December 30, 2019
by Todd Shaver | Dec 30, 2019 | Free Newsletter (Sent Weekly Monday at 12pm)
The Weekly Summary
As the year winds up, the only question left for 2019 to answer is how far back you need to go to get a stronger year. The market this year is close to what we saw in 1998, and we would settle for matching that ultra-bullish dot-com boom. Beyond that, it only takes a few extra percentage points of victory lap before we need to pull out 1975 and even 1958 to find a comparable rally on the books.
Of course BMR stocks are up 41% so far this year, so we're rolling in outperformance either way. A full four of our recommendations doubled, tripled or quadrupled in 2019 and a wide range of others (including mighty Apple itself) are in the 80-95% zone. Only six BMR stocks went down. We're confident that they'll come back strong in 2020.
But then 2020 is the real question Wall Street needs to answer. In our view, the new year will start a lot like the last one, with stocks moving strong to the upside. All we need is a little relief on trade or some sunshine in the coming 4Q19 earnings season to carry the bulls into the summer, at which point the political landscape will undoubtedly get too hot for many investors to handle. That's all right. As long as we stick to our game plan, the election shouldn't hurt us one way or the other . . . and in any event, it's nearly a year down the road, so there isn't a lot of sense in worrying about the results at this stage.
There’s always a bull market here at The Bull Market Report! Gary Jefferson is back with a powerful look at what 2020 is likely to bring us, while The Big Picture focuses on the way markets can swing from dread to exuberance. The rally we're enjoying now isn't any more "irrational" than normal. As such, The High Yield Investor discusses some avenues if you're looking to lock in a little added income before the old year ends. We suggest taking a fresh look at Office Properties Income Trust and Omega Healthcare Investors.
The rest of our paid subscription newsletter is devoted to a few of our biggest winners of 2019 like Anaplan and Alphabet, along with some BMR stocks that fell hard in recent months but are already rebounding fast: Okta, Alteryx and Twitter.
Remember, the last day you can buy or sell stocks this year is Tuesday. Wednesday will be a market holiday and then we start fresh in 2020 on Thursday. As usual, our News Flashes will be a little light this week . . . if there's nothing to say, we won't bore you with filler. Instead, we'll be working behind the scenes to get you ahead of the new year.
Key Market Indicators
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BMR Companies and Commentary
The Big Picture: Animal Spirits In Control
Part of what won Yale economist Robert Shiller the Nobel Prize was his 2005 warning that the housing market was getting unsustainably overheated. Since then, people have come to him to tell the bulls they’ve gone too far. That’s why his recent admission that this record-breaking year on Wall Street is built on irrational factors is so illuminating. Shiller now sees “animal spirits” as the main factor driving what could easily become the best year since the 1950s.
He knows this isn’t logical. And he doesn’t mind. After all, the market isn’t always rational, but when something gets it moving away from the fundamentals, there’s no point in fighting the flow. You’ve simply got to know your own nature. If you aren’t confident enough to run with the bulls, stay on the sidelines and keep cashing 2% Treasury bond coupons. But there’s a lot of money to be made even in a frothy market. Once you let the bulls loose, they’ll run until they’re completely exhausted. Needless to say, we're excited. Even Bob Shiller seems relatively sanguine about how far this rally can continue in 2020 and beyond.
He’s far from alone. Sprawling trillion-dollar asset management complexes are sharing their 2020 outlooks now and they’re convinced bullish conditions will prevail for the foreseeable future. All we need is a mood strong enough to cut through the shocks. Wall Street isn’t climbing a wall of worry any more. We’re riding a wave of exuberance.
It really amounts to market physics. A stock in motion will remain in motion until an obstacle forces a course correction. At this point, there’s nothing big enough looming on the horizon to break the bulls’ stride. We’ve already lived through a year of trade war and earnings deterioration. That’s the status quo now, part of the background noise.
More importantly, it’s already built into the trailing year-over-year comparisons. We don’t need a big external stimulus like tax cuts or even the Fed to get the 2020 numbers going in the right direction. All we need is a little organic growth. That’s been building up behind the scenes as the Fed keeps interest rates low.
Builder confidence is at its highest level since 1999. New home sales are tracking at 2007 levels once again and there’s no ceiling in sight. This is just getting started. And even Bob Shiller, the housing bubble guy himself, has stopped fighting the mood. A year ago, he warned that the housing market reminded him of 2006, right before the crash. Conditions now look hotter than ever.
Shiller says it’s contagious. The impeachment hasn’t stopped it. The trade war hasn’t stopped it. Under normal circumstances, the bulls would have run out of breath by now. But while these aren’t normal circumstances, history shows that they aren’t absolutely unprecedented either. On Shiller’s scale, stocks are “quite high” now at a 30X inflation-adjusted earnings multiple.
Back in 1999, his metrics stretched a full 50% beyond where they are now. History didn’t end. This time around, they can go at least as far before they snap. After all, as Shiller says, we have a motivational speaker in the White House now, someone who loves to talk the market up when everyone else tries to talk it down. That's huge.
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Anaplan (PLAN: $53, down 1% last week )
While Anaplan was down a bit over the past week, it has doubled in the past year and BMR subscribers have captured a healthy 42% of that gain after we added it to the Aggressive portfolio back in March. The company still has significant upside since growth prospects for its decision making software remain bright.
At the forefront of “Connected Planning,” a category that it has created and is a part of the cloud computing category, the technology allows companies to make faster, and, it believes better decisions. Anaplan’s technology, which it calls Hyperblock, connects data through various company’s departments rather than centralizing decision making within the finance department. Currently aimed at large enterprises, there is still plenty of room for growth. At the start of 2019, the company had 1,100 customers and only 250 were part of the Global 2000.
Recent results demonstrate the company’s growth prospects. In the fiscal third quarter (ended October 31), Anaplan’s rapid top-line growth continues, with revenue increasing 44%, from $62 million to $89 million. Although the company has a history of expanding losses, management has slowed down the rate of expense growth. For the most recent period, Anaplan’s operating loss narrowed to $32 million compared to third-quarter 2018’s $50 million operating loss. Management boosted its fiscal 2020 guidance, including raising their revenue expectation to a 44% top-line increase ($347 million) versus their prior 42% expectation, up from $240 million in 2019.
BMR Take: With its pristine balance sheet ($50 million in debt and $310 million in cash), this major disrupter still offers exciting growth prospects as large companies continue to adopt its technology, which includes machine learning and other artificial intelligence. Our Target is $75 and our Sell Price is $45 and we would expect the stock to reach new all-time highs above $60 in the first part of 2020.
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Alphabet (GOOG: $1,352, flat)
The Search giant is up 30% for the year and is within 1% of an all-time record. Not bad for a company with a near-trillion-dollar market cap ($933 billion). The big news recently is that the founders have stepped back and turned over the running of the firm to Sundar Pichai. He’s been running the core Google business since 2015 but this latest promotion gives him a clear line of authority over the entire enterprise.
The search business is solid and obscenely profitable but is not growing terribly fast. Their cloud platform business however rose more than 80% last year, albeit still small at $4.4 billion in revenues. But give this two more years at this growth rate and you have a huge business generating big cash numbers. With revenue tracking near $160 billion in 2019, up from $137 billion in 2018 and $110 billion in 2017, there is nothing but more green ahead for the company.
They are also buying stock back like no tomorrow, with almost $6 billion being spent on shares in just the 3rd quarter. With $120 billion in cash on the books, and generating over $2 billion a month, this type of buying could continue for months if not years into the future. After all, nobody talks about the M-word on the Street, but you have to admit, with 88% of the search market, this company is a monopoly. Is there a risk of the governments of the world getting involved in Google’s business? Yes, of course.
But we think this is highly unlikely and if we didn’t already own stock in the company, we would be happy to acquire shares of this fabulous firm as soon as the market opens for trading on Monday morning. Trading at its all-time high, this concerns us not a bit. After all, why oh why do you think this company is trading at an all-time high? Because it is a cash machine, now and in the future. Our Target is $1450 and our Sell Price is: We would not sell Google.
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Twitter (TWTR: $32.50, up 1%)
What do you do when some of your favorites are down 20-50% from their highs? We go back to the basics.
We continue to love Twitter but the stock has been flat for months now, since October when it was trading in the low 40s. But many times the stock doesn’t tell the whole story. Revenues are good, not spectacular, growing from $2.4 billion in 2017 to $3.0 billion in 2018. This year looks like they will hit the $3.5 billion level, with profits of $1.60 per share in 2018 and what looks like $2.40 in 2019. Compared to a lot of other high-tech companies with virtually no earnings, it’s a nice breath of fresh air to see Twitter actually producing profits.
They still have a ton of cash at $5.8 billion, balancing $2.6 billion of debt. The exposure the company gets from our current president and from the world-changing events that it has been involved in (Arab Spring, Hong Kong) we expect good things from the company in the coming 5-10 years. We see the upside much greater than the downside risk. Our Target of $47 is Aggressive for this $25 billion company and our Sell Price of $25 will protect you on the downside.
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A Word From Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
After digesting dozens of 2020 forecasts from leading Wall Street firms and other outside resources, we want to give you our take on what WE see for the coming year.
First, we don't expect a bear market or a recession. The economy is doing great and it simply is not going to stop on a dime. The things that matter such as consumer confidence, consumer spending, wages, full employment, low interest rates and inflation are at some of the best levels we have seen in our lifetimes.
And the strong economy, of course, is what has and we believe is what will continue to energize the market in 2020. Just look at GDP. The final Q3 GDP estimate of 2.1% puts 2019's annual growth rate on pace to beat the average annual growth rate since this bull market began. Consumer Sentiment was up as well, rising to 99.3 from last month's 96.8.
Even though we key on earnings, if all one did was monitor the following four items, you could accurately forecast the strength of the economy with uncanny precision: GDP, employment, consumer sentiment and interest rates. All are really, really doing well.
Earnings are expected to slow down the first two quarters, but the positive impact from all of the prior rate cuts should hit bottom lines around the midpoint of next year. We anticipate positive growth in the first two quarters and up to 10% earnings growth across S&P 500 stocks for the full year. Thus, if there is going to be a sell-off or "correction," we expect it might be in January or February, triggered more by political consternation than lowered earnings estimates.
If we don't see a pullback early next year, we may have a period of volatility in the June area as politics heats up again with conventions and selections of final candidates. We expect these downswings, if they occur, will be headline-driven events and will therefore result in "buy-the-dip" opportunities for investors wanting to put extra cash to work.
What worked last year: Technology was the clear outperformer in 2019 while Energy was the largest underperformer. As we move in to 2020, we favor Communication Services and Consumer Discretionary stocks (including Amazon) and are not looking for much from either Technology or Energy. However, if Big Oil bounces back, it will come roaring back . . . in that scenario, we'll add to our coverage there.
Either way, as we view the entirety of the economy, tariffs, politics and the Fed, we believe all major sectors are capable of achieving low double-digit returns in 2020, while Consumer Staples, REITs, Utilities and Financials may still be capable of somewhat lower returns.
What we don't expect is smooth sailing throughout 2020. We expect plenty of volatility because of global trade tensions, Brexit and of course politics right here at home. We don't expect the Fed to raise or lower rates next year, but in case the economy needs a safety net, they will lower rates. Oil prices, of course, have always been a wild card, but we see plenty of supply to keep markets stable. We don't expect the president to be removed from office, but rather expect his pro-business policies (less government, fewer regulations and lower taxes) will continue to foster business growth and entrepreneurism.
As a comparison to what we expect, here is the case made by the Stock Trader's Almanac for 2020:
- Worst Case: Correction but no bear in 2020. Flat to single digit loss for full year due to on-going unresolved trade deals, no improvement in earnings and growth weakens further. Trump is removed from office by the Senate, resigns or does not run and political uncertainty spikes.
- Base Case: Average election year gains. Incumbent victory, trade and growth remain muddled, modest improvement in corporate earnings and Fed stays neutral to accommodative. 5-10% gains for DJIA, S&P 500 and NASDAQ.
- Best Case: Above average gains. Incumbent victory, trade resolved, growth improves, earnings improve and Fed stays neutral and accommodative. 7-12% for DJIA, 12-17% for S&P 500 and 17-25% for NASDAQ.
We lean toward the upside.
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The High Yield Investor
As we look toward 2020, most investors have flipped from indulging their grimmest recession fears to a posture closer to our own bullish bias. That's ultimately a good thing. However, it also sets up volatility ahead when expectations get too far ahead of reality, even for a brief period of time. We are looking for good things from the coming year. We just know that the route is going to be far from smooth.
Our top High Yield priority for the coming year is simple: hold defensive positions and wait for money to flow out of these stocks before you expand your holdings. You should have locked in a reasonable quarter-to-quarter income stream to cushion the downswings, so chasing these stocks while yields are relatively low doesn't make a whole lot of strategic sense. The goal is to lock in the highest yields possible, which means waiting until these stocks are out of favor.
It will happen. For now, as long as the rest of the market is rallying, there isn't a whole lot of urgency in building up your defense. And if you're feeling nervous, we suggest capturing the biggest yields you can to offset the impact of negative real interest rates around the world. Remember, the Fed won't raise interest rates again before annual inflation reaches 2%, so locking in anything less for the long term means you're locking in at least a little purchasing power deterioration . . . you are guaranteed to lose money at the end of the road. Who wants that?
Most of our recommendations pay well above 5% and some carry much higher yields as the market pivots from defense to enthusiasm. We'd like to discuss two of our favorites here. The first is ............ AND THIS IS WHERE YOU WILL GET THE BEST VALUE FROM BEING A PAID SUBSCRIBER. GO HERE TO SUBSCRIBE. YOU WILL BE HAPPY YOU DID: www.BullMarket.com/subscribe
Good Investing,
Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998
April 2, 2017
by Todd Shaver | Apr 2, 2017 | Weekly Newsletter 7pm Sunday
The Week Ahead
This past week was more of the same calm and collected march higher for the stock market. Optimism is at record highs for business and consumers. There are pockets of softness in the economy, like historically low labor force participation and declining commercial and industrial loan activity at banks, but with the credit market dealing with the stresses of low interest rates the stock market just keeps drawing interest from investors. We now head into April after what was a strong 1Q 2017. The consensus estimate for 2017 S&P 500 EPS is currently $129 revealing a reasonable 18x P/E multiple for today’s overall stock market.
The first quarter closed Friday with the S&P 500 notching its best quarter since 2015, up 5.5%. The Nasdaq had its best quarter since 2013, up 10%. The Volatility Index (^VIX), the fear gauge, posted its second lowest quarterly average in history at 12.37. And listen to this, the average daily percentage change for the Dow Jones during the quarter was the lowest since 1965. Things are CALM out there!
Apple (AAPL: $144, up 2%. All changes in this report are for the WEEK), a component in all three major indexes, jumped 24% during the quarter, nestled next to an all-time high set again this week. The company added $145 billion to its market cap in the quarter, besting its own record set in 2012 of adding more market cap in a quarter than any other company. It was the biggest gainer in the Dow Jones 30. Facebook, Amazon and Netflix all added 18%.
There is always a bull market right here at The Bull Market Report! This week we highlight the following securities: Visa, Amazon, Microsoft, Tesla, Splunk, and Shopify.
Highlights From The Past Week
Trump Talks Tough on U.S.-China Trade. President Trump appeared to follow through Friday on his promises to get tough on trade with China, less than a week before he is to meet with President Xi Jinping of China. In two executive orders, Mr. Trump called for tighter enforcement of tariffs imposed in anti-dumping and anti-subsidy trade cases, as well as a comprehensive review of the United States trade deficits - measures that reflect America’s economic tensions with China. Straightening out the US trade balance with China would be a major positive for US GDP growth, if Trump can accomplish the goal.
Why the Urge to Merge Could Return to Wall Street. Nothing appears to be off the table for the Trump administration as it seeks to pare back the regulations imposed on Wall Street and banks after the financial crisis. There has already been considerable talk about rolling back much of the Dodd-Frank Act of 2010, as well as the Volcker Rule that is intended to prevent Wall Street firms from engaging in proprietary trading. Already, the acting chairman of the Securities and Exchange Commission, Michael Piwowar, says his agency has stopped writing the rules and regulations mandated by Dodd-Frank - more than 20,000 pages so far - in anticipation of the confirmation of Jay Clayton as the commission’s new chairman. There is little doubt change is coming. But no one seems to be talking about whether Wall Street banks will again be able to engage in what has historically been one of their favorite pastimes: getting bigger through mergers and acquisitions. We could be in for an M&A boom across sectors not just Financials.
"Valeant Bet Was a ‘Huge Mistake," Hedge Fund Chief Ackman Says. It is rare that William Ackman, the brash activist investor, apologizes for anything. As a successful hedge fund manager, Mr. Ackman has made billions of dollars for himself and his investors with bold and counterintuitive bets. But this week he conceded that his firm’s biggest wager yet - on Valeant Pharmaceuticals International - was “a huge mistake” that has cost his hedge fund firm, Pershing Square Capital Management, “a tremendous amount.” “I deeply and profoundly apologize,” Mr. Ackman added in an annual letter to investors. It was an unusual moment of contrition for Mr. Ackman and a stark contrast to his emphatic support of Valeant in recent years. In the bigger picture, this event is just the latest of many recent developments pointing to troubling times for hedge fund managers as more and more investors turn to do-it-yourself and/or ETF investing.
BMR Companies and Commentary
Visa (V: $89, flat)
Samsung Electronics announced a strategic partnership with Visa to help bring Samsung Pay to online merchants. Starting later this year, Samsung Pay users will be able to shop online at hundreds of thousands of merchants around the world where Visa Checkout is accepted. The partnership just goes to show everybody in payments relies heavily on Visa.
Samsung Pay’s simple, secure checkout experience using fingerprint authentication gives users a more streamlined online shopping experience, eliminating the lengthy process of adding their payment card data, billing or shipping details each time they shop. Users with fingerprint authentication-enabled Samsung devices will be able to click the Visa Checkout/Samsung Pay co-branded button and touch the fingerprint sensor and the payment will proceed instantly, without needing to enter a user name and password for each purchase.
How cool! The days of filling out long forms or remembering usernames and passwords to make online purchases are continuing to wind down, as options like Visa Checkout’s open platform become accessible on hundreds of thousands of merchant sites, and companies like Samsung see the value in simplifying the process for both consumers and merchants.
BMR Take: Visa trades at 26x the consensus estimate for this year’s fiscal EPS of $3.45. Take a look at this 5-year chart from Yahoo. Where do you think they are headed in 2017/8 and beyond?
Amazon (AMZN: $887, +5%)
Amazon is expected to enter the Australian market soon. Estimates call for this region to eventually contribute upward to $15 billion of sales to Amazon’s top line, which compares to this year’s sales tracking to be around $165 billion for the company.
What is great about Australia for Amazon? Online sales will account for just 12.5% of Australian retail sales by 2025, up from only 7% in 2016. In other words, Australia is just barely into the online sales phenomenon. We are likely heading to online sales being greater than 25% so there is just much growth runway ahead for Amazon in Australia.
What will be interesting to watch is what Amazon’s entry into Australia means for local retailers. Could it be an imminent disaster? Certainly, many local players will have to adjust to smaller store footprints, change pricing, and improve their customer engagement.
BMR Take: Amazon trades at 125x the consensus estimate for this year’s fiscal EPS of $7.09. It’s a big valuation, but growth is exceptional. EPS was a loss in 2014, $1.25 in 2015, and $4.90 in 2016 and now we see estimates for $7.10 in 2017, $12.35 in 2018, and almost $20 in 2019.
Consensus Ratings for Amazon
4 Hold Ratings, 45 Buy Ratings
Targets:
3/30/2017 Loop Capital $1,100
3/29/2017 Cantor Fitzgerald $970
3/28/2017 Stifel Nicolaus $1,025
3/17/2017 Pacific Crest $895
Apple (AAPL: $144, +2%)
In January, Forbes reported that a White House advisory panel issued a report recommending that the U.S. strengthen protection of the Semiconductor industry, especially against threats posed by Chinese policies to dominate the sector.
Then in March, Apple discussed publicly that the Japanese government is likely to ensure Toshiba is acquired. Prime Minister Shinzo Abe recently met with President Trump to discuss among other topics this one. There are now swirling talks that Apple is going to buy part of Toshiba. The deal could be executed for as much as $18 billion.
What does it all mean? Apple farms out their production for Macs, iDevices and accessories so that they can focus the bulk of their investments on software and engineering companies, setting up R&D centers around the world and building out new flagship Apple stores. We very well might be looking at the early signs of Apple soon making many of their products in the United States. Exciting.
BMR Take: Apple is again setting new all-time highs this week. The stock trades for just 15.5x this year’s consensus EPS estimate of $9.25. We are still seeing healthy EPS growth from Apple, as seen in the consensus forecast for EPS of $10.35 in 2018 and almost $11 in 2019.
Microsoft (MSFT: $66, +1%)
Last October Microsoft released the preview of Azure Analysis Services, which is built on the proven analytics engine in Microsoft SQL Server Analysis Services. With Azure Analysis Services, you can host data in the cloud. Users in your organization can then connect to your data models using tools like Excel, Power BI, and many others to create reports and perform ad-hoc data analysis. This is exciting stuff for the business community. You no longer need to run a big back office. You have Microsoft Azure!
Well, just this week, Microsoft announced that Azure Analysis Services is now available in two additional regions: Japan and the UK. This means that Azure Analysis Services is now available in the following regions: Australia, Canada, Brazil, Southeast Asia, North Europe, West Europe, the US, Japan and the UK.
BMR Take: Again a new all-time high for Microsoft this week as the cloud is taking over and Microsoft Azure is one of the top players. The stock trades at 21x this year’s EPS estimate of $3.10 though estimates call for EPS of $3.50 in 2018 and $4 in 2019.
Tesla (TSLA: $278, +6%)
Earlier this week, Tesla announced that Chinese Internet firm Tencent had acquired a 5% stake in the company for $1.8 billion. The cash infusion is good news for Tesla’s financial health, and the company’s growth prospects in the region.
In a recent filing, Tesla said that 2016 sales in China were $1.06 billion. That’s roughly a quarter of what the company made in the U.S. last year. And while the China figures represent significant growth from 2015, it’s still well below what CEO Elon Musk once imagined. In a 2014 interview with Bloomberg, Musk projected that China could eventually become the electric-car maker’s largest market. Admittedly, that day is a long way off, but we are moving closer and closer.
One big hurdle left to clear in China for Tesla is market share. According to CleanTechnica, 352,000 electric car sales were registered in China last year, which is nearly half of all plug-ins sold worldwide. Tesla, however, is the underdog. Despite being the best-selling foreign electric vehicle manufacturer to crack the Chinese market, the company only had a 3% share in 2016. Plenty of room left for improvement to drive more growth.
BMR Take: Tesla is selling cars in China like hotcakes. China LOVES Tesla and Elon Musk. We are excited to see the company make some progress in the attractive China market. The company is still losing money, basically because they are not making cars in mass quantities yet, so the extra money raised from the 5% stake sold is a welcomed boost of cash on the balance sheet. Tesla ended last quarter with over $8 billion in debt on total assets of $23 billion, a definitely elevated level.
Splunk (SPLK: $62, +2%)
An activist may have just shown up at the Splunk table. A notable language change in Splunk’s 10k filing was noticed this week. The new disclosure alerted investors to possible activist involvement in company operations.
The 2017 10-K included following phrasing absent from the previous year’s filing: "From time to time, public companies are subject to campaigns by investors seeking to increase short-term stockholder value through actions such as financial restructuring, increased debt, special dividends, stock repurchases or sales of assets or the entire company. If stockholders attempt to effect such changes or acquire control over us, responding to such actions would be costly, time-consuming and disruptive, which could adversely affect our results of operations, financial results and the value of our common stock. These factors could also make it more difficult for us to attract and retain qualified employees, executive officers and members of our board of directors."
BMR Take: The added language essentially fulfills the company’s legal obligation to warn investors of activist interference. So we would be in a for a nice catalyst here. We really like Splunk. All anybody ever talks about now is cybersecurity. The company has $1 billion in cash and just $100 million in debt. Consensus estimates call for meaningful growth from $0.40 of EPS last year to $0.60 this year and $0.90 next year.
Shopify (SHOP: $68, -1%)
There was a whirlwind of poor press circulating on the company this week. First of all, a research firm downgraded Shopify to a strong sell to reflect negative estimate revisions following an unimpressive full-year 2017 outlook and growing near-term headwinds. This is just near-term noise. We are focused on the longer term big picture, which is very attractive for Shopify. In particular, many investors are asking the question if it would make sense for Amazon to acquire Shopify. After all, the market cap is only $6 billion. This would be a rounding error on Amazon’s balance sheet.
Shopify offers an easy-to-use multi-channel commerce platform that targets small and medium-sized businesses. Its 2016 revenue was $390 million. This would be a bolt-on acquisition for the Amazon Web Services (AWS) business if the rumor is true. As far as what Amazon or another buyer might get for a bid of $7-8 billion or so, the Shopify website showed that more than 380,000 people have sold over $29 billion using Shopify. The service allows small and mid-sized businesses to fully customize their online stores and to add new sales channels, while managing unlimited products and inventory and tracking sales.
BMR Take: We are not worried that the stock took a few points of pullback this past week. This is a long-term investment that will pay off big in five years. EPS is expected to go from a slight loss this year of $0.18 to something like $1.25 by 2020. Given all the potential of Shopify’s technology and the earnings ramp set to occur, we remain excited about the future for this company.
Upcoming Economic News
It is a very quiet week ahead for economics news. Stay tuned for more economic news next week.
A Letter from a Reader
To: The Bull Market Report
From: Arthur Weed
Twilio, First Solar and Ferrellgas were all recommended at the high end of the price range. Shopify also is at the high end of the range in this market. Sometimes riding the market out for lower prices is a good option. I just prefer to watch for weakness and then go for it.
Hi Art –
OK, I understand. We all have our personal philosophies. I like to shoot for the fences with some of my assets. I missed Microsoft at 3 cents. And Apple at 11 cents . But I got AOL at $1 in the 90s and it went to $71. And I got Iomega at $17 even though the low was $3 for the year and it went to $330.
The facts:
Twilio was added after it dropped from its high of $71, and in fact, it had a fairly sharp drop from that level to $52 where we added it.
First Solar was added at $63 and a month later was $73. Revenues have fallen sharply.
The average price of Ferrellgas for the last 23 years is around $20. At $17 we thought we had a nice discount and an opportunity for it to go to $20 and then $25.
Our thoughts:
--- We believe Twilio will be a huge player in the internet communications marketplace. And we believe the stock can triple or more from $50.
--- First Solar has been a leader in this business for decades and until recently has the revenue to go with it. Unfortunately, we have to wait until 2019 for this one to play out. And that is not guaranteed, but we believe management can do it.
Note: First Solar was given a hold rating at JPMorgan Chase. They now have a $38.00 price target on the stock.
--- Ferrellgas has been a leader in the natural gas business forever. We didn’t know their big acquisition would go down as one of the worst in Wall Street history.
--- Shopify is the leader in e-Commerce by a wide margin and has big growth ahead of it. It is a potential Microsoft-like opportunity as the world is moving to mobile every single day, every week, every month, every year. We wish we had discovered it at $25 or $50. But if the stock goes to $100 and then $150-200 we won’t mind too much. We think this is quite possible over time.
Todd Shaver
A Letter from a Reader
From: Chet Malek
Sent: Thursday, March 30, 2017 9:07 AM
To: info@bullmarket.com
Subject: SNAP and Twitter
Todd – Do you have any thoughts on SNAP? Do you like Twitter better (I assume you do)?
Hi Chet –
We do not like Snap. They may surprise me and go to $50 and $100 but at the moment they are WAY behind where Facebook was when Facebook went public. And if you remember, they went public at $37, hit $43 that day, closed at $37 and then proceeded to go down to $16 in the next few months. Now the stock is at $142. BUT Facebook had big revenues and big profits at that time. Snap has good revenues but super negative earnings – They lost $515 million last year and $380 million in 2015! And they are a niche business unlike Facebook which covers it all.
We do like Twitter. One day they will figure it out. And one day someone will buy them at a 40% premium. If I were a gambling man I would buy 2-year LEAP options with a strike price of $25 or $30, cheap. [This is not for all. Consult your broker. High risk here.]
We really like Twilio – good business concept; strong revenues last quarter. No profits yet. But profits will come if the revenue is there, and it is.
Todd Shaver, Founder and Editor in Chief
Twilio Extends Relationship with Amazon
Twilio (TWLO: $29, flat) announced a further step in their relationship with Amazon. They said: Amazon Connect will use Twilio's programmable APIs to provide enhanced capabilities for customers.
(What are APIs? An Application Programming Interface is a set of subroutine definitions, protocols, and tools for building application software. In general terms, it is a set of clearly defined methods of communication between various software components. A good API makes it easier to develop a computer program by providing all the building blocks, which are then put together by the programmer. An API may be for a web-based system, operating system, database system, computer hardware or software library.)
From their public announcement Tuesday: Twilio, the leading cloud communications platform company, today announced support for Amazon Connect, the newly announced cloud-based contact center service from Amazon Web Services (AWS). Twilio's Programmable APIs will enable a range of new capabilities, including integrating phone intelligence lookup to personalize Amazon Connect contact flows, enhance customer contact details, and follow up with post-call surveys via text.
"We're pleased to further extend our work with Amazon Web Services by helping to power and further enhancing the capabilities of Amazon Connect," said Twilio CEO and co-founder Jeff Lawson. "Supporting the continued advancement of the contact center to its more agile future in software, frees developers and businesses from the legacy approach to contact centers -- an approach that simply can't keep pace with customer expectations today."
The announcement furthers the long-standing relationship between the two companies. Note that Twilio is built and globally deployed on the highly scalable AWS Cloud. Some say that Amazon can do what Twilio does and that all this hype is bad news for Twilio. We say the opposite. We think there is a symbiotic relationship here that appears to grow stronger and stronger each month.
Here’s what the company includes in their press releases:
About Twilio
Twilio's mission is to fuel the future of communications. Developers and businesses use Twilio to make communications relevant and contextual by embedding messaging, voice and video capabilities directly into their software applications. Founded in 2008, Twilio has over 650 employees, with headquarters in San Francisco and other offices in Bogotá, Dublin, Hong Kong, London, Madrid, Mountain View, Munich, Sweden, New York City, Singapore, and Tallinn [the capital of Estonia.]
Alphabet (GOOG: $830) is now covered by Barclays. They set an "overweight" rating and a target of $1,065. Our target is $900 but when that level is hit we fully expect to raise it to at least $1100. The only question is when.
The High Yield Corner
By Michael Foster, Special to The Bull Market Report
We start this week’s high yield summary with the GDP report. The headline news looks good: GDP grew at 2.1% versus 2% in the fourth quarter. Politically-minded Americans may want to dismiss this (and who isn’t politically minded these days?), arguing either things will get better or worse under Trump, depending on the flag they bear. We would suggest resisting the urge to devolve the topic to partisan bickering, because the details under this report are very important because they signal where exactly we are in the credit cycle. This, in turn, is important for one of the world’s biggest credit markets: U.S. corporate bonds.
The mainstream press focused on a couple of dynamics under the headline number, although both are relatively unimportant. A big theme, according to journalists, was consumer spending. This rose 3.5%, a sharp upwards revision from 3% previously. Since consumer consumption is the biggest driver of demand in the U.S., which in turn drives demand for the big industries abroad (manufacturing in China and Germany, exporting in Hong Kong and Singapore, commodities in Latin America, and so on), this is good news.
But it’s actually not the most important bit of good news from the report. The National Income and Product Accounts (NIPA) data, which makes up part of the GDP, gave significant and good surprises that have much more predictive power than consumer activity. According to the NIPA release, corporate profits rose after declining for three years. The “corporate profits” metric, jumped over 9% on a year-over-year basis in the 4th quarter of 2016, a sharp acceleration from the 2% increase seen in the 3rd quarter. Some economists have already said the so-called “corporate profit recession” has ended.
This decline, which was partly a result of the crash in commodity prices and partly the result of cash-strapped consumers pulling back, was a primary reason why the S&P 500 got more expensive. Because stock values are measured by dividing their current price by their earnings over a one-year period (the “price-to-earnings” ratio), stock values climbed higher and higher because profits were falling lower even as stock prices were going up. This caused the S&P 500 P/E ratio to shoot up to over 26 by the end of March, about 50% higher than its historical average. That definitely looked and smelled like an overbought market, but investors held their noses and bought stocks anyway.
We’re here to tell you that you can stop holding your nose. While the corporate profits measurement is not identical to the way S&P 500 companies report their earnings, they’re close enough. And with a 9% jump, that means the S&P 500’s one-year forward P/E ratio is less than 20, a very reasonable level.
At the same time, this increase in earnings is extremely good for corporate bonds, BDCs, and REITs for similar reasons. Let us go through these one by one to explain why.
Firstly, corporate bonds. The SPDR Barclays High Yield Bond ETF (JNK: $37) had a good week (up 1%) thanks in no small part to the GDP data, although investors are continuing to recognize what we have been saying for a long time: the default risks are over and will decline significantly because corporate profits are going up, meaning firms will have enough cash to pay their debts. What does this mean? All the risks that were priced into junk bonds back in 2015 are evaporating but the price hasn’t fully recovered on a real adjusted basis. Great news - this means we can buy junk bonds. But we can’t be indiscriminate about it. Well-managed funds like the PIMCO Dynamic Income Fund (PDI: $29) are ideally positioned to outperform. Last year PDI paid out a special dividend well over 4% of the fund’s value, bringing the annualized yield to over 13%. With the strength in junk bonds this type of return will be even easier for this fund to do this year, making it an obvious strong hold even though it is priced at a premium.
A similar rationale exists for why BDCs shot up this week: more corporate profits mean less concern companies will default on their debts. The UBS BDC ETF (BDCS: $24, up 2%) had an incredibly strong week as a result. However, we do not see this as a good enough reason to buy BDCs, especially the larger cap ones that are facing growing competition from banks that are increasing their middle market business lending practices. The market is cheering the macro conditions for BDCs, which are clearly much better than a year or two ago. However, the market is not taking into account the industry conditions for BDCs, which is more competitive and thus will force some BDCs to look for lower yielding or higher risk loans. This makes us cautious on BDCs just as we are more positive about their lower yielding competitors - namely, financial stocks.
Finally, let’s talk REITs. In the simplest sense, higher corporate profits mean more room to raise rents for industrial, commercial, and infrastructural tenants. Retail and commercial REITs make up a healthy chunk of the SPDR Dow Jones REIT ETF (RWR: $92, up 1%), but it also plays into the wheelhouse of The Bull Market Report’s favorite REITs.
Digital Realty Trust (DLR: $105, up 2.5%), Omega Healthcare Investors (OHI: $33, up 2%), Kimco Realty (KIM: $22, down 2%), Government Properties Trust (GOV: $21, up 2%), and Care Capital Properties (CCP: $27, up 6%) are all exposed to corporate and government tenants whose ability to tolerate raising rents is going up as corporate profits rise. This doesn’t mean the market is irrationally exuberant about the sector like they were in mid-2016, which again makes this a good sector to be into, especially if you’re choosing firms relying on commercial rents.
The market is stronger than the fearmongers would have you expect, and that strength is particularly acute in the high yield universe. It’s a great time to buy income.
Funny – as we write this last sentence above we think of all the folks out there who are thinking: How can I buy yield when interest rates are going to go up which means prices will go down? Well, we at The Bull Market Report don’t believe rates are going that much higher. In fact, if anything, we think rates could go lower, despite the Fed’s best wishes. Besides, as noted above and every week that we write this report, you surely notice that we are writing about strong companies with strong management who are well-aware of the world of interest rate risk. We believe in management of the companies we follow. Look at Annaly (NLY:$11.11). They paid a 30 cent divided this week (11% annualized), and the stock was flat. That’s a 2.7% gain for the week in our book. The stock is up over 10% from its low in December! And they’ve been doing this for 20 years.
Good Investing,
Todd Shaver
Founder and Editor in Chief
The Bull Market Report
Since 1998
October 7, 2016
by Todd Shaver | Oct 7, 2016 | 6pm News Flash
Twitter (TWTR: $19.90) fell through our stop of $24 on Thursday and thus we are out of the stock. We added the stock at $18 in January, it fell to the $14 level in February, rallied to $19, then fell to the same level again in May and June and you have watched it rally to the $25 level on Wednesday, based on the rumors of a buyout, those same rumors we espoused in January.
If the stock gets bought out from here, it could shoot to $25 or $30. However, if all the buyers pass, the stock could drop to $14 again, or below. What happens from here is just impossible to say, so we are out.
September 28, 2016
by Todd Shaver | Sep 28, 2016 | 11am News Flash
Twitter (TWTR: $23.40) has had a strong run these past two weeks. There are rumors swirling around about various firms buying the company and as we said in the newsletter Monday, there are many scenarios that could take place to cause the stock to move dramatically in either direction.
If more suitors join the fray, the stock could shoot higher. If they all drop, out the stock could reverse course and drop down to $18 or lower.
So we thought you may wish to consider a GTC* stop order if you still have the stock. A stop order as you may know already, will execute if a certain price is reached. You can have a buy stop or a sell stop. A buy stop is used if you want to acquire more shares if the stock goes higher. You would use this so that you don’t miss out on a stock if it goes higher as you expect it to do. A sell stop (which used to be called a stop loss) is used to get out of a stock if it goes lower.
*GTC – Good ‘Til Cancelled
With Twitter at around $23, you can place an order below this price that will execute when that price is reached, say $22, or $21. Thus, if the stock goes to $22 your stop becomes a market order and you are generally executed at your price. If the stock is headed to $18 or lower, this will get you out without giving back all the gains you made in the past few weeks. We think this is such a good idea, we are going to place an imaginary stop (since we don't own any of our stocks) at $22.45, thus protecting our gains.
One caveat – stops work about 99.9% of the time. Where they don’t work is when the stock is halted and the stock reopens at a price below your price. For example, if you have a stop at $22 and the stock opens at $19, that’s where your order will be executed. Not pretty. Why would that happen? Well, if there was some bad news that came out overnight causing investors to rush to the exits, this could cause the stock to plummet. But again, this is rare.
Good luck with your Twitter. And good investing overall.
September 25, 2016
by Todd Shaver | Sep 25, 2016 | Weekly Newsletter 7pm Sunday
The Week Ahead
No rate hike! Stocks rallied. The Fed pushed out the potential for another rate hike to December. With all the political and economic uncertainty between now and then, however, the odds of a rate hike are only 50% currently. The slow methodical pace of interest rate normalization removes what had been a lid on equity prices and we should see indices move much higher in the months ahead.
The Presidential election is quickly approaching. The first round of debates is tonight. We will be watching closely. It could be that this political cycle is more disruptive to the markets than the Fed. Either way, we still think there are good opportunities to make money for stock pickers. This week we highlight Twitter, Ferrellgas, UPS and PayPal.
Here is How Last Week Progressed
Monday (9/19) - S&P 500 -0.6%
--- The week started off sluggishly.
--- New reports revealed that the US federal debt is growing at the fastest rate since 2008.
--- Legendary investor, Steve Eisman, who called the mortgage crisis and is the headliner in the movie “The Big Short”, revealed publicly what the next big short is: “When the world loses confidence in central banks and their quantitative easing policies.”
--- We observed more signs of financially leveraged earnings growth, as just one month after completing its largest bond offering ever, Microsoft announced the approval of an incremental $40 billion share repurchase program equal to roughly 9% of its outstanding shares. The bond sale was $20 billion, the fifth largest deal ever. (Verizon was the largest at $49 billion in 2013.) They sold it in seven tranches, going out to 40 years at just 4%. The firm will use some of the proceeds for the $26 billion purchase of LinkedIn.
Tuesday (9/20) - S&P 500 flat
--- Another day of standing in the same place.
--- Wells Fargo was on the hot seat for improper practices that enabled the reporting of higher than reality cross sale figures. The bank was blasted by the media and policymakers not just for the illegal behavior, but also for firing 5,300 low level employees rather than senior business leaders.
--- JP Morgan published research agreeing with Donald Trump’s views that the Fed is political and accused Yellen of distorting asset markets and blowing bubbles.
Wednesday (9/21) - S&P 500 +1.1%
--- Stocks jumped higher on news from the Fed. No rate hike. The Fed now sees only three rate hikes through the end of 2017 and also cut their long-run US GDP expectations.
--- JP Morgan’s head quant proceeded to throw in the bearish towel now seeing nothing but smooth, levitating markets ahead.
--- Yahoo confirmed that over 500 million user accounts were hacked, believed to be a foreign country-backed.
--- Research surfaced on Fannie Mae and Freddie Mae raising more concerns about the FHA’s decision earlier this year to make it cheaper for first-time home buyers to get into the housing market with sub-680 credit scores
Thursday (9/22) - S&P 500 +0.6
--- Big up day today.
--- The NY Fed released new estimates cutting its 3Q and 4Q GDP estimates to under 1.5% from 1.5-3.0%.
--- Germany's largest market research institute suggested that things for the iPhone 7 are not as great as the carriers would like the world to believe. According to the note, Apple iPhone units showed that launch weekend sales for iPhone 7 were down by 25% YoY compared to the first weekend for the 6S.
Friday (9/23) - S&P 500 -0.6%
--- Focus started to shift to Monday’s first presidential debate. News broke that most of Hillary Clinton’s deleted emails, subsequently recovered during an FBI probe into her email server abuse, won’t be made public until after Election Day, according to a timetable set Friday by a federal judge.
BMR Companies and Commentary
Twitter (TWTR: $23, +18%) CNBC reported that the company has received expressions of interest from a number of companies considering whether to make a bid and the board is said to be largely in favor of a deal. There is no imminent sale though Twitter has engaged with potential suitors looking at the possibility of a deal. Those suitors are believed to be Salesforce (CRM: $70) and Google (GOOG: $787), among others. Twitter is working with Goldman Sachs to explore the sale. Sources say that talks are picking up momentum and that a deal could result by year end.
In recent weeks, co-founder Ev Williams said in an interview with Bloomberg TV that the company has to weigh all options amid ongoing speculation it’s a takeover target. Williams initially declined to comment when asked by Bloomberg whether Twitter can remain an independent company. He went on to say, “We’re in a strong position now, and as a board member we have to consider the right options.”
CEO Jack Dorsey, the co-founder who took the top job again last year, is trying to reshape the company’s reputation and product mix to draw a more mainstream audience. The company is cutting deals to stream more live events, from sporting matches to political debates, and this year acquired an artificial intelligence startup to make live video look more professional.
BMR Take: The current situation feels eerily similar to LinkedIn, which was eventually acquired by Microsoft at a 50% markup. We’ve mentioned this many times recently: We believe there are two opportunities here. The first is for the company to start the turnaround, growing users and revenues and profits. The second is for a firm with a ton of cash or valuable stock to swoop in and pick up the company. Google? Apple? Facebook? A Saudi Prince? A Steve Ballmer with all that Microsoft money?
Now – If you own the stock, what should you do from here? One of two things will happen from here: the stock will go higher or it will go lower. If the bidders go away, the stock will plummet back to $18 or lower. It will go higher if there is a bidding war. It might go to $25 or $30, even $35. So it’s a tough call. We can’t help you on this one. If we were to guess, we would say it would go higher, because we don’t think Salesforce will be the only buyer to surface.
We think the stock will go higher over time because management is working diligently to shake things up and make things happen. But this could take a year or two. Good luck with your decision.
Ferrellgas Partners (FGP: $16.83, -1%)
We are diving deeper into our recently added position, Ferrellgas. In particular, we researched the dividend coverage and risk of a dividend cut.
As we mentioned in our Research Report last week that Ferrellgas is a multi-billion publicly-traded Master Limited Partnership. What we didn’t mention is that there is concern about the prospect for maintaining the dividend. The $0.51 quarterly dividend amounts to $2.05 of annual payout to shareholders, but consensus EPS estimates call for a loss of $0.27 this year and a gain of just $0.40 next year. Accordingly, to continue making the payment, Ferrellgas will have to borrow money.
The bull case scenario for Ferrellgas calls for much greater than $2 of earnings power assuming crude recovers and all the benefits of the Bridger acquisition are realized. This would result in more than 100% dividend coverage.
However, should the operating backdrop continue to be challenging, we expect Ferrellgas to be able to weather the storm for at least several more quarters. Both Moody’s and Standard & Poor’s have a single B credit rating on Ferrellgas, which is not the junk status of C that could be more problematic.
While we see a path forward to once again having full dividend coverage, they are not there today and that carries risk. The current dividend yield of around 12% compares to a historic level of 7%. The market is already pricing in a dividend cut to around $1.25 from $2.05. This would not be unexpected.
BMR Take: Ferrellgas has maintained its dividend so far through this downtown. Many of its peers cannot say the same. We think this reflects the high quality of the Ferrellgas franchise and we think long term shareholders are getting in at very attractive entry points at today’s prices.
UPS (UPS: $109, +2%) We care about UPS, but that doesn’t mean there is no value in keeping an eye on how FedEx (FDX: $174, up 9%) is doing. There are a lot of read-throughs from one business to the other, as each is dealing with the same operating backdrop. Accordingly, we highlight some takeaways from the quarterly results out of FedEx earlier this week.
The bottom line is that core Express and Ground business was rock solid. Revenue increased slightly as improved base yields, higher package volume and increased freight pounds more than offset lower fuel surcharges and unfavorable currency exchange rates. FedEx Ground average daily volume grew 10% in the first quarter, driven by e-commerce and commercial package growth.
Additionally, pricing power is alive and well. As previously announced, effective January 2, 2017, FedEx Express will increase shipping rates by an average of 4%, while FedEx Ground, FedEx Home Delivery and FedEx Freight will increase shipping rates by an average of 5%.
BMR Take: UPS is scheduled to release earnings about a month from now, October 27th. The consensus EPS estimate is $1.44. UPS has beat consensus in each of the past eight quarters. All looks good for the quarter. We really like the stock for the short term and certainly for the long haul.
PayPal (PYPL: $40) PayPal and Visa recently partnered to form a deal that extends PayPal’s reach offline, and one that some analysts say can benefit retailers in the long run. The new deal, which both companies announced separately during last quarter’s earnings results, is twofold. First, PayPal will no longer steer its users away from linking their accounts to Visa credit cards, as it currently does. Second, PayPal customers will be able to use Visa’s contactless mobile checkout technology, Visa Digital Enablement Program, to pay in retail stores with their smartphones.
Now that some time has passed, investors and analysts have been able to look deeper into the partnership. Here are some insights. The basic impact to the business model is that PayPal will be paying more to Visa per transaction, but in return benefit from a windfall of more volume through being associated with the Visa brand, resulting in incremental profits. Analysts are expecting anywhere of $10 to $100 billion of volume to run through PayPal resulting from the Visa partnership, where the initial impact may be modestly dilutive to earnings, but long term attractively profitable.
BMR Take: We see a compelling long term opportunity for PayPal in joining the ranks of Visa and MasterCard. While shares trade just over a 20 PE, PayPal’s ample war chest ($5 billion in cash, no debt and over $2 billion per year in free cash flow) could help drive EPS growth through share repurchases and accretive acquisitions. Add solid organic growth on top of that and you have a long term winner.
Upcoming Economic News
The focus will undoubtedly be on the Presidential debates this week. The debate continues over the health of the economy. Republicans argue there are signs of risk and much work to be done. The democrats argue Obama has led a great recovery since 2008 and the status quo is a safe path to stay on. What else is new? 🙂 Our take is that who the new president is, and what he or she attempts to do in the White House is uncertain and a long way off.
We do know this – the market hates uncertainty, so if anything, there will be a slightly negative pall overhanging the market. But this is nothing new. It’s been this way all year and will stay this way well into 2017 as the new president takes office and “attempts” to make changes. We put this in quotes because with gridlock in Congress, we really don’t see many changes ahead. Of course, things WILL change and things WILL surprise us. This is nothing new, and is par for the course.
Thus, we will continue to buy high quality stocks, and if you are afraid of anything that you just read here, or anything else that concerns you, we would suggest that you lighten up on equities, move to a larger cash position and if you wish to be in equities, look to the High Yield Portfolio for high dividends and more secure investments.
Words from Gary Jefferson
First Vice-President, Investments
UBS Securities
The days of buying a good company and watching it hit its earnings projections and move steadily upward over time are long gone. So are the days of a broadly diversified portfolio being a sufficient risk-management strategy. It's all been replaced by high speed, shadow traders and hedge fund lemmings who have decided that investment fundamentals no longer matter. They (along with the Fed) have changed the investment landscape into an environment which is susceptible to large market shifts in either direction – what they call a "risk-on, risk-off" market. Just look at the past year – China unexpectedly devalued the yuan in August 2015; the Bank of Japan moved one of its policy rates below zero in 2016; and of course Brexit this past June. Each time, there was a huge spike in volatility accompanied by a wipe-out of billions of dollars of market value, followed almost as rapidly by similarly strong rallies. We are not saying that good stock selection or proper diversification no longer matter – they still do. However, with a risk-on, risk-off environment, investors absolutely have to adjust their emotions and understand the consequences of "sequence of returns".
Half a century ago James P. O'Shaughnessy said, "The four horsemen of the Investment Apocalypse are fear, greed, hope and ignorance. Only one is not an emotion – ignorance. These four things have accounted for more losses in the market than any recession or depression, and they will never change. Even if you correct ignorance, the other three will get you every time..."
Thus, knowing that emotions can be very tough on investment returns, it's even that much more important to understand it in a risk-on, risk-off environment. Today, many of the major investment firms are, unfortunately, not exactly helping with the emotion issue. UBS recently put out a big warning for the second time in a few weeks, telling investors that it expects the S&P 500 to drop by 8-10% as soon as October. The bank says that the recent move sharply higher in bond yields is a big trigger for a global stock selloff. Deutsche Bank has just made a bold call saying that all investors need to know about. The bank basically is saying that the world is fast approaching an inflection point which will flip a switch and deliver heavy losses to bondholders with rates rising sharply. And, Goldman Sachs recently put out a warning to investors to expect a sharp fall in equities. Yet, these same firms and most other major institutions we follow have other analysts or chief strategists who are calling for the S&P 500 to end the year with a new all-time high. It's an advisory tug-of-war that can be very tough on emotions, especially with the 24/7 media adding fuel to the fire.
There is little doubt that investing will continue to be an emotional roller coaster ride. Regardless of any huge spikes or declines in prices, try to remember that in the end it is all about earnings. If your dividend stocks drop, for example, it's no different than the Labor Day or after-Christmas sales that happen each year. At some point in the future, you will be glad for the opportunity to have bought more shares. Don't beat yourself up because you didn't take a profit or you didn't buy something when it went on sale. Don't panic when everything in the media is "doom and gloom." In other words, if you can understand that it is your emotions causing you to react, rather than fundamental changes to your long-term investment goals, you should be much more capable of achieving those goals by avoiding the three horsemen, fear, greed, hope, that O'Shaughnessy wisely said, "will get you every time."
An Interesting Subscriber Comment
We had an email exchange with a subscriber. Here’s how it went:
He said: I know you cannot report on everything, and I really enjoy your reports, but do you still believe in Mazor and KMI? Just curious if moving money out of those, and into some of your more recent recommendations, might be a better financial decision.
Ron Shepro
We said this:
Hi Ron –
Well, we are just getting started with Mazor (MZOR: $22, up 2%), so no, we would not move from this.
KMI (KMI: $22, flat) – Long term hold.
After we went back and forth for a few days Ron said this:
Thanks for the great advice, I really appreciate what you do for all of us. Who needs Cramer.
Thank you,
Ron Shepro
Sales/GM | Buddy’s All Stars, Inc.
Phoenix, AZ
BMR Take: Gotta love it. Thanks for the kudos, Ron. Good investing!
The Apple Corner
From UBS: Valuation: Raise price target to $127
We are raising our target price from $115 to $127 based on higher F17 EPS and target P/E of 14x up from 13x. Our confidence in iPhone 7 growth grows. Apple's discount to the market of 30% should narrow closer to its five-year average of 20%, which would be 14x.
Increased procurement could reflect demand or just timing
The UBS Asia tech team's latest estimates show iPhone 7 procurement plans for F17 have increased from 80 million to 90 million. This figure is higher than the iPhone 6, which fits with our thesis. We think Apple has become more conservative in procurement to avoid over-ordering.
BMR Take: It’s simply business as usual... business as normal at Apple. They are selling iPhones like hotcakes and the world continues to use mobile more and more each day. I know you have seen how the 20- and 30-somethings use the iPhone. They are on the phone constantly. Do you know any Samsung users? We think we know one person. They are very few and far between. Apple has a LOCK on the smart phone business and this lead is only going to grow. And every one of them is buying apps and buying music, and is wearing out their phone each day, which makes them candidates for an upgrade.
Apple is going to set a new all-time high. When? You tell me. Write me with your prediction at Info@BullMarket.com. If we get more than 100 entries, the closest to the date gets a NEW APPLE WATCH SERIES 2!
More Apple News
Last week news broke that Apple may be interested in acquiring hyper car manufacturer and Formula One team McLaren. Could this be there big move into self-driving cars?
McLaren knows how to build cars. Their engineers have found unique ways to put mind-boggling capabilities in the hands of regular car owners. As for the potential deal with Apple there are plenty of synergies, both business-wise and culturally: The automation, the engineering, not to mention a potential tax advantage for Apple with McLaren being headquartered overseas. By acquiring this company Apple could solidify itself as a major player in the autonomous car space.
Apple is sitting on $232 billion in cash while McLaren is valued at around $2 billion. Meaning Apple has enough money to buy them 100 times over right now. The deal makes sense if you think about it. Why try to reinvent a car from scratch (hello Tesla!)
As noted above, the stock’s been on a run along with the rest of the market. Today it’s trading at $113 after dipping to the low 90s during the summer.
Annaly Capital Mortgage (NLY: $10.79, up 3%) had a great week. They announced their latest dividend of 30 cents, payable on Halloween. The ex-dividend date is Wednesday so the stock will open for trading that day 30 cents lower. Don’t be alarmed. The 30 cents is generally made up over the following 3-4 weeks. It’s been like this for years. In fact, since inception in 1997, Annaly has paid over 10% per year, year in and year out and this year is no exception.
Note that the “world” out there always panics about Annaly when there is a hint of higher interest rates, because everyone thinks that they will have to pay more to finance their purchase of the assets that they buy. And the “world” sells off the stock and the stock goes down. This actually happened slightly over the past month, dropping from $11 down to $10.50 last week. But as always, the stock popped right back up again.
What people forget is that the Fannie and Freddie securities they buy in the future will pay a higher rate, negating the higher cost of funds, so it all works out in the end. The company will do just fine with higher rates. Besides, when rates rise they rise slowly. Sure, if interest rates jumped a full point or two Annaly would have some issues. But this very rarely happens. It’s generally slow and steady. So in our book, there is no need for panic. In fact, when this happens, it presents a buying opportunity, allowing you to buy more shares locking in those higher yields.
Microsoft (MSFT: $57, unch.) announced a stock buyback program of $9 billion. Thank you very much Satya! The current $40 billion buyback that they implemented in 2014 ends at the end of this year and the company gave no details about the new plan. Microsoft also increased its dividend payout by 8%, which investors always love. The company has $115 billion in cash, with long-term debt of $40 billion. With operating income of nearly $25 billion a year, their financial position is extremely strong, and it's not really a surprise that they keep coming up with share buybacks in the order of tens of billions.
HIGH YIELD CORNER
What an interesting week for the markets. The S&P 500 gained over 1% even including Friday’s weakness. The move is largely a result of strong macroeconomic data; jobless claims fell surprisingly; the Fed’s dovish policy seems to be staying in place; and Moody’s released a study showing strong fundamentals in America’s economy. So where does that leave high yield alternatives to normal equities?
Just about everything outperformed the market, with the exception of high yield bonds. The SPDR High Yield Bond ETF (JNK: $37) rose 1% for the week, a bit lower than the market. But up is up, and a steady increase is actually a good thing for the junk bond market. We’re still seeing bankruptcies increase and credit risks, especially in Energy, are still there. But oil rose this week, which is making those risks seem less bothersome for the time being, and that’s keeping money in the corporate bond market.
This blind flow of cash into corporate bonds means we need to be choosy when investing in corporate bonds. Diversified funds that incorporate junk bonds with other high yielding assets remain a better alternative until bankruptcy rates level off or oil climbs up past $80 per barrel. That price point is crucial, because even the smallest energy companies can be profitable and pay their bills if oil sells for that much. Sadly, we’re nowhere near that price point, which means caution is still in order.
So where do we go for yield and corporate bonds? The Bull Market Report still likes the Pimco Dynamic Income Fund (PDI: $28), which rose 1% this week. No matter; its 9% dividend yield is amply covered by investment income and the fund’s undistributed net investment income has risen to $1.34 for the fiscal year. In accordance with regulations, the fund will have to return much of that to investors by December. If the fund only gives $1 (an unlikely scenario since the fund is still earning in excess of its payouts), that would mean a special dividend of over 3% and an annualized yield of nearly 13%.
Imagine that - for every $1,000 invested in this fund, you’ll get $130 per year. Compare that to investing in the SPDR High Yield fund, which gives a paltry $60 per year. And the distributions of that fund have been declining as junk bond defaults have risen and yields on corporate bonds have fallen.
This demonstrates a key point: Index investing does not work when it comes to corporate bonds. Pimco has access to high quality payouts and sophisticated tools to manage funds, which is why the Dynamic Income fund has been paying annualized dividends over 13% for years - and why it will likely continue to do so. Hold this fund and enjoy the high income stream.
Now let’s turn to REITs. We’ve written at length about how this asset class is soaring in 2016, and that a correction was inevitable. That correction began in August, but it seems to have come to an end. After some steep declines, the SPDR Dow Jones REIT ETF (RWR: $99) jumped 4% this week. With that recovery, the fund is flat for the past month and up over 3% for the past 3 months.
Our REIT picks have done better. Digital Realty Trust (DLR: $98) rose nearly 6%, and is likely just the beginning. This company is exposed to cloud computing, and profits heavily from growth in that industry. Since cloud computing is expected to see double-digit annualized growth for the decade ahead, there’s no reason to think that some of that won’t flow to Digital Realty Trust. On top of that, this company out earns its dividend by a healthy margin and has a history of growing dividends. It’s tempting to cash out and profit from the company’s 58% year-over-year stock price growth, but hold steady- there’s a lot more growth to come, as this fund’s dividends will just keep going higher.
Importantly, Digital Realty Trust’s dividend is not going to be threatened by a cyclical downturn. Yes, in 2008-2009 we saw dividend cuts and bankruptcies in the REIT industry. But the growth in data storage and cloud computing didn’t stop. Even if we see the economy collapse, we’re still going to be using computers, using the internet, and transmitting data. The market doesn’t see Digital Realty Trust as a recession-proof REIT. But it is - and that’s why we love it.
Finally, let’s address municipal bonds. Munis are a great asset class for tax-free income and stability. The iShares National AMT-Free Municipal Bond fund (MUB: $113), paying 2.3%, is up 2% year-to-date and was never down more than 2%. That’s incredible stability, which is good for peace of mind. But there’s another advantage to municipal bond funds - because of their low volatility, they provide an opportunity to sell shares when necessary and to jump back in when possible. And when you’re in, you’re getting tax-free income that far exceeds what any bank or U.S. Treasury can offer.
That’s why we added the Nuveen Enhanced AMT-Free Municipal Credit Opportunities Fund (NVG: $16.05) to The Bull Market Report High Yield portfolio a couple months ago. This week, the fund rose over 1%. The yield has dropped a bit as a result, but is still nearly 6%. Remember, that’s tax free.
We’re actually not happy to see the strong price growth this week, although things could be worse. The fund is up slightly over the past three months, and down over 1% for the past month. What does all this mean? Simply put, it means now is still a good time to buy more. We still like this fund and recommend buying more for a high yield opportunity that also offers greater liquidity than other high yield options. If you have extra cash that you want to put into the market to get some income, this is an opportunity, especially if you think you might need to access that cash in the next few months.
Looking at next week, we will be keeping a close look at oil prices and the action in REITs. Both will have wide implications for the high yield universe as a whole, and may provide us with more buying opportunities. For now, enjoy your gains for this week.
Good Investing,
Todd Shaver
Editor in Chief
