is Upgraded on the Street
Nomura Instinet reiterated its buy rating for Square (SQ: $44, up 11%) and raised its price target to $64 from $48. This represents a substantial upside potential.
According to Nomura, Square is like Amazon and Google in their early days, meaning that it’s difficult to decode the company’s true potential using traditional valuation methods. Using a discounted cash flow model to value Square, Nomura gave it the highest price target on Wall Street. Amazon and Google have disrupted their industries of course, so this type of pronouncement carried some serious weight in our book.
Square is a financial technology company whose services span payment processing, cash transfer, investing, and lending, an area where it competes with PayPal and Amazon. Square has supplied more than $1.8 billion in loans since launching its credit service in 2014. PayPal and Amazon have loaned about $3.0 billion each.
Over $17 billion in payments processed
Nomura sees Square taking market share from its competitors, which could transform the company’s fortunes in the coming decade. Square processed $17.4 billion in payments in 3Q17, an increase of 31% from 3Q16.
BMR Take: If you’ve been reading The Bull Market Report you’ll know that we love this company and think a lot of its future potential. Our Target is $45 which it reached in November, a bit ahead of schedule. After a pullback at the end of last year which washed out a lot of non-believers, the stock has moved back nicely in the first six weeks of the new year. We can’t WAIT to move our Target up to $53! We are moving up the Sell Price from $32 to $38.
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The High Yield Investor
By Michael Foster
VP, High Yield
The Bull Market Report
For the Bull Market Report portfolios, the story of the week was the multitude of earnings reports. Two reports came from our High Yield portfolio while the other two came from the REIT portfolio. The recap and analysis of these reports will be covered below, after a brief discussion of the broad market action over the past week. As we noted in last week’s summary, the quick drop in the S&P 500 Index was not a worrisome event. Fear might have taken control of your mind if you paid attention to the general financial media. If you didn’t, you probably saw many opportunities to add more to the positions in your portfolio. One prime example of this, which we’ll talk about in more detail below, is the situation with Apollo Commercial Real Estate Finance (ARI: $18.70, up 6%). The overall market drop pulled Apollo down by approximately 5% since the beginning of February, offering a fantastic price area to pick up shares before their earnings report.
With that said, it’s also true that short term price movements to the upside should not be immediately praised, just as one should not immediately become fearful when a drawdown occurs. While volatility may maintain a presence for the next few weeks, it should die down as the earnings season wraps up and investors realize how positive the 4th quarter was for most companies. Along with that note, inflation fears were slightly quelled after CPI (inflation) numbers were reported under the 2% mark at 1.8% for the month of January.
In relation to our portfolios, all signs are bullish. High Yield and REITs both lagged behind the market bounce last week, indicating slight caution among investors.
AllianzGI Equity & Convertible Income Fund (NIE: $21.53, up 4.5%) has been in line with the S&P’s rebound over the past week. Much of the increase can be attributed to the broad market. The fund’s investment in Tech stocks, in which it holds Microsoft, Alphabet, and Amazon, led to the strong performance for the fund, which comes during the best weekly gain for the Nasdaq since 2011.
Let’s dive deeper into Apollo’s report. As stated above, the dip prior to earnings ended up being a great opportunity and we should be content with this position. The Q4 results were stellar. While the company posted a 29% YoY growth in NII of $69 million, beating the consensus estimates of $68 million, it firm also posted an EPS of $0.12 against the consensus estimate of $0.10. Full-year operating earnings (backing out the CMBS sale – see below) of $191 million or $1.89 per share vs. $137 million in 2016 also helps maintain the bullish thesis. The total loan portfolio at the end of the year was about $3.7 billion, with a weighted average remaining term of 2.8 years and all-in yield of 9%. The company announced dividends of $0.46 per share, which translates to a dividend yield of 10%. The ending book value per share was $16.30 with a P/B ratio of 1.1x. The company also got rid of its loss-creating CMBS portfolio, which had become a lesser focus for ARI. Although the sale of CMBS portfolio resulted in one-time losses, the event was viewed positively by analysts.
Digital Realty Trust (DLR: $102, flat), the second earnings report within the High Yield portfolio, had relatively poor performance compared with the broader market, based on poor Q4 results. It dropped over 3% after the announcement. While the company showed a 27% YoY growth in Q4 revenues to $730 million, the company reported FFO of $1.48, down 6% from the year ago period of $1.58. These numbers led to a small drop in share price. Guidance is generally more important and this area left us reassured: the company reiterated a 2018 outlook for core FFO/share of $6.50 and EPS of $1.50. These numbers were based on assumptions of total revenues equaling $3.1 billion, and adjusted EBITDA margins of 59%.
Invesco Municipal Trust (VKQ: $11.90, up 2%) lagged slightly behind the broader market for the week, with no significant news to note. Nuveen Municipal (NVG: $14.45, up 2%), another fund with major investments in US investment grade municipal bonds, also ended up a bit for the week. We’ll take it. Little by little.
As we move on to the REIT portfolio, one should keep the CPI data that we noted above in mind. Annaly Capital Management (NLY: $10.68, up 5%) had a GREAT week. The company reported Q4 earnings, which was in-line with the consensus estimates. The interest income was down 7% YoY to $745 million in Q4, while core EPS was at $0.31 per share vs $0.30 per share in Q3. The ending book value per share, $11.34, was up from $11.16 in 2016. This represents the stock trading at a significant discount to its book value, so we are in no way paying a premium for this company with an 11.3% dividend yield. In fact, Annaly was another example of the general market in the large February drawdown pulling down a solid company, falling to $10.03 a week ago Friday when the S&P hit its lows. This drop provided prudent investors with bargain prices.
Government Properties (GOV: $16.10, down 2%) underperformed the market. The company posted a 52-week low of $15.63, although it recovered 3% at the close of the week with a sudden spike in volume during the last trading day. The spike should be viewed favorably, as it was the highest level of volume since mid-2017. When selling or buying occurs on small amounts of volume, the movement shouldn’t be taken as seriously as when large volume appears. Since this spike in volume corresponded with buy orders, we remain confident about the position.
Omega Healthcare Investors (OHI: $26.74, up 2%) didn’t fare especially well after posting its Q4 results and 2018 guidance, although the drop was a meager 2%. The company posted Q4 FFO per share at $0.77, in-line with estimates and slightly worse than the $0.84 per share one year ago. Rental revenue was flat at $194 million and missed the consensus of $220 million. The company guided full year FFO for 2018 at $3.00, much lower than the $3.60 reported in the current year. The company stated that 2018 would not be a growth year due to its strategic re-positioning of assets, with an estimated $300 million worth of assets to be sold in 2018. The company increased the dividend to $0.66, leaving the annual yield at close to 10%. However, the company highlighted challenges in increasing the dividend in 2018.
Owning this company requires patience. In past newsletters we’ve highlighted the events occurring within the company, from missed payments by Signature HealthCARE to the Orianna developments. During the earnings conference call, executives made sure to note considerable progress being made with Signature. The firm is in good hands and we can sit tight knowing the attractive dividend yield is being covered nicely by cash flow.
Good Investing,
Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998
February 14, 2018
by Todd Shaver | Feb 14, 2018 | Earnings Preview 6 AM, Earnings Preview 6 PM
Mazor Robotics (MZOR: $60)
Bull Market Report Target Price: $70
Bull Market Report Sell Price: $40, raised now to $52
Earnings Date: Wednesday, before the market open
Consensus: 4Q17
Revenues: $17 million
EPS: -$0.15
Year Ago Quarter Results
Revenues: $14 million
EPS: -$0.18
Key Things to Watch For in the Quarter
Analysts expect Mazor to report a 21% increase in revenues with a slight decrease in its earnings deficit for 4Q17. The stock is up 160% over the last year. We are intrigued by the firm’s ability to grow its top line, and expect them to turn a profit later in 2018 and in 2019. Mazor operates in a niche market where they produce spinal surgical robotics, and we expect the demand for their products to increase with the aging population.
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Shopify (SHOP: $126)
Bull Market Report Target Price: $125
Bull Market Report Sell Price: $105
Earnings Date: Thursday, 8:30 AM ET
Consensus: 4Q17
Revenues: $210 million
EPS: $0.05
Year Ago Quarter Results
Revenues: $130 million
EPS: $0.00
Key Things to Watch For in the Quarter
Shopify is expected to report a 60% increase in revenues (huge!) and a slight increase in earnings for 4Q17. The firm has beaten estimates in each of the past four quarters, which has been reflected in the stock’s 120% appreciation since this time last year. Since this is the firm’s first quarter reporting profitability, we expect the Street to react positively. The stock has shown a strong ability to grow its top line which will continue as e-commerce grows throughout Canada and the U.S. and the rest of the world.
The stock is right at our Target, and we would like it to move into the 130s before we raise the Target. We are quite confident this will happen soon. Maybe Andrew Left will short MORE stock! Yea.
January 28, 2018
by Todd Shaver | Jan 28, 2018 | Weekly Newsletter 7pm Sunday
The Weekly Summary
The big news this week was Davos. Davos is an annual event hosted by the World Economic Forum that’s mission is to improve the state of the world by engaging business, political, academic, and other leaders of society to share global, regional and industry agendas. Davos is a mountain resort in the Alps of Switzerland. All of the top brass from companies and countries attend. Trump rocked the party with his message of America first. He said America first does not mean America alone, and that America is open for business. He promoted our 3% GDP growth, our massive tax reform, and our historic reduction in regulation. We put a billionaire in office exactly to do this. The S&P 500 is already up 6% so far this year and Trump’s deals in Davos could drive gains higher.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight: Gilead, Shopify, Bristol Myers, Nutanix, Google, and Tesla.
Key Market Measures
BMR Companies & Commentary
Gilead (GILD: $86, up 6%)
Gilead has had a tough time since 2015; however, its fortunes may finally be changing. The big event is that Celgene is buying Juno Therapeutics for a 50% premium. One of Juno’s most promising drugs directly competes with Gilead. Clearly, Gilead is playing in the right sandbox. The Wall Street research firm Jefferies poured some gas on the fire of excitement now burning for Gilead. They upgraded the stock this week and said to look for good things to happen soon. The company is looking at a February approval and launch of a drug for HIV, and highlighted some key Phase 3 data on another drug to be released by 2019.
BMR Take: The stock appears to be inexpensive at this level, as it trades at just 8x this year’s EPS of $8.70. But we know that earnings are set to decline to $6.50-$7.25 over the next few years as Gilead’s top two drugs face declining sales. These two drugs were among the top three best sellers of all time – but nothing lasts forever. Could Gilead fetch 15-20x EPS when the dust settles and new drugs re-invigorate some excitement? Possibly, but it’s going to take quite some time.
As you may remember, we had the stock in our portfolio and removed it a year ago as we were tired of waiting. It took a year to come back, but from here we think the run is over for at least the next few years. We will remain on the sidelines.
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Shopify (SHOP: $129, up 12%)
Somebody stopped by Shopify this week to work on collaboration for the future of augmented reality. Tim Cook. CEO of Apple. No big deal. (HA!) He praised the companies “profound” emerging technology. No further explanation needed. Apple + Shopify = $1.8 billion added to Shopfy’s market cap, now at $13 billion. Wow.
BMR Take: Tim Cook met with developers and coders and listened to demonstrations. Augmented and virtual reality is a major part of Apple’s future plans. These markets are likely to balloon to $215 billion by just 2021. Maybe Apple works with Shopify. Maybe Apple buys Shopify. Either way we see this all leading to good things ahead for Shopify. Their sales are expected to grow from $660 million this year to $1.6 billion by 2020, without factoring in anything from the possibilities with Apple.
Andrew Left of Citron is crying in his beer. (He’s the guy who shorted the stock at $119 and made a big deal about it in the press. He drove it down to $92, and now is losing money big-time. YES!!! We don't like the way this guy operates.) Remember, if you hear that a stock is heavily shorted, that’s a BULLISH signal. Why? Because after you short a stock the only thing you can do from that point on is to BUY THE STOCK BACK. Very bullish.
Look at this chart:
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Bristol-Myers Squibb (BMY: $64, up 3%)
Bristol-Myers received a big regulatory approval in Europe this week. The European Commission (EC) expanded the indication of Yervoy to include treatment of advanced melanoma in pediatric patients. The EC approval marks Bristol-Myers’ first pediatric indication for an Immuno-Oncology medicine in the European Union and allows for the marketing of Yervoy for this indication in all 28 Member States of the EU. This is just a key development for geographic market expansion and ultimately sales. Hip hip hooray!
BMR Take: Bristol-Myers is a leader in Immuno-Oncology. This space is red hot. Bristol’s EPS is expected to grow from $3.00 this year to $4.00 in 24 months. This Healthcare bellwether is overdue for a breakout in the stock. Remember, activist Carl Icahn is making some noise here and pushing for good things for all shareholders.
Looking at the 1-year chart, you can see that it is a slow mover, but steadily up. We’ll take that any day. The company is no small firm. The market cap is $105 billion and the stock is moving towards its all-time high of $74 set two years ago.
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Nutanix (NTNX: $33, down 8%)
Nutanix caught some heat this week from a downgrade at JP Morgan. The report said nothing specific. They said: The market rally has gone on for eight long years. Valuations aren’t cheap. Nutanix is up a lot lately.
We say: Ignore this report – it appears to be just one person’s opinion. We believe there is more money to be made here. In fact, just this week Nutanix spoke to investors about how hosting providers like Amazon Web Services are taking steps to work with customers more broadly to support bare services, expanding the market opportunity for Nutanix.
BMR Take: Nutanix is a must-own stock. “The opportunity of a decade,” says Goldman Sachs. The customer base has doubled in 18 months. The average annual sales per customer is expanding from $1 million to $5 million, fueling greater than 30% top line growth. And we could see this $5 billion market cap company get bought by the likes of an IBM or Oracle any day. The stock is down this week to where it was in December. But in October, just three months ago, it was $22. Stay on this train!
More on Nutanix below.
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Google (GOOG: $1,176, up 3%)
The future of the Smart Home is a big deal. Whoever wins this market is going to make some big bucks. Google Home is now installed in 14 million homes and is well on its way to cementing itself as a key player in the space. The Smart Home of the future will allow you to use voice to control your thermostat, your TV, your lights, your locks, your security cameras, your car ignition, your coffee machine, and on and on. The hardware sales and the multi-year services contracts make for a lucrative revenue opportunity. Google is positioning itself to get in on the action.
BMR Take: One thing we really like about Google is its valuation. When you look elsewhere in Tech – like Facebook, Amazon, Netflix, or Adobe – the price to earnings ratios are way up there. Look, we understand growth and innovation can’t be valued just on a price to earnings ratio alone. But that subjectivity in the analysis leaves room for the high flyers to be in for a rougher valuation reversal in a correction. In contrast, Google is set to generate about $42 of EPS in 2018, which is 29% growth from 2017, and the price to earnings ratio is exactly 29. When the price to earnings ratio is equal to or is less than the earnings growth rate you know as an investor you are paying a reasonable price for growth. Again, that is why we like Google’s valuation.
And again, please have no fear of the high stock price. It’s just a number. Pretend that it has a 20-1 split tomorrow. The price would drop to $59. Would you buy more then? It’s all psychological. Google HAS split their stock 2-1 – once – in 2014. They just might be thinking of doing that again. And we would suggest the stock would shoot higher.
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Tesla (TSLA: $343, down 2%)
Tesla’s Gigafactory is exciting! Tesla’s mission is to accelerate the world’s transition to sustainable energy through increasingly affordable electric vehicles and energy products. To achieve its planned production rate of 500,000 cars per year by 2018, Tesla alone will require today’s entire worldwide supply of lithium-ion batteries. The Tesla Gigafactory was born out of necessity and will supply enough batteries to support Tesla’s projected vehicle demand.
Tesla broke ground on the Gigafactory in 2014 in Nevada. The name Gigafactory comes from the word “Giga,” the unit of measurement representing “billions.” The factory’s planned annual battery production capacity is 35 gigawatt-hours (GWh), with one GWh being the equivalent of 1 billion watts for one hour. This is nearly as much as the entire world’s current battery production combined. With the Gigafactory ramping up production, Tesla’s cost of battery cells will decline significantly through economies of scale, innovative manufacturing, reduction of waste, and the simple optimization of locating most manufacturing processes under one roof. By reducing the cost of batteries, Tesla can make products available to more and more people, allowing them to make the biggest possible impact on transitioning the world to sustainable energy.
BMR Take: Seriously. Who builds a Gigafactory in Nevada because their business is using up all of the world’s lithium-ion batteries? Only Elon Musk. So innovative. So groundbreaking. World changing. If Tesla is right about the future of vehicles and takes over the crown of the auto industry from the old guards in Detroit, you don’t want to miss out on the future earnings potential of the company and what this stock could do in your portfolio.
As noted last week, we do have a $335 Sell Price on the stock because of our concern about how much capital they will have to raise this year. It would upset us to have to sell this wonderful company run by a genius, but we have to protect our gains. Watch closely this week.
Note on Musk’s New Pay Package:
Tesla announced a huge pay package this week for Elon Musk that again ties his compensation to key performance benchmarks. This time the goals include taking the electric-car maker to $650 billion in market value
Tesla outlined a massive compensation plan for its unorthodox CEO on Tuesday, setting a series of ambitious growth targets that, if various conditions are met, could net Musk as much as $55 billion over the next decade The package is based entirely on performance, guaranteeing no salary and no bonus, and requires Musk to reach aggressive market capitalization and financial goals in order to be paid. He would also have to hold onto his shares for five years after he receives them before selling. Musk would only receive the full payout if the company reaches a market capitalization of $650 billion, a more than 11-fold increase over its current $57 billion market cap.
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Economic Calendar
Consumer Confidence
Tuesday, January 30th, 10:00 AM
Period: January
Consensus: 122.1
Prior: 122.1
Pending Home Sales
Wednesday, January 31st, 10:00 AM
Period: December
Consensus: 109.5
Prior: 109.5
Nonfarm Payrolls
Friday, February 2nd, 8:30 AM
Period: January
Consensus: 172.5K
Prior: 148.0K
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We got a letter about Nutanix from Stanley Makovsky, of Stan Lee Marketing, one of our subscribers. He said:
"Todd,
Any opinion on the below report?
Nutanix Stock Falls After J.P. Morgan Warns That Software Shift Could Prove Disruptive"
Stanley Makovsky
Stan Lee Marketing
Hi Stanley – I many times take these things with a grain of salt. Yes, the stock is down 8%, but will it stay down here? Maybe. It might go to $30. But that just might be an amazing buying opportunity.
JP Morgan wrote this opinion based on this:
“on concerns that shares could lag those of peers in the near future following a recent rally.”
Lagging peers? What does that really mean? Who cares about their peers.
This is what matters to us:
The last four quarters of revenue:
$275 million
$226 million
$192 million
$160 million.
I call that growth.
Todd Shaver
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The Carlyle Group (CG: $25.60, up 5%)
We've been pounding the table on this stock for months. On December 19th the stock was $21.50. It's now at $26, up 21%. We are pounding the table on this one NOW. We expect $30 in a few months. Do the math. That's another 17%. We have it on good authority that one of the major stockholders is not selling a share until it hits $30. Our Target is $28, but we sure will be happy to raise it to $33 when it hits $28. The Sell Price is hereby raised from $20 to $24. We're up 54% on this one in less than a year; it's paying a 5% dividend. How can you go wrong.
Look at this chart:
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CBRE (CBG: $46) Hits All-Time High
Friday saw another all-time high. Earnings are coming out soon and we understand that they will be announcing another solid quarter. Some say it might be called a blowout. We've passed our Target of $40 so we hereby raise it to $52. Our Sell Price is at $35, so we are raising that to $40. The company is in business to save corporations money with their real estate. And that they are doing with relish. This one is a sleeper.
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The High Yield Corner
By Michel Foster
VP High Yield, The Bull Market Report
We wish to do a bit of a deep dive into what’s happening in stocks, the economy, and society at large - and what this tells us about high yield.
The reason we want to do this now is that there is a trend that looks very alarming on the surface that is actually not a problem at all. We’re referring to the incessant bull market of 2018.
January is ending in a few days, yet the S&P 500 is up over 6% already this year. Remember that this index goes up about 8% on average every year, so that a 6% gain in a month is very intense. So intense, in fact, that the market has already hit and surpassed the price target that a lot of big bank analysts had on the market for the entire year.
At the same time volatility is down, the financial mass media is getting more bullish, and the general anxieties in society seem to be drifting further and further away from economic issues and towards other domains of human life - politics, religion, identity. This is usually a cyclical trend.
To explain what we mean, think back to 2005 and 2011. Very different years with very different social concerns and economies. 2005 was the height of the housing bubble - a time when exotic dancers in Las Vegas were buying multiple homes to flip (as brilliantly documented in Michael Lewis’s The Big Short.) But Americans are a contentious bunch, so there was plenty of angst and debate going around - a lot of it about gender equality, the war in Iraq, Guantanamo Bay, race relations, and other things. Little talk about income inequality, wage growth, or other economic issues.
Now think about 2011. This was the time of the short-lived Occupy Wall Street movement. The Iraq War, still going on, wasn’t an issue; Guantanamo Bay didn’t come up unless you brought it up to the protestors. Race relations, gender issues were given brief lip service. But the real concern? Income inequality. “We are the 99%” was a rally cry of socio-economically disaffected people.
Whether or not you agreed with their message, their means or their complaints, doesn’t really matter - not for rational investors like us who want to grow our wealth by understanding what’s happening in the world. What matters much more is acknowledging what was going on and why it was going on. Namely, 2011 was a time when political and social unrest hinged on economic issues - because the 99% weren’t getting richer and weren’t even getting the illusion of getting richer that the debt-fueled housing bubble gave so many Americans.
Fast forward to 2018. What are the hot topics of the day? Donald Trump is the obvious one. And, again, whether you support Trump or do not, what does matter is acknowledging that the cultural fixation of the moment is on an issue that has relatively little to do with the economy.
From this perspective, 2018 feels a lot like 2005. The economy is, at least on the surface, showing enough strength to keep people from focusing on economic and financial issues. Corporate profits are rising and look to rise even further. Stocks are going up, as are housing prices and U.S. incomes. A weaker U.S. dollar is hurting imports, but it’s also helping exports and encouraging more tourism to the U.S. - another big boost.
What does all this have to do with the stock market and high yield investments? Two things. First, we seem to be at that stage in the business cycle where hope has already turned into optimism. But we aren’t at the point where optimism turns into euphoria, although it’s getting closer and closer on the horizon. In other words, a lot like 2005.
This tells us that the best thing to do is to buy and hold stocks. Stay in the market. Despite the monstrous gains in the market for 2018, the S&P 500 P/E ratio is down from where it was in the middle of 2016, and if earnings growth meets expectations (13% growth for the year), that P/E ratio isn’t going to go up much further.
It also tells us that high yield remains an option, but investors may become choosier when it comes to high yield as we go further into the greedy stage of the business cycle and away from the fearful stage. That could mean municipal bond prices will remain lower while junk bonds remain higher. That may mean little capital gains from Invesco Municipal Trust (VKQ: $12.30, flat) and Nuveen AMT-Free Municipal Credit (NVG: $15.09, down 2%) despite the fundamental strength in both funds’ incomes. Income may begin to rise if municipal bond yields rise alongside Treasuries. It does not mean a big crash in either fund, however - so don’t rush to sell. Just recognize that these funds’ income streams will remain intact, with some possible upside.
AllianzGI Equity & Convertible (NIE: $22.55, up 2%) and Pimco Dynamic Income Fund (PDI: $30, up 1%) are interesting options for investors. Since these funds have exposure to junk bonds and convertible bonds, the continued increase in profitability and financial strength among America’s companies could drive demand for these funds in excess of what we’ve seen in the past. Both have provided strong total returns since The Bull Market Report first recommended them. More good returns are becoming more likely, thanks to America’s increasingly complacent and euphoric economic mood.
Where does that leave us investors, concerned about volatility, wishing to preserve capital, and hoping for a reliable high income stream? It is too early to worry about a euphoric market, but it is time to recognize that worrisome euphoria and the bubbles they produce could come. That could take a couple of years, perhaps even longer. What matters is that we remain keenly aware of what’s happening in our economy and our society in an impartial and calm way, investing accordingly, and constantly looking, listening, and watching.
Good investing,
Todd Shaver
The Bull Market Report
Since 1998
