March 23, 2025
by Scott Martin | Mar 23, 2025 | Weekly Newsletter 7pm Sunday
The Bull Market Report
Probably the Best Financial Newsletter in the Country
IN THIS ISSUE
Market Summary
The Big Picture
Netflix
C3.ai
VanEck Semiconductor ETF
Zscaler
Dexcom
iShares Oil & Gas Exploration & Production ETF
Range Resources
Ally Financial
Welltower
The Bull Market High Yield Investor
- Invesco Municipal Trust
Market Summary
We'll count this as a win. While our stocks still have a little ground to recover before we wipe out the last YTD losses and start moving forward again, at least we've started moving fast in the right direction. Broad market benchmarks, on the other hand, still look more than a little stalled, with the S&P 500, Nasdaq and Dow Industrials down 2-3% from where they were two weeks ago. What's changed in the world? Not much at all. Trade policy remains unsettled, the Fed is still on hold and earnings season is effectively over until the next cycle gets underway in mid-April.
However, the recent "flash correction" (seventh-fastest in history, we're told) managed to attract buyers back to a market that felt slightly overpriced relative to the amount of uncertainty out there. A few months ago, investors seemed confident holding onto stocks valued at 22X earnings. Now, while the outlook has weakened a little, investors seem willing to accept roughly 20X as a viable entry point. If that proposition holds in the longer term, this will go down in history as a bottom and not a hard ceiling on the market's ability to keep rallying despite all apparent threats.
After all, the collective corporate bottom line is not going down. It's only going up a little less fast than we hoped a few months ago. We'll talk about this in greater detail in The Big Picture but the executive summary really boils down to the fact that all the apparent threats haven't triggered any kind of earnings recession. All they've done is curbed the most enthusiastic growth forecasts. We're in more realistic territory now. And if investors will pull cash off the sidelines and pour it into stocks with the market at 20X, then that's the world we find ourselves in.
There are at least two key lessons here for BMR subscribers. First, our approach to diversification may superficially hurt us when the bulls are running at full froth, but the minute the market mood turns sour, a little extra exposure to income-oriented stocks and funds goes a long way. These investments rarely have a lot of growth on their side. The underlying businesses are steady cash generators but management is more focused on returning cash to shareholders than pouring it back into corporate expansion initiatives. As a result, while they're rarely sexy, they have a lot of staying power. Our Healthcare portfolio is up YTD. So are most of our REITs, most of our Financials and, in a shock to some, Energy. Yes, the Energy portfolio is up 5% YTD despite all the nattering about the world economy and falling oil prices. Never forget that in a true economic upheaval, it's strategically useful to have a stake in the companies that collectively keep the world's lights on and the trucks running. (We've been loving our SPDR Gold Shares for similar strategic reasons: up 15% so far this year!)
The second lesson is that over time the most dynamic companies will outperform. They rally harder in the good phases and while they might correct almost as hard in the downswings, you just can't keep a good stock down. The rebounds are more robust than the retreats. In some cases, you can't even see the retreat. We're pleased to have names like Netflix (up 8% YTD), Meta Platforms (up 11%, beating everything else in the "Magnificent 7") and Zscaler (up 16%) to both buoy our overall results and demonstrate our expertise. From cycle to cycle, having stocks like this on our list is how we keep outperforming.
Do the allocation math. We currently cover 55 stocks and funds. Unlike top-down passive portfolios, our "BMR Index" is equally weighted to allow smaller names the same shot at the spotlight as the giants. Otherwise, small stocks like Recursion Pharmaceuticals (market cap $2 billion) would vanish in the face of a single Apple ($3.8 trillion). They'd lose all their impact. Netflix accounts for about 1.4% of our equal-weight universe so its strength this year shows up a lot more clearly than it does in index funds that track the S&P 500, for example, which weight the stock at barely half that level. Zscaler, with a relatively lofty $31 billion valuation, doesn't show up in the index fund at all. Those investors are locked out of success stories like this until the stocks have already succeeded. Even then, it takes trillions to add up to more than the percentage point or so of attention we give every single recommendation.
Granted, the last few weeks haven't been kind to a lot of these companies and the rest of our recommendations have taken a significant step back. But we've always said that while Wall Street's moods come and go, the fundamentals always assert themselves as the ultimate arbiter of shareholder value. Or as Warren Buffett's mentor Benjamin Graham once said: "In the short run, the market is a voting machine, but in the long run, it is a weighing machine." The fundamentals remain robust. As long as that situation doesn't change, the votes should ultimately swing back in our direction.
That's how we outperform, with a strong defensive line against the storms and a stronger offense when the skies clear. Let the Fed do whatever it wants. Let Washington swirl. One way or the other, we're in position to ride the wave. And this week in particular, that edge shows up in our tangible results, both recent and YTD.
There's always a bull market here at The Bull Market Report. We've spent a lot of time looking back at trailing earnings reports lately, so it's past time we opened up The Big Picture to what investors actually need to know: our take on the future and whether that projection is bright enough to justify buying (and holding) stocks at this point. Since the Fed met, you can guess what The Bull Market High Yield Investor is all about. And as always, we need to update you on stocks in our favorite sectors.
Key Market Indicators
The Big Picture: Substance Over Shock
A packed news cycle has a lot of investors on edge. We get it. But in our experience, flinching from every hypothetical shock practically ensures that you'll miss out on a lot of opportunities, even if you're not a "trader" looking to sell out ahead of periods when stocks underperform or go down. After all, most of the nightmare scenarios we can imagine simply don't come true, and the ones that happen are rarely as bad as the worst projections suggest. Unless you can't roll with a few rumors, you'll find it challenging to reach for the upside.
And we're in luck because there's one news cycle we can always anticipate and the next one starts in a few weeks when the big Banks start to release their quarterly numbers. Unlike all the speculation about trade policy or taxes, for example, earnings season is a scheduled event. We can all see it coming. Most of the bigger companies let us know weeks in advance when exactly to expect the numbers. They also provide some sense of what to expect from the numbers, which is all "guidance" really means. Of course this advance glimpse at how the cash is flowing is not official or perfectly accurate, but it's the best sense the executives running the operation have of where the trends point.
While that logic might seem intuitive and even basic on the surface, it's worth letting it sink in through all the anxious chatter currently choking the market. Guidance gives us a pretty good sense of earnings, revenue and other key metrics for the current quarter and often the full year as well. At the very least, it's as good as the numbers the executives see every day as they guide the business around short-term threats and toward long-term goals. When something emerges as a real risk factor, they'll mention that they're watching it. If they don't volunteer that information, odds are extremely good that one or more of the analysts on the conference call will raise the question.
Those risk factors are built into every company's projections. When emergent threats have a material negative impact on those projections, a smart management team will acknowledge the pain early and warn Wall Street that the corporate sky has gotten cloudy. Normally somewhere between 55 and 65 members of the S&P 500 will issue this kind of warning at this phase of the quarterly cycle. We're currently tracking 66, which is only a fraction above average. Needless to say, "average" means normal. It isn't elevated. It isn't extreme.
Don't get us wrong: those warnings have a cumulative chilling effect. Our sense of earnings growth across the S&P 500 for the full year (2025) has come down about 3 percentage points in the last two months, which is roughly when the warnings started stacking up. Revenue growth is coming on 1/2 percentage point lower. This does not suggest that either the top or bottom line for America's corporate giants is going down, only that it is rising a little less fast than we hoped. All in all, we are still looking for 11% more profit this year than last and well above 5% higher sales numbers as well. Does that look like a looming crash to you? Remember, executives play a challenging game: when they guide our expectations lower, their stocks go down in the short term, but if they don't warn us at all, the stocks drop hard when we get the results. That's when the real "shocks" that matter happen.
We don't buy the S&P 500 as a whole, so all these numbers are really only relevant when it comes to gauging the overall market's mood. So who is feeling the chill? Materials producers are hurting hard. We don't recommend them. Tesla is hurting hard, with growth forecasts dropping as sales and sentiment falter. We don't recommend them right now either. The Industrials are reeling. Not a lot of that in our portfolios. Walmart warns? We don't cover it.
What we like (and what we overweight) is growth at the right price. That means a lot of Technology, a handful of Finance and Communications companies that effectively double as Tech and a surprising amount of Healthcare. Healthcare is booming, with earnings across the sector on track to expand 18% this year, right in line with traditional Tech. Some of these stocks have rallied so hard that they've gotten ahead of their realistic growth curves, but others have the dynamism to validate their valuations.
Here's the basic barometer: the S&P 500 might give us 11% growth this year and trades at 20X forward earnings. While that's not great by historical standards, it gives you a sense of what a vanilla "stock investor" would get in an index fund right now. Across the Tech sector, that growth rate might come in around 19% and Wall Street is paying 25X for that accelerated trajectory. Again, not great calculations by historical standards (back in the E.F. Hutton era, Tech would need to drop another 25% or so to qualify as a screaming buy) but not exactly bad enough to dump existing positions and start over. We'd call it a "hold" at worst. Healthcare looks much better at 18% growth and 17X forward earnings. Yes, that is that E.F. Hutton era "screaming buy," and it's why we are so happy with so many of our Big Pharma names.
Growth isn't everything, either. We have always preferred some sectors and industries (Real Estate, high-yield Financials and lately Energy) because they satisfy different investment criteria, the main one being the ability to lock in decent current income as the dividends accrue. Energy, as you know, is a boom-and-bust cycle. Right now these stocks are far out of favor with earnings stalled this year, but management feels comfortable forecasting 17% growth next year and we find no reason to disagree. At that point, Energy will be expanding faster than Tech. Investors who buy that story now at barely 14X current earnings will feel pretty smug in that scenario. That's exactly how all of this works. Buy clarity, don't flinch until it's clear that the bad headlines are actually headed into your lane.
BMR Companies and Commentary
Netflix (NFLX: $960, up 5% last week)
LONG TERM GROWTH PORTFOLIO
Streaming giant Netflix is riding high on the blockbuster success of its new tiers, content, and initiatives, and Wall Street, too, is taking notice with a string of bullish price targets in recent weeks. The most prominent take comes from MoffettNathanson which states rather definitively that ‘Netflix has won the streaming wars, case closed’ as its content and engagement metrics are miles ahead of competitors.
The stock released its fourth quarter results recently, reporting $10.3 billion in revenue, up 16% YoY, compared to $8.8 billion a year ago. Profits came in at $1.9 billion, or $4.27 per share, doubling from $940 million, or $2.11. We believe that the streaming giant’s profits are only just beginning to scale as it begins to unlock value from its massive worldwide landed base of 300 million paid subscribers.
The platform now reaches an audience of over 700 million viewers, or a little under a tenth of the world’s population, putting it right alongside the world’s top media conglomerates. The company’s much-publicized foray into advertising and its new powerful ad suite are all aimed at unlocking the billions in untapped value that comes from having so many eyeballs on you each evening.
The company’s relentless focus on engagement and customer satisfaction is paying off and is not slowing down. There was a time when its original content was hit-or-miss, but the company has finally cracked the content game and is now on par with the big studios such as Disney and Paramount. The move into live sports has flourished similarly in recent months, driving millions of fresh sign-ups.
Since the beginning of streaming play, Netflix's goal has been to have as many people spend as much time on the platform as possible. Having attained this goal, gears are shifting toward monetization. We expect advertising to become a major contributor to profits over the following months and years, in addition to several new content and pricing tiers.
In 2024, Netflix had more shows ranked #1 in the ‘Top 10 Streaming’ charts than the other streaming platforms combined. The Jake Paul vs. Mike Tyson boxing match last year was the most-streamed sporting event in history, and with the Christmas Day NFL Game, WWE Raw Pro, and the Screen Actors Guild Awards, it is now an entertainment powerhouse. Talk about streaming—Netflix’s profits will keep flowing in, and they’re already impressive, with $1.9 billion in profit on $10.3 billion in revenue.
Our Target for Netflix is a hefty $1300, and We Would Not Sell Netflix. We believe we have one of the highest targets on The Street. We can see a 10-1 stock split in the company’s future. Wouldn’t that be nice?
C3.ai (AI: $23, up 5%)
EARLY STAGE PORTFOLIO
Enterprise AI company C3.ai released its third quarter results recently, reporting $100 million in revenue, up 26% YoY, compared to $78 million a year ago. The loss during the quarter stood at $16 million, or $0.12 per share, against $16 million, or $0.13. Still, the company had a spectacular beat on consensus estimates at the top and bottom lines, giving investors renewed confidence in its future performance.
Subscriptions led the way at $86 million, up 22% YoY, followed by professional services at $13 million, a big 62% over the prior year. This was an eventful quarter for the company, with 66 new agreements, up 72% from the preceding year, made possible by its expanding global distribution network comprising several heavy-hitters in the cloud, AI, and professional services.
C3.ai signed 28 agreements spanning 9 industries via its partnership with Microsoft alone. It is now entering into similar partnerships with Amazon’s AWS and McKinsey QuantumBlack, which is focused on spearheading digital and AI transformation across large enterprises. The company realizes that such partnerships are key for seamless reach and execution at the leading edge of enterprise AI and tech.
We saw several new and expanded agreements from well-known brands during the quarter, including Sanofi, Nucor, ExxonMobil, and Coca-Cola. C3’s federal business continues to scale with similar agreements with the Department of Defense, US Air Force, the CAE USA, and the Missile Defense Agency, alongside 21 different state and local government wins during this period.
While investors remain concerned about the company’s persistent losses, profitability is approaching. Management aims to be profitable towards the end of 2026. In the meantime, we cannot ignore that this is one of the few companies to have succeeded with productized AI for large enterprises, which is bound to accrue value.
The markets, however, have been unable to look past the losses, with CEO Tom Siebel’s health issues* also weighing on their concerns. The stock is down 35% YTD, but we believe in this beaten-down speculative stock and its underlying tech platform. It has the resources to stay afloat till it turns profitable, with $720 million in cash and just under $5 million in debt.
*Siebel has been diagnosed with an autoimmune disease that is impairing his vision. The company has made specific accommodations, and he remains in charge of the day-to-day operations; however, when traveling for treatments, Jim Snabe, the former co-CEO of SAP and chairman of Maersk, Allianz, and Siemens, will be in charge. So, we know that things remain on course even as he battles this unfortunate condition.
Our Target is $50, and our SP is $30. The stock is way below our Sell Price. Perhaps it is time for you to get out, especially with the government cutback going on in Washington. We will hang in here for a few weeks and watch events unfold.
VanEck Semiconductor ETF (SMH: $225, down 1%)
HIGH TECHNOLOGY PORTFOLIO
As the name suggests, the VanEck Semiconductor ETF allocates its assets to the various high-fliers of the burgeoning semiconductor and AI industries. The well-known heavy-hitters in the Fund include Nvidia (NVDA), Taiwan Semiconductor Manufacturing (TSM), Broadcom (AVGO), and ASML Holding (ASML), along with several under-the-radar picks such as Lam Research (LRCX) and KLA (KLAC), among 20 other stocks that it deems crucial for this computing revolution that is upon us.
The Fund hasn’t had a great start to the year, with most of its holdings struggling with high valuations and uncertainties regarding the trade wars. We’ve seen an 8% pullback YTD, and while this pales in comparison to the 120% rally since 2022, investors are perplexed about the future of this Fund and industry, particularly in the near term. We, however, have no such qualms, and neither should you.
Leaving aside all the hue and cry surrounding geopolitics, trade wars, tariffs, technicals, and valuations, what truly matters is the underlying demand for chips and the growing use cases for AI across sectors and businesses, which show no signs of slowing down. We’re trying to say that the secular trends of AI, cloud computing, 5G, and electric vehicles are here to stay and will continue to grow dramatically.
A key feature of the Fund is its concentration across many stocks, but as we’ve discussed in the Newsletter, it’s a double-edged sword. With nearly 40% of its assets allocated to just three stocks, Nvidia, Taiwan Semiconductor, and Broadcom, it captured the phenomenal upside in these stocks during the AI frenzy in 2023 and 2024. But now, as the market has pulled back a little, it is facing the downside, with no diversification to come to its aid.
A recent earthquake in Taiwan caused a pullback in Taiwan Semiconductor, though the company claims it had minimal impact on production. However, the VanEck Semiconductor ETF took a hit, as smaller holdings like Lam Research and Applied Materials—due to their limited allocations and long sales cycles—were unable to offset the losses from larger stocks.
During its recent earnings release, Nvidia CEO Jensen Huang claimed that advanced reasoning AI models require 100 times more computing power than the current models. This matters to us, as it means that we’ve barely scratched the surface so far. The VanEck Semiconductor ETF is one of the best vehicles to ride this trend, with a robust track record and a low expense ratio of just 0.35%.
Our Target is $300, and our Sell Price is $230; as you can see, the stock is below this. We added the stock at $270 last summer, so we are undoubtedly underwater. Should we sell and move on, or hold and hope? Good question. No one knows if the overall market will move higher from here, but if it moves lower, we can be sure that the Fund will fall even more. We’re going to stick with it for the next few weeks.
Zscaler (ZS: $205, up 4%)
HIGH TECHNOLOGY PORTFOLIO
Cloud security giant Zscaler released its second-quarter results two weeks ago, reporting $650 million in revenue, up 23% YoY, compared to $520 million a year ago. Profits during the quarter stood at $130 million, or $0.78 per share, against $100 million, or $0.63, beating estimates at the top and bottom lines, coupled with strong guidance for the third quarter and full-year, lifting the stock following the results.
The company’s calculated billings - contractual revenue yet to be realized - stood at $740 million, up 18% YoY, followed by deferred revenue at $1.9 billion, up 25% YoY. Zscaler continues to ride the rising demand for Zero-Trust architecture and security solutions in an increasingly digitalized world. It fulfilled the promise of simplified enterprise security, which has long been the dream of this industry.
Zscaler now sports a customer retention rate of 115%, which is impressive for a SAAS company of this size. It has nearly 3,300 customers with annual contract values over $100,000 and 620 with ACVs greater than $1 million. During the quarter, we saw several new marquee logo adds, including a Fortune 50 energy company, a Global 2000 manufacturing giant, and a nation-state.
The big story is its new Zero Trust Everywhere Initiative, which bundles its security solutions, helping consolidate tools and services while transferring enormous savings to enterprise customers. This gives it a powerful competitive moat, leaving newer entrants and even a few established players at a disadvantage, unable to match Zscaler’s scale and pricing in enterprise security.
The company is making strides by combining Zero Trust with AI, which many companies are scrambling to access, given the risk of data loss when using AI tools such as ChatGPT and Microsoft Copilot. Zscaler checks data streams going to and from tools like ChatGPT, ensuring no leakage in between. This is a critical solution for enterprises looking to fast-track their AI adoption and workflows.
The stock is up 13% YTD and shows no signs of slowing as the company outperforms and outwits peers. Over the years, it has built remarkable moats that the industry is just starting to notice. With the amount of data it tracks and trains its models on, no new entrant can offer similar solutions at scale. It ended the quarter with $2.9 billion in cash, $1.2 billion in debt, and $900 million in cash flow. Our Target is $280, and the SP is $170. We added the stock at $85 in 2019, so we’d like to see it return to its peak in 2021 at $375.
Dexcom (DXCM: $74, up 4%)
HEALTHCARE PORTFOLIO
Medical devices company Dexcom released its fourth quarter results recently, reporting $1.1 billion in revenue, up 8% YoY, compared to $1.0 billion a year ago. It posted a profit of $180 million, or $0.45 per share, down from $200 million, or $0.50 the prior year. For the full year, the company reported $4.0 billion in revenue, up 11% YoY, with a profit of $670 million, or $1.64, against $620 million, or $1.52.
The decline in profits during the quarter was primarily due to a one-time charge of $21 million due to certain mistakes by Dexcom’s shipping partner. Besides this, the company’s new build configurations took a toll on its production yield and gross margins, which stood at 59%, down from 64% a year ago. Management is taking all necessary steps to get production and margins back on track.
Dexcom’s global user base now stands at an impressive 2.8 million, up 25% YoY, with its newly launched over-the-counter solution, Stelo, already adding 150,000 users within four months of launch. This comes amid growing concerns about competitive and substitutive headwinds among investors. Starting with the popularity of GLP-1 drugs, followed by the entry of Abbott and Medtronic in this segment.
As we’ve covered before, the entire premise of GLP-1 drugs reducing demand for continuous glucose monitoring (CGM) devices is flawed. Regarding the competition, Dexcom is addressing this head-on by rehauling its sales and distribution strategy. It has dedicated enormous resources to training sales reps while expanding existing relationships with medical equipment distributors, which are key to this business.
In addition, it is vying for deeper penetration in existing markets while executing aggressive expansions overseas. During the quarter, the company got three of the largest pharmacy benefit managers (PBMs) to cover its products and is now working to onboard other PBMs. It gained similar coverage in New Zealand and France and is set for more wins across Canada, Germany, and others.
In 2025, the company projects $4.6 billion in revenue and 14% YoY growth. The stock didn’t have a great year last year and is down 50% from its all-time high in 2021, but we expect things to turn around soon. The company has barely scratched the surface of the multi-billion-dollar diabetes industry and ended the quarter with $2.6 billion in cash, $2.6 billion in debt, and $1.0 billion in cash flow.
Our Target is $90, and our SP is $70. We have faith in this company and believe that, given a few more months, it will come out on top in its quest to be the best in its class in this great business of continuous glucose monitoring (CGM) technology. Dexcom has built a reputation for accuracy, ease of use, and innovation, making it the gold standard in CGM technology. With expanding adoption beyond Type 1 diabetes and strong financial growth, Dexcom remains the leading player in the space.
iShares Oil & Gas Exploration & Production ETF (IEO: $93, up 2%)
ENERGY PORTFOLIO
As the name suggests, the iShares Oil and Gas ETF is a fund that provides exposure to the high-fliers of the energy industry. However, note that the fund steers clear of the industry's diversified, vertically integrated giants, such as ExxonMobil and Chevron. It allocates most of its assets to pure-play oil and gas producers, allowing it to track commodity prices more closely.
The fund holds a basket of 51 different securities in the energy space, with its top three holdings, ConocoPhillips, EOG Resources, and Phillips 66, constituting 35% of total assets. So far, this year looks to be a mixed mag for the industry, with supply tightening in key regions of the world such as Iran and Venezuela, but things looking up in the US with a new fossil-friendly White House administration.
However, several geopolitical factors are at play, the most prominent of which are tariffs and trade wars by the US government. Most recently, India agreed to buy more oil and gas from the US instead of Russia, Iraq, and Saudi Arabia. This has sent ripples across the industry and bodes well for the US domestic players and, by extension, the IEO fund.
The US government will likely try to reach a similar deal with Europe. With Russian supply still under sanctions, the path is clear for American companies to dominate the global energy industry. US LNG supplies to Europe have already risen over 3,700% since 2017 and will go higher with Russian gas transit through Ukraine now blocked and Europe looking to wean itself off Russian energy entirely.
Asian markets have been out of reach, mainly due to the distances involved and partly the high fees levied by the Panama Canal. The Trump administration is now dealing with the latter, which would be a win for US oil and gas giants. Of course, in the long run, how the industry fares depends a lot on whether the US keeps sanctions on Russia.
The iShares Oil and Gas ETF didn’t have a great year in 2024 and is flat YTD, but things are looking up for its constituents, at least in the mid-term. There are several reasons to love this fund, with a few prominent ones being its low expense ratio of just 0.40%, annualized yield of 2.5%, and an illustrious track record going back nearly two decades. Over the past five years, the fund has returned 320%.
Our Target is $120, and our Sell Price is $95.
Range Resources (RRC: $40, up 4%)
ENERGY PORTFOLIO
This company is one of the largest natural gas producers in the world and released its fourth quarter results recently, reporting $630 million in revenue, down 34% YoY, compared to $940 million a year ago. It posted a profit of $160 million, or $0.68 per share, against $150 million, or $0.63, performing admirably despite bottom-tier gas prices, with results hinting at strong cost controls and execution excellence.
For the full year, the company reported $2.4 billion in sales, down 28% YoY, compared to $3.4 billion a year ago, with a profit of $560 million, or $2.30, down marginally from $570 million, or $2.40. Production averaged 2.18 billion cubic feet equivalent of natural gas per day, coming in ahead of estimates, with 68% being natural gas and the rest comprising natural gas liquids and crude oil.
The company took a hit at the top and bottom lines during the quarter, owing to comparatively lower realized prices. Natural gas realizations stood at $2.36 per million cubic feet equivalent, down from $2.40 last year. Natural gas liquids, however, saw an uptick to $26.43, compared to $24.91, while its negligible crude oil output saw a decline in realizations at $59 per barrel, down from $68 last year.
However, realizations were well ahead of Henry Hub averages, owing to the company’s efforts in marketing and exposure to better-priced markets in the Midwestern and Gulf regions. Even as domestic prices remain under pressure, Range has executed well enough to benefit from prevailing dock constraints and global demand tightness, which we expect to persist.
Range Resources is known for its operational efficiencies that allow it to keep its head comfortably above water even during harsh conditions. Throughout the year, it ran a 2-rig, 1-frac crew operation, which means only two rigs were operational at any given time, with one completion crew digging 800,000 lateral feet across 59 wells, with an average of 14,000 lateral feet per well, thus maximizing efficiencies.
The company is also renowned for its capital allocation. During the quarter, it used its $450 million cash flow to pare down its debt by $170 million while returning $140 million to investors through buybacks and dividends. All-in capital expenditures for the year stood at $650 million, and its balance sheet continues to grow more robust, with $300 million in cash and just $1.8 billion in debt.
The stock has been a solid investment for us - we added it at $28 in 2022. It would be nice to see it at $90 like it was in 2014. Our Target is $41, and our Sell Price is $27, which are moving today to $50 and $33, respectively. It’s a relatively small firm, clocking in at just under $10 billion in market cap, and it is certainly a buyout candidate. With higher crude prices later this year or early next, we can see this stock back up to the $50+ level.
Ally Financial (ALLY: $36, up 7%)
FINANCIAL PORTFOLIO
Banking and auto finance giant Ally Financial released its fourth quarter results recently, reporting $2.1 billion in revenue, up 5% YoY, compared to $2.0 billion a year ago. It posted a profit of $250 million, or $0.78 per share, against $120 million, or $0.40 the prior year. Despite bearing the brunt of a $560 million credit provisioning against bad loans, this also hints at a phenomenal year ahead.
The company originated $10.3 billion of auto loans during the quarter, up 7% YoY, with a weighted average yield of 9.6% and 49% of originations in the higher credit quality tiers. This is down a bit from their yearly average of 10.4% in response to falling interest rates. Still, the company’s net interest rate margins hold steady at 3.3%, leaving plenty of cushion to deal with uncertainties.
Ally’s insurance business continues to grow, with $370 million in written premiums during the quarter, up from $330 million a year ago. Retail deposits stood at $143 billion, up from $142 billion across 3.3 million customers, and an average retention rate of 95%. During the fourth quarter alone, the company saw retail deposit growth of over $2.0 billion. The company is a top-tier banking services provider.
The big story during the quarter concerns the sale of its credit card business, which, despite being a good business, allows Ally to focus all of its efforts and resources on its core offerings, banking and auto financing. It called to cease mortgage originations, which only offer 3% yields, so this move is expected to free up capital for other high-yielding loans and investment opportunities.
Ally has been restructuring its operations, which involve extensive workforce reductions, resulting in savings worth over $60 million annually. The sale of its credit card business is expected to dampen net interest margins in the medium term, as the segment yields over 20% annually. Still, it will minimize future credit costs and operating expenses, and this restructuring should help offset the loss of revenue.
The stock was flat last year and continues to be range-bound so far this year, but things are turning around for the company as all of its restructuring efforts start to pay off. The company did not buy back any stock during the year, but its dividend yield has increased to 3.3%. It ended the quarter with $10.3 billion in cash, $18.3 billion in debt, and $4.5 billion in cash flow.
Our Target is $52, and our Sell Price is $35.
Welltower (WELL: $147, down 1%)
HEALTHCARE PORTFOLIO
Leading healthcare REIT Welltower released its fourth quarter results recently, reporting $2.3 billion in revenue, up 29% YoY, compared to $1.7 billion a year ago. It posted a profit, or FFO, of $720 million, or $1.13 per share, against $530 million, or $0.96. For the year, the company reported $8.0 billion in sales, up 20% YoY, with a profit of $2.6 billion, or $4.32 per share, against $1.9 billion, or $3.64.
Welltower had a strong quarter on the operations front, with same-store operating income growing 24% YoY, marking its ninth consecutive quarter of 20-plus percentage gains. The occupancy rate stood at 87%, rising by an impressive 310 bps YoY and 120 bps sequentially, which management noted was during the time of year when move-ins often moderate, hinting at a growing broad-based momentum.
The company has over 750 healthcare facilities in the U.S., Canada, and the U.K.
During the quarter, Welltower deployed $2.4 billion across 21 different transactions, with $2.2 billion in acquisitions and loan funding and $230 million in development funding. This is a 20% decline YoY from $3.0 billion a year ago, but it marks an end to a tremendous year of investment activity, with YTD acquisitions totaling $7.0 billion, up 19% YoY, compared to $5.9 billion during the same period last year.
The company is also off to a great start this year, with $2 billion in gross commitments under contract within the first six weeks. Management attributes this to favorable market dynamics, with the over-80 population rising quickly and limited new supply owing to high interest rates and rising material costs, coupled with a new immigration policy making it harder for competitors.
Welltower is pursuing a renewed approach to capital allocation, focusing on ‘Local Clustering,’ which involves ‘going deep, not broad.’ Thus, the company will allocate more capital in each region, aiming for more properties and density instead of diversifying across many areas. This allows for plenty of cost synergies, which can be beneficial as the new RIDEA structure gains steam.
The RIDEA structure allows Welltower to participate in the operating profits of its facilities, as opposed to merely earning rent. This can be a game-changer for the entire industry, particularly senior housing. The stock is off to a great start, rallying 17% YTD, and the firm maintains a robust balance sheet as it enters a lucrative period, with $3.5 billion in cash, $16.8 billion in debt, and $2.3 billion in cash flow.
Our Target is $155, and our Sell Price is $115. It hit $157 a few weeks ago and has pulled back an inch. We’re raising our SP to $130 and can’t wait to raise the Target to $180 in another few weeks as it passes $150.
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The Bull Market Report High Yield Investor
Fed meetings has gotten shorter and sweeter lately: no change in interest rates, thus minimal reaction from the market. Once again, Powell and company hit "pause" while they wait to see what trade policy does to consumer prices. If inflation edges up a bit, that pause will lengthen or force the Fed to tighten again in response.
But if the economy takes a sharp enough downturn to shake the job market, you can bet that the rate cuts will start up again fast and furiously. That's never been far from Powell's mind or commentary in recent years. He's willing to tolerate a mild recession in order to kill inflation but anything that aspires to the catastrophic levels of 2008 or 2020 will trigger massive retaliation.
As it is, the now-notorious "dot plot" that telegraphs the Fed's sense of its next moves remains clear. Three months ago, Powell and company thought the economy would expand at a healthy 2.1% rate this year. Now that GDP growth number has come down to 1.7%, which is not "better" but still a long way from the apocalypse. The Fed doesn't really think that growth will get much lower or much higher than this in the long run, so this is roughly as good AND as bad as it gets. This is normal.
Likewise, the Fed doesn't see unemployment rising or falling much from here. Again, in their view this is normal. Remember, they get all the macro data the government produces. When they make a forecast, it's usually pretty good. And they see inflation going down on its own, which gives them leverage to make as many as two rate cuts this year and then another two next year. Not a quick race back to the zero-rate world, but guess what? That world, created in the long shadow of the 2008 crash, was never normal. From here, rates may edge up and down but barring an extreme economic surprise, this is the world we live in now.
In this world, cash is unlikely to pay more than 4% and even long-term Treasury yields may have peaked. To earn a higher rate of return, you need to reach beyond the federal bond market into areas that have been neglected or even actively shunned. Muni bonds, for example, have been under serious pressure as some regions of the country teeter closer to recession and maybe even default, but that's an opportunity if you know how to pick the people who can pick the best bets in the field. Here's one of our favorites:
Invesco Municipal Trust (VKQ: $9.73, down 1%. Yield=7.3%, the equivalent of 10.3% taxable)
HIGH YIELD PORTFOLIO
The Invesco Municipal Trust is a closed-end fund that primarily invests in tax-free municipal bonds, making it very appealing to conservative, income-seeking investors. The fund still goes the extra mile in the relatively risk-free muni space. Further, it diversifies its holdings while actively managing and rebalancing them to drive additional value for investors, making it perfect for risk-averse investors.
Muni bonds had a modest year in 2024, with total returns of just 1.05%. It was an election year with major consequences for the debt markets and started with relatively high interest rates. We saw a jump in late 2024, right after the election, in anticipation of pro-growth policies by the incoming administration, with high-yielding munis ending the year with over 6% in gains.
In 2025, the year has been a mixed bag for the segment, starting with yields dipping in January in response to cooler inflation readings. However, this was followed by rising yields in February and March, with new issuances pressuring muni prices. Right now, yields are at their highest in over 2 years, with the Fed’s ‘higher-for-longer’ policy bias keeping volatility in the segment elevated.
Last year, we saw record new issuances worth over $500 billion, which marks a YoY increase of 36%, and most analysts expect the market to surpass these figures in 2025. The good thing is that there is plenty of demand for muni bonds to soak up these new issues, with the asset class now being deemed the most attractive among its fixed-income peers when weighing it on an absolute yield basis after tax.
With plenty of uncertainties surrounding global equity markets and the potential implications of a trade war and other geopolitical tensions, munis are a much-needed safe haven that will see billions of dollars in new inflows over the next few months. As long as their tax-exempt status remains, we expect the asset class to continue going strong with plenty of new issuances and inflows.
One of the reasons for the uptick in activity is the ongoing talks of altering the tax-exempt status of munis in Washington. This has led to the front-loading of issuances before any such policy changes. However, we firmly believe that any such changes will be fairly limited, such as capping the deductions for wealthy investors. None of this should matter for long-term investors, especially with a fund such as the Invesco Municipal Trust, given its illustrious track record for several decades.
Our Target is $13, and our Sell Price is $9.
Good Investing,
Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998
June 2, 2024
by Scott Martin | Jun 2, 2024 | Weekly Newsletter 7pm Sunday
Market Summary
The Bull Market Report
The last two weeks were a tale of one stock. We spent a few days waiting for NVIDIA (NVDA) to release its quarterly results, leaving Wall Street almost literally breathless in the meantime. Then we watched money crowd into NVIDIA after the SEC filing, swelling the stock to lofty levels ($2.7 trillion, more than the entire German market). And finally, investors tired of scrutinizing this AI giant found a distraction in the form of a potentially threatening uptick in bond yields. We're happy we have NVIDIA in our High Technology portfolio. It's already soared close to 140% in the last six months for us.
But we'll never be satisfied with exposure to just one stock, no matter how strong it is in the moment. If that were the case, we'd have cut everything but Apple (AAPL) or Berkshire Hathaway (BRK-B) long ago, and had to live with the day-to-day consequences of that decision. In our world, a balanced portfolio of themes will win in the end. When Technology is triumphant, we have plenty of those stocks scattered around our universe. When Silicon Valley hits a wall, our Financials or Energy or Real Estate holdings tend to benefit as the pendulum of sentiment swings in their favor. And throughout the cycle, our High Yield recommendations keep paying dividends.
How has that paid out for us in the last two weeks? NVIDIA obviously did extremely well on its own, but its success sucked all the air out of the Technology portfolio and cut big holes into our results in the Stocks For Success and Long-Term Growth portfolios as well. Only mighty Apple managed to rise above the tide on the Stocks For Success side. First Solar (FSLR) was an absolute triumph and helped buoy Long-Term Growth. See below.
What's more interesting is the way the Early Stage recommendations were split between a 12% gain in the past two weeks for C3.ai (AI) and a 12% loss from Recursion Pharmaceuticals (RXRX), leaving the portfolio neutral for the period. A lot of our portfolios sat out the NVIDIA cycle close to neutral. This was a non-event as far as they were concerned. Now that Wall Street's attention has moved on, we expect them to recover their momentum and get back to work.
For now, this was a "rebuilding" period for our stocks. The Dow Industrials lost more ground but the Nasdaq, overweight NVIDIA as it is, held up better than the BMR universe in the aggregate. That's okay. Ordinarily our "equal weight" system for accounting for our performance plays out in our favor. This time, the single standout name was so strong (and nearly everything else was so tentative) that only portfolios that were heavily concentrated in NVIDIA managed to do well. One way or another, earnings season is over. It was a good one. We can afford to let the AI giant hog the spotlight. After all, we own it too.
In our view, bond yields are a sideshow. They sting, but the real story is what the Fed said two weeks ago. It's going to take serious pain in the Treasury market to feed back into our stocks. And get serious: that kind of pain in the Treasury market is not going to entice smart investors to pull their money out of stocks and flood into the "safety" of bonds paying less than 5% a year. That kind of pain is not enticing. It's scary. And it feeds on itself. Stocks like ours may even look defensive in that scenario. But in our view, the scenario is unlikely. The bond market corrects itself. When yields are attractive to the people who want bonds, you'll know. Otherwise, we focus on stocks.
There's always a bull market here at The Bull Market Report. With earnings season on the books, The Big Picture tackles the question of whether stocks have gotten ahead of their growth rates, while The Bull Market High Yield Investor sets the scene for the next Fed meeting And as always, we can't resist updating you on our latest thoughts on our favorite recommendations.
Key Market Indicators
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The Big Picture: Record Earnings, Record Stocks
Despite the persistent drag from the Fed on the short end of the yield curve and a weakening bond market on the long end, the economy remains resilient and the largest corporations in the world are making more money than ever. With 98% of S&P 500 companies reporting results, the index is on track for a healthy 6% growth in earnings per share. This surpasses analysts’ earlier forecasts of 3.2% growth, marking the biggest year-over-year increase since mid-2022 and quite the upside surprise. So far, nothing in the recent past has provided even a speed bump, and guidance suggests that things get even stronger in the current quarter and beyond.
When earnings hit records, stocks deserve to hit records too. That part is inevitable. The only question is how far investors' comfort zone will stretch to accommodate stronger fundamentals when valuations across the market are already on the high side of recent memory. After doing the math, we aren't especially worried that stocks have gotten ahead of their growth trend.
Think about it. Yes, the S&P 500 is currently priced at 20.3X forward earnings, which is significantly elevated when you consider that across the past decade the market only commanded a 17.8X multiple. However, it's barely a notch above where it's averaged out over the last five extreme bear-and-bull-and-bear-and-bull years. And because growth shows every sign of accelerating in the coming year, we wouldn't be shocked next summer to see the market as a whole at least 15% above where it is now. That's better than what stocks have historically delivered over the long haul. It's a boom.
And even in this 15% scenario, there's a strong argument that stocks will be strategically attractive at that point. The Fed will find an excuse to guide the short end of the yield curve down. That's a good thing for the market, giving valuations an excuse to reinflate as the "risk-free" return rate on cash drops. Long-term yields should drop far enough with it to take a lot of pressure off the economy and Wall Street alike.
Meanwhile, earnings expansion is on track to speed up from 11% for this year to 14% in 2025.
Those extra 3 percentage points bend the P/E calculations just enough to eliminate just about any rational fear that stocks are overvalued now. Remember, smart investors pay extra for faster growth because every additional percentage point on that side shortens the amount of time you need to wait in uncertainty and doubt to see your companies grow into what would otherwise look like high valuations. We wouldn't be shocked to recheck the numbers in 12 months and see the S&P 500 in the aggregate bringing in as much as $50 more per "share" (spread across all 500 stocks of course) than it's making now, and then at the end of 2025, adding another $35-$40 to that pool of cash takes the S&P 500 multiple down BELOW long-term historical averages if the market doesn't move appreciably in either direction in the meantime.
All you need to take advantage of that discounted future is buy stocks today and hold on until next summer. There will undoubtedly be volatility. Maybe it will take the market down, in which case the discount will be even more substantial a year from now. And maybe it will take the market up, in which case the route to positive returns pays off earlier. All in all, analysts collectively think the market can rally another 13% or so in the next 12 months. At that point, if all the projections line up with reality, the market looks LESS overheated on an earnings basis, even though investors would have reason to cheer with a better-than-average annual gain on the books.
We like the odds of executives continuing to outperform. They've already successfully weathered an earnings recession, a slowing global economy and just about everything inflation and interest rates can throw at them. Give them a little relief and the numbers will go through the roof. All we need to provide is that year of fortitude. It feels like a pretty good bet.
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BMR Companies and Commentary
C3.ai (AI: $30, up 23% last week)
Early Stage Portfolio
Enterprise AI company C3.ai released its fourth-quarter results last week, reporting $87 million in revenue, up 20% YoY, compared to $72 million a year ago. The company posted a loss of $14 million, or $0.11 per share, against $15 million, or $0.13, with a beat on estimates on the top and bottom lines, coupled with robust guidance for the new year bringing much-needed glad tidings for investors.
For the full year, the company posted $310 million in revenue, up 16% YoY, compared to $270 million a year ago, with a loss of $56 million, or $0.47, against $46 million, or $0.42. With demand for enterprise AI solutions continuing to intensify across industries, the company exceeded the top end of its guidance for the full year as well. It marked its fifth consecutive quarter of accelerating revenue growth.
During the quarter, the company signed 47 new agreements, including 32 new pilots, with marquee clients such as ExxonMobil, General Mills, BASF Petronas, and the US Navy, among others. This has resulted in subscription revenues rising 41% YoY, constituting 92% of its total revenue, giving the company much-needed stability and certainty regarding its cash flow position going forward.
C3’s focus on expanding its partner network has paid off well, with 91 of the 115 agreements closed last year from companies such as AWS, Google Cloud, and Microsoft Azure. The qualified opportunity pipeline with the partner network grew a huge 63% YoY. The company received a blockbuster response for its GenAI offerings, with 50,000 inquiries coming from 3,000 businesses during the fourth quarter; alone.
Some thoughts:
C3.ai's future holds promise, but it's definitely on the speculative side of the AI industry. Here's a breakdown of their potential and competition where it fits into the landscape of the AI revolution:
Strengths:
- Focus on Enterprise Applications: Unlike some AI companies targeting broad consumer markets, C3.ai focuses on developing enterprise-grade AI solutions for specific industries like manufacturing, energy, and healthcare. This targeted approach allows them to cater to specific needs and potentially achieve faster adoption.
- C3 AI Suite: Their core product, the C3 AI Suite, offers a comprehensive platform for developing, deploying, and managing AI applications. This can be attractive to businesses looking for an all-in-one solution.
- Partnerships: C3.ai has established partnerships with major technology players like Microsoft and Google. This gives them a leg up in terms of access to resources and market reach.
Challenges and Competition:
- Emerging Market: The enterprise AI market is still evolving, and it's not guaranteed that its approach will be the most successful in the long run. They face competition from established tech giants like Microsoft, Amazon (AWS), and IBM, all with significant resources and cloud computing expertise.
Profitability: C3.ai is not yet profitable, and it's unclear how quickly they can achieve profitability in this competitive landscape
The best choice for you depends on your risk tolerance and specific investment goals. The company offers a potentially high reward but also carries a higher risk due to the competitive landscape and its unproven track record of profitability.
The stock has had a fairly volatile year so far, but the recent rally following its fourth-quarter results has put it firmly in the green. As of now, the company is focused on growth, giving profitability a pass, but a pole position in the potentially $1 trillion enterprise AI market will ultimately will make it worthwhile. The company has sound financials, with $750 million in cash, and no debt. Our Target for this very speculative high-flyer is $50 with the Sell Price at $24. We added the stock at $22 in 2023, so we are up 34%. But is it worth the anguish or the volatility? Only YOU can decide that!
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The Trade Desk (TTD: $93, down 2%)
High Technology Portfolio
Pioneering ad tech company The Trade Desk released its first quarter results recently, reporting $490 million in revenue, up 28% YoY, compared to $380 million a year ago. It produced a profit of $130 million, or $0.26 per share, compared to $110 million, or $0.23, with a beat on consensus estimates on the top and bottom lines, coupled with an upbeat forecast for the second quarter. We are impressed by the profitability level – 27% after tax. That’s up there with some of the greatest companies in the market, like Apple, Google and Facebook.
During the quarter, the company was aided by continued penetration of connected TVs, with industry giants such as Disney, NBC Universal, and Roku making deeper pivots into this segment. This comes as the company’s UID2*, its alternative to the aging browser cookies, as it becomes more and more ubiquitous across the open internet, resulting in robust value for advertisers, and undeniably strong moats for Trade Desk. Unified ID 2.0 (UID2) is a non-proprietary, open standard accessible to constituents across the advertising ecosystem. It enables advertisers, agencies, ad technology companies, and ad publishers selling advertising to interoperate together in advertising workflows. The company struck a string of new collaborations and partnerships with its UID2 during the quarter, starting with Times Internet, a leading media conglomerate in India, followed by satellite TV giant, Dish Media, along with TF1 and M6, two of the largest broadcasters in France. As a result, the platform now has access to ad inventory in over 11,000 destinations across connected TV, display, mobile, and audio.
The Trade Desk isn't just another ad network; it provides a self-service, cloud-based platform for ad buyers. This platform allows businesses and agencies to plan, manage, and optimize their advertising campaigns across various channels and devices. Here's what makes them special:
- Independent and Open Platform: Unlike some ad networks that prioritize their own inventory, The Trade Desk offers an independent platform with access to a vast marketplace of ad inventory. This gives ad buyers more control and flexibility in reaching their target audience.
- Data-Driven Targeting: The Trade Desk leverages data and analytics to help ad buyers target specific audiences with greater precision. This can lead to more effective and efficient advertising campaigns.
- Programmatic Bidding: They automate the ad buying process, allowing advertisers to bid on ad impressions in real-time based on pre-defined criteria. This can help them secure better ad placements at more competitive prices.
Why They Are Leaders:
- Focus on Innovation: The Trade Desk is constantly innovating and developing new features to stay ahead of the curve in the fast-evolving advertising landscape.
- Transparency & Control: They prioritize transparency and control for advertisers. This builds trust and encourages long-term partnerships.
- Global Reach: The Trade Desk operates in a global marketplace, giving advertisers access to a vast audience.
The Trade Desk has strong secular tailwinds in its favor within the digital advertising market, which stood at $600 billion in 2023, expected to rise to over $870 billion by 2027. Global streaming giants are doubling down on advertising: Netflix with its 40 million ad-tier subscribers and Disney+ have already announced partnerships with the company to monetize their massive ad inventory.
The stock had a phenomenal year in 2023, up 60%, which has been extended this year with a YTD rally of 31%. While the valuation is anything but cheap, at 22 times sales and 120 times earnings, the massive addressable market and an impressive compound annual growth rate of 32% largely make up for it. The company ended the quarter with $1.4 billion in cash, just $240 million in debt, and $600 million in cash flow. Our Target is $100 and our Sell Price is $64. We’re raising both to $120 and $84 respectively. The stock hit $97 two weeks ago, not quite a new all-time high, as that was set in 2021 at $114. But we can see that number being broken later this year if the market holds steady and moves higher. If not, that is why we have such a tight stop. No matter how good a company is, if the overall market tanks hard, it will bring these high flyers down with it. Revenues are great – moving from $840 million in 2020 to $1.2 billion, to $1.6 billion to $1.95 billion in 2023. What worries us the most, is its low level of profitability. Watch this one closely.
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Workday (WDAY: $211, up 4%)
TERMINATING COVERAGE
Workday, a leading financial and human capital management solutions provider, released its first quarter results last week, reporting $2.0 billion in revenue, up 18% YoY, compared to $1.7 billion a year ago. It posted a profit of $103 million, or $0.38 per share, against -$10 million, or $0. The company beat on consensus estimates but lowered full-year guidance a bit. See below.
As always, subscription revenues led the way at $1.8 billion, up 19% YoY, with the rest coming from professional services at $180 million, up 12% YoY. The company’s 12-month subscription backlog now stands at $6.6 billion, up 18% YoY, followed by total subscription backlog at $21 billion, an increase of 24% YoY. The gross revenue retention rate came in at 95%, representing a churn of just 5% over the year.
During the quarter, the company onboarded several marquee new companies. This includes Asda, Electrolux, TopGolf, and LVHM, among others. In the public sector, the company acquired the Defense Intelligence Agency (DIA) as a customer for its Workday Government Cloud. It now counts 60% of the global Fortune 500 as customers and was named a leader in cloud Human Capital Management for 1,000+ employees by Gartner.
The company continues to double down on AI and now has 50 AI and 25 generative AI use cases in its roadmap. Workday completed the acquisition of HiredScore, an AI-powered talent acquisition and internal mobility solution. With 65 million users and 800 billion transactions on its platform each year, the company has a wealth of data to train its AI and leapfrog competitors.
Following a robust performance last year, the stock has had a rough start to 2024, and is down 21% YTD, mostly owing to its high valuation. We believe that this is unjustifiable, and overblown, considering the massive addressable market of $140 billion, and an impressive 5-year CAGR of 20%. Workday ended the quarter with $7.2 billion in cash, $3.3 billion in debt, and $2.2 billion in cash flow. Our Target is $325 and our Sell Price is $250.
We, that is, you and we have a decision to make. Do we let the company go here? Or do we buckle down and add more? We added the stock at $139 in 2018, so we are up over 50%. You, however, may have a higher entry price. Not that that makes any difference. It just feels better if you can sell and take a profit, even though the stock was at $311 in February. Revenues have been growing for the past four years, from $4.3 billion in 2020, to $5.1 billion, to $6.2 billion, to $7.3 billion in 2023. At the current rate it looks like $8.0 billion is probable for 2024. Growth appears to be slowing and we wonder: Is this 10% growth rate worth such a high valuation? The market just might have something here.
Here’s what occurred: When Workday reported quarterly earnings a week ago, it lowered its forecast for fiscal 2025 subscription revenue to between $7.7 billion to $7.725 billion from a prior call for $7.725 billion to $7.775 billion. That prompted a flurry of price-target cuts from Wall Street. This is a tiny lowering. It is such a small reduction, that you have to re-read the sentence to understand the difference. The stock was smashed. This is what the market is doing to great companies. We’re not happy about it, but it is reality. For this reason, and the slowdown in growth discussed in the previous paragraph, we are going to exit the stock. Tough decision, but the market is just destroying growth companies with slower growth in the forecast.
If you wish to stay in the stock, the knockdown of the stock by $52 a share (19%) since earnings a week ago, certainly creates a better valuation now. It’s down $100 (32%) since February. With cash of $7.2 billion and debt of $3.3 billion, the balance sheet is strong.
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First Solar (FSLR: $272, up 2%)
Long-Term Growth Portfolio
First Solar released its first quarter results recently, reporting $800 million in revenue, up 45% YoY, compared to $550 million a year ago. It posted a profit of $240 million, or $2.20 per share, against $42 million, or $0.40, with a beat on consensus estimates on the top and bottom lines, all driven by macro regulatory tailwinds, ever since the passing of the IRA Act in 2022.
The company has a sales backlog of 78.3 GW, up from 71.6 GW a year ago, with net YTD bookings at 2.7 GW, down from 12.1 GW. Its average selling price stands at 31.3 cents per watt, down from 31.8 cents a year ago. The company expects its bookings backlog to extend through 2030, as there is seemingly no stopping demand for rooftop solar and large-scale solar energy generation projects.
While much of the solar energy industry reels from the structural overcapacity in China, First Solar has circumvented this threat, with its focus on differentiation and its business model. The company’s cadmium telluride semiconductor technology is vastly better than the commoditized crystalline silicon modules coming from China, which are known to harbor various reliability and quality issues.
Beyond the regulatory tailwinds, the company stands to benefit from the rise of generative AI as tech giants look to transition towards green energy to operate their massive new data centers, with First Solar being the preferred choice. A typical query on ChatGPT consumes 50 times more energy than a Google Search, so the giants of AI must make this shift to solar if they want to save money and don’t want to come under criticism.
It is already up 58% YTD and is showing no signs of slowing with plenty of tailwinds in its favor, and a pole position in the market. First Solar ended the quarter with a robust balance sheet, with $2 billion in cash reserves, just $680 million in debt, and $900 million in cash flow.
Many leading analysts from UBS, Piper Sandler, and JP Morgan Chase have increased their Price Targets for the stock. UBS raised its target to $320, from $270, the highest on the Street. Our Target was destroyed in the last two weeks as the stock rallied from $187 on May 14th to its present level of $272. We’re up 40% in less than a year. At $215 it is time to raise. We love this company so we are going to best UBS and place a $325 Target on the stock. Our Sell Price of $140 is hereby raised to $240.
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iShares US Oil & Gas Exploration & Production ETF (IEO: $103, up 2%)
Energy Portfolio
A pure-play energy fund with concentrated exposure to oil and gas companies that are exclusively involved in exploration and production, this fund closely tracks global energy companies and is thus subject to the industry’s swings and volatility. So far this year, the fund is off to a flying start and is up 9% YTD, mainly owing to the recovery in natural gas prices following a prolonged slump over the past year.
Given a short to medium-term horizon, the oil and gas industry is always eventful, with plenty of geopolitics and macroeconomic factors coming into play. For example, right now there is the Red Sea crisis, a prolonged conflict in the Middle East, and Ukraine intensifying its attacks on Russian oil refineries, among a host of other things to factor in, that could lead to swings in global energy prices.
On the macro front, the demand from China is still weak, but a recovery is in the cards, which could push oil prices beyond the $85 mark. Apart from that, a rate cut by the Fed sometime later this year, and a recovery in demand from Europe this winter for space heating and other residential and commercial uses can all lead to a much-needed rally in natural gas prices, which remain at multi-year lows.
When taking a long-term view, there is a lot to be optimistic about oil and gas stocks. This might seem counterintuitive considering the growing environmental movements the world over, alongside new alternative energy sources, but we believe that natural gas and hydrogen will play an outsized role in this transition. This too will take anywhere from two to three decades to become a reality, and in the meantime, oil and gas giants will be reaping profits.
The Exchange Traded Fund allows investors to ride this trend with its highly concentrated portfolio, with 45% of its assets held in ConocoPhillips, EOG Resources, Marathon Petroleum, and Phillips 66. These are all companies with massive inventories and low production costs, helping generate outsized returns during bullish streaks in energy prices, while still outperforming when prices slump.
Our Target is $120 and our Sell Price is $95. This fund is a great way to own an assortment of energy companies in one transaction. We added the fund at $80 two years ago.
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Recursion Pharmaceuticals (RXRX: $8.28, down 10%)
Early Stage Portfolio
Recursion Pharmaceuticals, a leading AI and machine learning company in the biotech space, released its first quarter results a month ago, reporting $13.8 million in revenue, up 14% YoY, compared to $12.1 million a year ago. It posted a loss of $91 million, or $0.39 per share, as against a loss of $65 million, or $0.34 the prior year, but posted a beat on consensus estimates on the top and bottom lines.
Rising losses were largely the result of increasing R&D expenses, at $68 million, up from $47 million a year ago. This was followed by a similar rise in administrative expenses at $31 million, up from $23 million, as the company has been on a hiring spree. Revenues during the quarter were entirely from its partnership with Swiss life sciences company, Roche, which the company expects to scale further.
Recursion has plenty of value catalysts coming up over the next few quarters, which can be quite profitable for the company in a significant way. This includes five drugs in phase 2 clinical trials, each with over 100,000 potential patients worldwide, and no competitor. If the company can successfully commercialize just one of these five drugs, it can add significant value from current levels.
Its AI-enabled drug discovery platform continues to gain momentum, with potential new partnerships and the exercising of existing partnership options capable of driving top-line growth. The company’s 20 petabytes of data collected from real patients, when used with its internal AI software is a game changer for the industry, prompting Roche and Bayer to start working with Recursion.
The company’s AI play has been formidable enough to warrant a $50 million investment from Nvidia, and it has grand plans in this regard, including a next-generation supercomputer. The stock is down 16% YTD, and it stands to offer enormous value if catalysts start to align going forward from present levels. It has a robust balance sheet, with $300 million in cash, and just $50 million in debt. Our Target is $28 and our Sell Price is $8, which is getting tight. We added the stock at $10 just six months ago and it ran up to $17 in February but has since settled down. This is a speculative stock for sure. Enjoy the ride, but be careful.
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ARK Innovation ETF (ARKK: $42, down 4%)
TERMINATING COVERAGE
Cathie Wood's flagship Innovation ETF has had a rough start to the year and is down 16% YTD. This comes as the broader equity markets, including disruptive tech stocks, have posted a rally this year. The pullback can be attributed to its high exposure to Tesla, which has been a key detractor for the fund in recent quarters.
The fund’s overreliance on Tesla is clearly wearing it down, and alongside this, other key weak investments include Roku (down 88% from peak), Unity Software (down 90%), Pacific Biosciences (down 96$), and Teladoc, which is down 50% this year and over 95% from its peak in 2021. Ark attributes the weakness in Tesla to auto sales still being lower than pre-COVID levels, but we think the various controversies surrounding Tesla’s founder, Elon Musk, and his controversial $45 billion compensation package could have contributed just as much, not to mention his purchase of Twitter, spending half his time with SpaceX, and many other strange personal quirks that this genius brings to the table. In our opinion, the fund’s underperformance in recent quarters is largely due to it being underweight on market leaders and mega-cap stocks, which have led the rally in 2023 and this year so far.
Investors should start treating the Ark Innovation ETF like a venture capital or private equity fund, which often comes with a lock-in period lasting a few years, up to a decade. That’s how long it takes for disruptive innovations to pay off, and at current levels the stock offers robust value, making it perfect for value-seeking investors with a long enough time horizon.
We are asking ourselves some tough questions lately. Cathie Wood has clearly lost her magic. We added the stock in 2021 at $117, after it had hit an all-time high of $158. We thought it was overvalued and waited patiently for it to come down. Come down it did, but it has continued to erode for the past three years, going nowhere for the past two years, languishing in the low 40s. Why do we continue to hang on to this stock? That’s a good question. We have again been patient with this fund, but for far too long. We don’t have the time to wait any longer. There are much better places for our funds, than the many pie-in-the-sky investments she has made these past few years.
We are exiting the fund and moving on. We’d rather own more Nvidia, more Super Micro Computers, or Eli Lilly and Novo Nordisk.
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The Bull Market High Yield Investor
The clock is now ticking on the next Fed policy meeting on June 12. Nobody expects a rate cut or a rate hike at this point. We're more interested in seeing whether consumer inflation numbers due out that morning have any impact on Jay Powell's prepared marks: a soft or "cool" print could once again prompt a lot of talk about relaxing overnight lending rates when the moment is right, while anything hotter than expected could have the opposite effect. Whatever we see this month, it's unlikely to change the primary narrative around the Fed, which is that we'll probably be in a place where Powell and company can start relaxing in September and cut more aggressively after that.
We've been saying it for months and we were right. Short-term interest rates have peaked. People parked in money markets are unlikely to earn more on those accounts than they're making right now. And as the short end of the yield curve recedes, upward pressure on the long end will evaporate along with it. There simply won't be a reason for capital to keep flowing out of Treasury bonds into those money market accounts. And as the bond market stabilizes, long-term yields have less reason to keep climbing to the point where they spook us here in the stock market.
Add it all up and if you're looking for a relatively smooth income stream without the strain of life in the stock market, you need to lock in Treasury yields where they are. That means settling for 4-5% a year, which translates into 2-3% above where the Fed wants to guide inflation in the long term. Maybe a 2-3% real return is enough for you. We have a feeling most investors will want their money to work a little harder, which is why we're banging the drum on stocks and funds like these.
Arbor Realty (ABR: $13.68, up 2%. Yield=12.6%)
REIT Portfolio
Leading Mortgage REIT Arbor Realty released its first quarter results recently, reporting $104 million in revenue, down 5% YoY, compared to $109 million a year ago. It posted a profit or FFO of $58 million, or $0.31 per share, down from $84 million, or $0.46. This was a mixed quarter for the company, with a beat on the top line, but a miss at the bottom, largely owing to a big drop in loan originations across the board due to the tougher mortgage business, due to 7% 30-year loans.
Agency loan originations during the quarter stood at $850 million, down from $1.1 billion a year ago, which Arbor had warned against a couple of months back. The company believes that the first two quarters of this year will include peak stress, as interest rates remain higher, with a possibility of a rate cut in late 2024. Borrowers are deferring taking loans in anticipation of lower rates.
Arbor’s structured portfolio, however, continues to do well, albeit with a small YoY decline, with $256 million in originations, down from $266 million the prior year, with a total of 59 loans being originated, the same as last year. Similarly, the company’s servicing portfolio hit new highs during the quarter, at $31 billion, up 8% YoY, compared to $29 billion a year ago, with a net servicing revenue of $31 million.
The company has done remarkably well throughout the pandemic, and the volatile interest rates environment that followed. This was largely owing to its diversified business model with multiple countercyclical income streams. For instance, if interest rates continue to remain high, originations will take a hit, but the mortgage servicing rights portfolio will increase in value due to low refinancing rates. Who is going to refinance a 3-4% loan at today’s 7% level?
This has helped it maintain its distributable earnings in excess of dividends, and a payout ratio of at least 90% throughout, all the while maintaining its book value, currently at $13.02. Over the past few months, Arbor has held outsized reserves to hedge against delinquencies and has continued to shore up liquidity, resulting in a robust balance sheet, with $910 million in cash, $12 billion in debt, and $550 million in cash flow.
Realty Income Corporation (O: $53, up 2%. Yield=5.9%)
REIT Portfolio
Realty Income, "the Monthly Dividend Company," is one of the largest investors in commercial real estate across the globe and recently reported $1.2 billion in revenue, up 40% YoY, compared to $940 million a year ago. It posted a profit or FFO of $790 million, or $0.94 per share, against $680 million, or $1.03, with a beat on top-line estimates, but a miss at the bottom, making it a mixed performance.
The company is structured as a real estate investment trust, and its monthly dividends are supported by the cash flow from over 13,250 real estate properties owned under long-term lease agreements with commercial clients. During the quarter, the company invested $600 million across a wide range of properties, with a weighted average yield of 7.8%. A significant chunk of these investments, or $320 million was allocated towards assets in the UK and Europe, with an average yield of 8.2%. The company invested $38 million in a US-based data center joint venture, marking its first investment in the space.
Another big milestone during the quarter was the completion of the $9.2 billion acquisition of Spirit Realty Capital, with the new combined firm valued at $63 billion, and Spirit shareholders set to own 13% of it. The CEO of Arbor stated that the transaction is immediately accretive. This gives Realty Income significantly more size, scale, and diversification across asset, geographical, and demographic lines, along with the potential for realizing various cost and operational synergies.
This was an eventful quarter for the company in terms of capital activity, starting with a secondary offering to raise $550 million an at average price of $56.93 per share. Followed by $450 million in 4.750% senior unsecured notes due on February 2029, and $800 million worth of 5.125% senior unsecured notes due on February 2034, resulting in $4 billion in liquidity, to fund $2 billion in investments during the year.
The stock is down by nearly 10% so far this year, but there are a few key catalysts that could turn things around, most importantly a rate cut by the Fed, later this year. What makes this REIT truly impressive is its diversification across classes, assets, and geographies, leaving it well off in all market conditions. It ended the quarter with $680 million in cash, $26 billion in debt, and $3 billion in cash flow.
Invesco Municipal Trust (VKQ: $7.93, up 2%. Yield=5.1% tax free, or the equivalent of 7.8% taxable)
High Yield Portfolio
The Invesco Municipal Trust is a closed-end fund that invests in tax-free municipal bonds, with the aim of generating steady current income for investors, with limited volatility and downside risks given a long-term horizon. It is a perfect product for retirees and other conservative investors seeking consistent tax-free income, but don’t want to stomach any excessive market risks.
The fund posted a stellar rally starting in October when the Fed officially ended its hawkish stance, but as the anticipation of further rate cuts soured, it has been increasingly rangebound over this year. It is, however, making the most of the higher nominal yields in recent months.
Following two consecutive years of net outflows, $140 billion in 2022, and $8 billion in 2023, muni bonds are set for a turnaround this year. Bonds posted negative performance in April, mostly owing to the better-than-expected employment and inflation data, prompting a hawkish reaction from the Fed. New issuances, however, swelled to $45 billion, 29% over the 5-year average, and were oversubscribed 3.8 times. After several months of limited supply, this quarter presented an opportunity for funds to add yield to their portfolios at an attractive risk-reward proposition.
Despite its phenomenal 22% rally since mid-year 2023, the fund offers an attractive discount of 12% to book value, while providing tax-free yields of 5.15%. This makes for a very impressive proposition, not just for conservative, income-seeking investors, but for speculators seeking value as well. With its extensive 30-year track record and a low expense ratio of just 1.3%, this fund is for those who want no risk from equities.
Good Investing,
Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998
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 11, 2018
by Todd Shaver | Feb 11, 2018 | Weekly Newsletter 7pm Sunday
The Weekly Summary
Volatility is back and in an uproar. We’ll run through what is happening in the markets below, but don’t lose sight that although the backdrop warrants caution, the bull market is alive and well. US equities ended their worst week in two years on a positive note with the Dow up 330 points on Friday, but rate-hike fears that pushed markets down remain in place as investors await inflation figures on Wednesday. The S&P 500 tumbled 5.2% in the week, its steepest slide since early 2016, jolting equity markets from an unprecedented stretch of calm. At one point, stocks were 12% below the highs set just two 11 days ago, before a strong rally Friday left the equity benchmark 1.5% higher on the day.
Still, the selloff has wiped out gains for the year. Signs are mounting that jitters spread to other assets, with measures of market unrest pushing higher junk bonds, emerging-market equities and treasuries. The CBOE Volatility Index ended at 29, almost 3x higher than its level January 26th. We at The Bull Market Report are staying calm. We believe stocks are on sale so we would suggest picking out one or two of your favorites and slowly buying more shares.
No matter what is happening out there, there is always a bull market here at The Bull Market Report! This week we highlight: Blackrock, The Carlyle Group, Synaptics, Tesla, CBRE Group, and Ventas.
Key Market Measures (Friday’s Close)
BMR Companies & Commentary
Blackrock (BLK: $522, down 5%)
BlackRock is trusted to manage more money than any other investment firm. Its business is investing on behalf of clients from large institutions, to parents and grandparents, teachers, nurses, doctors and people from all walks of life who entrust their savings to the firm. Well, the company is getting even bigger.
BlackRock is seeking to raise $10 billion for "BlackRock Long-Term Private Capital" to buy and hold $500 million to $2 billion minority stakes in companies for periods of up to more than a decade. The move establishes BlackRock as a potential competitor to Wall Street private-equity giants like Carlyle Group and Apollo Global Management. It is the first-ever attempt by the world's largest asset manager to make such direct investments.
BlackRock has praised Berkshire Hathaway as the best-known example of the strategy. Well, of course. No one has ever done it better. We all know this. BlackRock Long-Term Private Capital will operate differently from most private equity funds, taking full commitments up front and reinvesting as it exits investments. As compared with most investments that return capital to investors after one deal. This is great for Blackrock shareholders because there is no need for ongoing fundraising.
BMR Take: The rock of the investment management industry right now is Blackrock. The company is going to generate nearly $14 billion of revenue this year and produce about $28.60 of EPS. With revenue and EPS growing to over $15 billion and $32.00 next year, respectively, the stock is far from expensive leaving a lot of room for upside.
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The Carlyle Group (CG: $23, down 10%)
Carlyle delivered a solid quarter. Revenue was $1.0 billion versus just $435 million a year ago. EPS hit $1.01 versus just $0.02 a year ago.
Management discussed how the business concluded 2017 with great momentum across all businesses. Carlyle had record activity deploying $22 billion into new investments and raising $43 billion of capital across the platform. Investment performance was exceptional with 20% appreciation across carry funds enabling realizations of $26 billion that went to investors as proceeds for their investments.
The company declared a quarterly distribution of $0.33 per share on February 21st. For full year 2017, they paid out $1.41. That is nearly a 6% yield at the current price.
BMR Take: In private equity The Carlyle Group is a top-notch franchise, known everywhere, the who’s who of business, doing deals in the top floor offices of every major city. The business is raising money like weeds and generating big returns. It is a very compelling opportunity. EPS should hit $3.00 next year leaving this stock dirt cheap.
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Synaptics (SYNA: $44, up 7% - yes really!)
Synaptics reported revenue of $430 million versus $461 million last year. EPS was $1.11 versus $1.49 a year ago. Not terribly pretty, but Synaptics is starting to benefit from the transition encompassing a more diversified product portfolio and customer base, and expects to see strong momentum from investments in infinity displays and consumer IoT in the second half of this calendar year. They continue to make meaningful strides across core growth priorities within chip-on-film, OLED (organic light-emitting diode*), in-display fingerprint technology, and consumer IoT. This includes retail availability of flagship smartphone products, such as new fingerprint, display, and voice-enabled technologies.
* OLED panels are made from organic (carbon based) materials that emit light when electricity is applied through them. Since OLEDs do not require a backlight and filters (unlike LCD displays), they are more efficient, simpler to make, and much thinner - and in fact can be made flexible and even rollable.
BMR Take: With all of the growth investments happening, and the lucrative opportunity emerging for consumer IoT, the quarter’s results were less important than the outlook for attacking this major opportunity. And the outlook is bright. EPS is expected to ramp from around $4 this year to $5 next year and substantially more in the years ahead. We added the stock at $41 in December and our Price Target is $54 and we are hopeful of seeing this during the current year. It would be helpful in achieving this goal if the market calms down and resumes its bull run.
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Tesla (TSLA: $310, down 9%)
Tesla reported revenue of $3.3 billion this quarter versus $2.3 billion last year. For the full year Tesla did $12 billion versus $7 billion a year ago. EPS this quarter was a loss of $3.04.
However, the big ramp in profitability is on the horizon. Revenue is expected to jump to $20 billion this year and $27 billion next year. EPS is expected to swing from a loss to a positive $3.25 in 24 months.
The stock traded about flat after the earnings release that included a fractional revenue miss, and narrower-than-consensus EPS loss. Gross margins came in 190 basis points below consensus, with the Model 3 production ramp weighing on the overall margin profile. But that didn’t really matter as management reiterated its target of 5,000 Model 3 production units per week by the end of Q2.
BMR Take: Most continue to see many moving parts to the Tesla story, with the guidance for sustainable positive operating profits sometime in 2018 garnering more of a show-me attitude, especially given the checkered track record of not hitting guidance milestones or production targets. However, most agree the healthy demand for the Model 3 continues to be a good problem to have, and are spectators on the pace of production execution.
We put a Sell Price of $335 on the stock a few weeks ago so we don’t lose the tremendous profits we have on the stock, but the market this week smashed most stocks down including Tesla. Our Sell Prices are for YOU to decide what to do.
--- We love the concept of the company.
--- We love Elon Musk (Space X with its new successful launch this week has had positive ramifications on Tesla).
--- We love the cars they make.
--- But the debt is crushing.
--- But they have been able to weather the storm through debt and equity sales.
As we’ve said before, this stock could go to $200 or $500. And we’re not sure which will come first? It is very speculative. Should you be in this stock for the wild ride ahead? Only you can decide.
Here’s a 5-year chart. Pretty impressive:
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CBRE Group (CBG: $42, down 5%)
CBRE is crushing it. The company reported revenue of $4.4 billion versus $3.8 billion last year. EPS was $0.99 up from $0.93 a year ago. The consensus expects this year’s revenue to grow from $14.2 billion to $16.5 billion in 2019. EPS is similarly expected to grow from $2.70 this year to $3.20 in 2019.
Fourth-quarter results capped another excellent year for CBRE. Performance significantly exceeded the expectations discussed on the third-quarter earnings call as some concerns surfaced about occupier outsourcing and leasing fee revenue growth. But all that went to the wayside as revenue and earnings for 2017 ended up reaching all-time highs. 2017 marked the 8th consecutive year of double-digit EPS growth for CBRE.
BMR Take: The macro environment is a supportive backdrop for this business, and management continues to operate within an industry poised for long-term growth. This is due to the growing acceptance of outsourced commercial real estate services, the increasing capital allocation to commercial real estate as an institutional asset class, and the continuing consolidation of activity within the industry to the highest-quality, globally diversified market leaders. CBRE Group is a must-own holding in your portfolio in the real estate sector.
We’re up over 60% in two years on this wonderful firm. No dividend yet, but we can see that coming. Our target is $54 and there’s an outside chance it can hit that this year. We know what this company does first hand – they save big multi-national companies money. Big money as in millions and millions of dollars. And the firm gets rewarded in brokerage fees, fixed fees and more. And so few people know about this great firm.
This chart shows the value this stock offers here, after this rough week:
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Ventas (VTR: $52, down 5%)
Ventas reported revenue for the quarter of $895 million versus $875 million a year ago. Revenue for 2017 ended at $3.6 billion versus $3.4 billion in 2016. EPS was $0.50 versus $0.58 a year ago. EPS for 2017 ended at $1.78 versus $1.86 in 2016. Consensus expects revenue to drift upward toward $3.7 billion over the next 2 years. EPS is expected remain stable around $1.75 although we see several sources of EPS upside that are likely to drive revisions closer to the highest Street forecast of $2.15.
All in all, 2017 was another excellent year for Ventas, as the business generated record cash flow from operations and delivered same-store property cash net operating income growth at the high end of internal expectations. To further enhance their diverse portfolio, the company made nearly $2 billion in value-creating investments, including significant expansion of their university-based life science business. And they profitably disposed of almost $1 billion in assets and completed innovative deals with leading operating partners.
BMR Take: Ventas has proven resilient through cycles for two decades. They remain one of the world's best REITs with a specialty in healthcare among other areas.
This success is founded on solid strategic vision, superior foresight and innovation, intelligent and timely capital allocation decisions, rigorous execution and a cohesive, expert team. As they enter 2018 – the company’s 20th anniversary year – management is confident that they can continue the long track record of superior consistent performance as the industry leader.
We added Ventas at $60 in last 2016, a little over a year ago. Until the last two weeks, it was hovering around $56, down a bit, but still paying a nice 6% dividend. It’s worth $18 billion, and has over 1200 properties across the US, Canada and the UK. And as you know, they are in the senior living business along with medical facilities as well. Yes, the stock is down, but this company is strong, and we can only see good things happening from here. If you bought at $60 now is the time to add to your position to bring your cost down. Two years from now we wouldn’t be surprised to see the stock in the 70s, as remember, 10,000 people a day turn 65 in the US. They have to live somewhere!
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We got a letter from one of our readers about Ventas
From: Richard Reed [mailto:reed995@]
Sent: Wednesday, February 07, 2018 10:21 AM
To: The Bull Market Report <Info@bullmarket.com>
Subject: Re: EARNINGS PREVIEW FOR THE WEEK AHEAD
Hi Todd,
Ventas (VTR) is below your Sell Price. Are you lowering the sell price? Thanks.
Richard
Our answer:
Hi Richard –
Look – they own 1200 assets in the United States, Canada and the UK. The properties are senior living properties and more. Are they all going down the tubes? NO WAY. A $19 billion asset paying 6%. We would buy more.
Furthermore, our Sell Price on Ventas is $58. But at $52, we have to say that we like it even more. Nothing has changed for the company in the past two weeks. Yes, interest rates are a shade higher, but nothing out of the ordinary. When the economy is good, rates go out. This is just normal. So to answer your question above, yes, we are lowering our Sell Price to $48. Of course, YOU can make up your own mind on this one, as always, but we would take this opportunity to buy an amazing company at an even lower price.
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Economic Calendar
CPI Ex-Food & Energy
Wednesday, February 14th, 8:30 AM
Period: January
Consensus: 1.7%
Prior: 1.8%
CPI
Wednesday, February 14th, 8:30 AM
Period: January
Consensus: 1.9%
Prior: 2.1%
PPI
Thursday, February 15th, 8:30 AM
Period: January
Consensus: 2.5%
Prior: 2.6%
Housing Starts
Friday, February 16th, 8:30 AM
Period: January
Consensus: 3.7%
Prior: -8.2%
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Apple has $285 Billion in Cash
Can you believe this? Again – a record high for any company in history. Apple (AAPL: $156, flat for the week) has $285 billion in cash, or $56 a share. With the stock at $156, that’s 36% of each share of stock in cash. We’re not sure of the Wall St. record, but we are guessing this is twice as much than any other company in history. With the stock flat for the week (amazing) this just screams out at us to add more to the portfolio.
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If the Market Heads Back Up
No one knows where the market is heading. Will it calm down and move higher this coming week and month? Or will it be heading for 23,000 and lower? Again, we don’t know. But if things simmer down and the volatility abates – AND IT WILL – there are a few stocks that we would want to add to our positions in. Here are just a few:
Microsoft
PayPal
Google
Facebook
Apple
Eli Lilly
Yes, many of these are the super Tech stocks that have been leading the market. But guess what? These stocks will continue to lead the market for many years to come.
And one more note. Did you see Annaly Capital Mortgage (NLY: $10.21, down 1%) this week? Solid as a rock. So if you are super worried about things, we believe Annaly can be a store of value for a month or two or 12, and you can enjoy the 11% dividend in this $12 billion market cap company.
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A Word from Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
There was no comment Monday or Tuesday because everything I wrote was outdated and the numbers were obsolete within minutes of writing, rewriting and re-rewriting them. The dust may or may not have settled, but a few things are much clearer today.
In short, the seismic swings over the past few days have been based on three primary factors that we believe now form a consensus:
1. The threat of higher inflation (Rising bond yields)
2. The possibility of more Fed hikes
3. The long streak without a normal and healthy market shakeout.
How does that stack up against the best economy we've seen in over a decade? In other words, is it good news or bad news that economic growth is so strong the Fed may have to raise rates sooner than expected? Or, is it good news or bad news that nearly half the companies in the S&P 500 have reported fourth quarter results and more than 80% of them have beaten Wall Street's revenue expectations, the highest percentage since the third quarter of 2008? And, is it good news or bad news that the tax law will boost those profits further in the quarters ahead?
Let's put all this in perspective:
First, the market isn’t overbought anymore. We now know that. There was a "10% correction." Let’s get over it.
Second, earnings are robust.
Third, the rise in bond yields has been a headwind, but it’s not signaling a looming recession. Importantly, the 10-year vs. 2-year Treasury yield spread has widened out as yields have risen, implying the bond market is now discounting higher inflation and better economic growth, which over the medium term has almost always been positive for stocks.
While volatility has returned with a vengeance, the market fundamentals are now better and earnings growth prospects haven't looked better in years. Basically, all of the reasons why investors have been bullish on the market last week, last month and last year are still here.
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The High Yield Report
by Michael Foster
VP High Yield
It should always be emphasized that much of a stock's action is not caused by only the underlying company, but also by the industry and the overall market. In a volatile environment, this emphasis is especially important. While our High Yield and REIT portfolios have shown lackluster performance over the past two weeks, the fundamental aspects of the companies that make up the portfolios have not changed.
The S&P 500 decreased 5.1% over the past week, leading to stocks officially being in correction territory. Much of the decline is being attributed to interest rate and liquidity fears, which is why much of the analysis on the portfolio below will focus on those aspects. It takes just one week to rattle bullish sentiment. As an investor, you should not put too much weight on what the general financial media is discussing. What should take priority is thinking about whether the fundamental aspects of the economy and market have changed. When this is the priority, our fear diminishes as we realize that earnings are still strong, nonfarm payrolls on February 2nd were above expectations, and a deregulatory environment is still present.
One metric, the yield curve, is worth looking at though. The spread between the 10-year Treasury yield and the 2-year Treasury yield has been constantly decreasing as a result of the Federal Reserve tightening policies and the lack of inflation. On a basic level, you can note that the presence of an inverted yield curve, if it were to happen, has been a common predictor of past recessions. Going deeper, the economic repercussions of the inversion are much more important. Consumers and banks are directly impacted. For consumers, the cost of credit increases, which leads to a larger portion of expendable income being dedicated to servicing debt. For banks, the spread between long-dated loans and deposits decreases, which leads to worse financial performance. We’re sharing this information so that you can keep the yield curve on your radar, but there’s no need to worry as of now. When the curve inverted in the past, it still took between 7 to 24 months to reach any sort of recessionary state.
AllianzGI Equity & Convertible Income Fund (NIE: $20.59, down 4%) fared slightly better than the S&P’s drop of over 5%. It moved from the weekly low of $19.50 to its current level after recovering about 2.5% in the last hour of trading on Friday. The performance of individual equities which it holds, including Microsoft, Alphabet, and Amazon, led to the recovery in the last hour. Given that the fund invests little in the bonds and the scenario of the inverted yield curve, we can expect the funds to be shifted from Equity to Bonds.
We still see Apollo Commercial RE Finance (ARI: $17.70, down 3%) as a cyclical play on the U.S. commercial real estate sector. Given that commercial real estate in the U.S. remains solid, with Apollo’s loan originations hitting $1.5 billion YTD and the economy of the US continuing to get stronger and stronger, Apollo is not a position to be worried about.
Digital Realty Trust (DLR: $102, down 5%) dropped almost by the same amount as the S&P. This was the opposite of the week prior, where the company maintained strength in the midst of widespread declines. While we noted the continued demand for data centers in the last summary, there are some other metrics to note. Digital Realty, owning many data centers in US and internationally, is affected by rising interest rates as the cost of borrowing rises. The company has a massive debt level of $5.8 billion with a Debt/EBITDA ratio of 22. Rising interest rates could cripple the company’s dividend payout and future prospects.
Invesco Municipal Trust (VKQ: $11.83, flat) ended up at the same level as the beginning of the week. With its investments primarily in investment grade U.S. municipal bond obligations (85%), the fund can expect to yield better returns amidst the current rising interest rates scenario. Also, a Fitch report stating that plans to cut federal funds to them won't impact the revenues of the municipal bond funds and ETFs, played a large part in keeping the fund’s price level stable. Nuveen Municipal (NVG: $14.43, flat), another high yield fund with major investments in U.S. investment grade municipal bonds, also maintained its price level.
Pimco Dynamic Fund (PDI: $30, down 1%) was less volatile. The firm, investing primarily in a range of debt securities, including mortgage-backed securities, high yield corporates, and emerging market bonds, could witness further issues with rising interest rates, changes in tax structure, and better yields.
The REIT sector has been partially impacted by the recent economic data, heightening fears of higher interest rates. Primarily, the sector is engaged in massive borrowings, and rising interest rates could increase the cost of the borrowings. With that said, rising interest rates often occur in a booming economy, which indicates higher demand by consumers.
Market corrections generally provide prudent investors with great buying opportunities. One way of going about this is finding relative strength in strong industries. Applying this analysis to REITs, the overall REIT sector was down only 3%. Within out portfolio, three of the five positions outperformed the sector. Annaly Capital Management (NLY: $10.21, down 1%), Government Properties (GOV: $16.37, down 1%), and Omega Healthcare Investors (OHI: $26, flat) composed that group.
As a company that primarily engages in buying mortgages and mortgage-backed securities (as well as other assets), Annaly could fare very well as interest rates go up and correspondingly coupon rates do as well. While this is not necessarily the reason for the less-than-average drop this week, going forward it is something we will keep in mind. Both Government Properties and Omega should not feel a significantly negative impact by rising rates either. The former gets offered attractive rates by the government as a result of its leases and the latter’s healthcare-related real estate is, for the most part, unaffected by the business cycles.
The other two positions, Ventas (VTR: $52, down 5%) and Welltower (HCN: $55, down 5%), ended up having declines that were in-line with the S&P 500 but larger than the move in the REIT sector.
Ventas reported positive 4th quarter earnings on Friday, which provided a minor boost to the stock. The reported income from continuing operations for 2017, $640,000, was a record for the company. In turn, the EPS and FFO per share numbers were also records. In a rising rate environment, this is a positive sign. With the earnings report occurring during a stock market decline, any overall S&P bounce should result in outperformance by Ventas.
The other relatively weak company, Welltower, did not have any news this week to explain the larger than average decline in the stock. As it is focused on owning senior living properties and funding real estate infrastructure, the large amount of debt maintained could pose an issue within the rising rate environment. Currently, though, the extensive track record of stock appreciation over the past 25 years leaves us unworried. Welltower is also at the lower end of its range for the past four years, so it is a good area to pick up more shares.
Good Investing,
Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998
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
