I just returned from the Orlando Money Show, where I had an opportunity to see and speak with several of our contributors. The mood was festive, and the advisors were optimistic. And why not? The markets continue to outperform, as we navigate through the nasty election season. Both investors and advisors continue to be very bullish, as you can see from our Advisor Sentiment Barometer, as well as our Market Views.
The economy is very strong, with a healthy housing market, steady employment, and good retail sales. We’ve yet to see if the coronavirus outbreak will have any major and long-lasting effects on the global economy.
But for now, the investment opportunities are plentiful. Read the Issue for more details.
Market Views 826
It’s been another solid week for the market, with the major indexes kiting higher and, while individual stocks were a bit more mixed and news-driven, most are acting just fine.
Overall, not much has really changed from a week ago—the vast majority of evidence remains bullish, especially the primary evidence (trends and action of the major indexes and key leading stocks), which tells you what big investors are doing right now.
That said, you shouldn’t get too far over your skis, either. The title of my Cabot Growth Investor was “Positive—but not Pounding the Table” which tells you our thinking. If you’re heavily invested, we’d certainly be riding most of your winners (partial profits are fine here and there, as always), and some new buying is fine if you find solid setups.
We don’t want to overemphasize the handful of yellow flags out there. Obviously, the market could pull in at any time, which simply means you want to be more discerning on the buy side. Simple as that.
Michael Cintolo, Cabot Top Ten Trader, www.cabotwealth.com, 978-745-5532, February 14, 2020
Gold is Bullish
We’re already seeing governments react to fears that the coronavirus outbreaks will drag on global economic growth. They’re cutting interest rates and firing liquidity cannons, and more “preventative” action will follow. Thanks to inflation, when benchmark rates go very low, real interest rates—which take inflation into account—go negative. Sometimes this happens even if the benchmark rate is still positive. The bottom line is that gold is bullish for all sorts of reason. But the government reaction to the coronavirus adds more fuel to the fire. Pullbacks can be bought.
Sean Broderick, Weiss Ratings, 1-877-934-7778, www.weissratings.com, February 10, 2020
Global Pessimism looks Overblown
Fed Chairman Powell told Congress that monetary policy is appropriate for a resilient economy facing low inflation and China risks.
Earnings are well ahead of expectations, led by tech. No, this is not another dot com bubble. The Nasdaq rose 99% in the last five years. In the bubble’s five years, it rose 531%.
Analysts disagree on how much buying power remains to fuel the stock rally. RBC thinks it’s “quite low;” Northwestern Mutual thinks it’s “a lot.”
The concentration of the coronavirus remains in Hubei, China.Chinese deaths are 1,665. To reach the proportion of China’s population that flu deaths reached in the US in 2018, the figure would need to be 259,000.
Many analysts warn of a Chinese and global economic slowdown, but China is confident it will emerge stronger, and its central bank is supporting businesses.
Jason Kelly, The Kelly Letter, http://jasonkelly.com/kellyletter, February 16, 2020
Tyson Foods, Inc. (TSN): A Comeback, but still Undervalued
Tyson Foods, Inc. (TSN) is one of the world’s largest food companies, with operations in 20 countries, and is a recognized leader in protein. Leading brands include Tyson, Jimmy Dean, Hillshire Farm, Ball Park, Wright, Aidells, ibp and State Fair.
Spotlight Stock 826
Tyson Foods, Inc. (TSN) is one of the world’s largest food companies, with operations in 20 countries, and is a recognized leader in protein. Leading brands include Tyson, Jimmy Dean, Hillshire Farm, Ball Park, Wright, Aidells, ibp and State Fair.
Tyson Foods reported first quarter EPS of $1.66 this morning, on target with consensus estimates, on $10.8 billion revenue, slightly below the $11.0 billion estimate. International demand for beef and pork products is increasing due to the epidemic of African Swine Fever that has decimated Asian hog populations. The quarter’s successes include record beef GAAP operating margins of 10.7% and a record adjusted operating margin of 11.2%. Revenue grew 6% year-over-year.
CEO Noel White commented, “Our Chicken segment performed better operationally, although in a soft pricing environment. Our Prepared Foods segment produced its sixth consecutive quarter of retail consumption growth, demonstrating the strength of our brands and innovation as we grew or held market share in all core categories. With improved access to global markets resulting from recent trade developments, there are reasons to be optimistic about fiscal 2020 and beyond and we are well-positioned to capitalize on opportunities in the global marketplace. Although we anticipate the challenges and volatility typical in our second fiscal quarter, our long-term outlook remains positive.”
The company embarked on a restructuring program that is expected to contribute to financial fitness by eliminating overhead and consolidating operational functions. This includes the layoff of 500 mostly-corporate employees and an associated $44 million pretax charge, leading to expected cost savings of $55-$65 million in fiscal 2020.
Thus far, Wall Street expects Tyson Foods to achieve 25.1% EPS growth in fiscal 2020 (September year-end). The P/E is just 10.8. Analysts will tweak their estimates over the next two weeks. The restructuring should slightly boost 2020 earnings estimates, as should strength in international trade. The fact that the stock is down today makes no sense in light of the company’s ongoing growth and success. TSN is trading at about 80, which represents price support that was established in September through November 2019. I’m moving TSN from Hold to a Strong Buy recommendation now that the share price seems optimal again. This is a great moment to buy low for traders and growth investors. Strong Buy.
Crista Huff, Cabot Undervalued Stocks Advisor, www.cabotwealth.com, 9787455532, February 5 & 6, 2020
Feature 826
Our Spotlight Stock, Tyson Foods, began its life in 1935 when Arkansas farmer, John Tyson heard that chickens were commanding better prices up north. He hauled 500 chickens to Chicago, sold out, and repeated the process. From that modest start, Tyson now commands some 20% of the chicken, beef, and pork markets in the United States. And the company is a leading producer of meat in another 125 countries around the globe, including Canada, Central America, China, the European Union, Japan, Mexico, the Middle East, South Korea, and Taiwan.
Over the years, Tyson expanded into other food categories, like frozen bakery products and entrees, but in the last couple of years, the company has decided to turn its focus back on protein only. Consequently, Tyson has begun divesting its non-protein product lines like Sara Lee, Kettle, and Van’s.
And that timing looks prescient. As contributor Crista Huff, Chief Analyst of Cabot Undervalued Stocks Advisor noted, the African Swine Flu has really hurt Asian pig farmers. It has now struck 50 countries, changing the landscape of the meat and feed markets in Vietnam, Cambodia, Laos, Korea, and the Philippines. But China has been particularly devastated; some reports noted that its hog herds were 40% smaller in September than the year before. And some folks think that number is conservative. While a horrible development, that supply shortage is helping Tyson. Also encouraging is that it is estimated that nearly 98% of global protein consumption growth will occur outside the U.S., with 70% of that coming from Asia.
In its efforts to develop additional protein products, Tyson Foods is backing a $150 million fund—New Tyson Ventures—that is investing in entrepreneurial businesses that are involved in food innovation. Their target is “commercializing alternative proteins, addressing food insecurity and food loss through commercial models, and promoting better use of resources, safety, and consumer empowerment in the food chain.”
Additionally, Tyson has been on a buying spree, adding protein-based acquisitions, including Keystone Foods and AdvancePierre Foods. At the end of 2018, Keystone, which supplies chicken, beef, fish and pork to some of the world’s leading quick-service restaurant chains, retail and convenience store channels, was purchased for $2.16 billion cash. More recently, Tyson paid $4.3 billion for AdvancePierre Foods—a manufacturer of ready-to-eat sandwiches, entrees and snacks.
The timing of the new protein focus and acquisitions is great, especially now that the trade war seems to be all but over. As well, meat (beef, pork, and poultry) production in this country hit record levels last year, and are continuing to grow. The USDA projects that commercial beef production will reach 27.5 billion pounds this year, pork should be up to 28.6 billion pounds, and chicken production is forecast to reach 51.006 pounds. It’s hard for me to believe, as I’m not much of a meat eater, but the National Chicken Council predicts that combined poultry and red meat consumption could reach more than 225 pounds per person in 2020. That’s up 5 pounds per person just since 2018. And that is good for Tyson. Its shares have had a good year, beginning 2019 around $55, and trading close to $82 today, but they still appear to be undervalued. This looks like a good time to enter the stock.
Growth 826
Ecolab Inc. (ECL) | Daily Alert January 20
Founded in 1923 and headquartered in St. Paul, Minnesota, Ecolab Inc. (ECL) is a diversified company that provides water, hygiene, energy technologies and services, for the hospitality, healthcare, and industrial markets worldwide. The company operates through Global Industrial, Global Institutional, Global Energy, and other segments, and sells its products through field sales and corporate account personnel, distributors, and dealers. Its current total market capitalization of $55.2 billion makes ECL a large capitalization stock (a large-cap stock has a market capitalization value of more than $10 billion) with a long history of consistent earnings growth and dividend payments. It is considered a solid and well-diversified business with a wide economic moat and sustainable competitive advantage over its rivals the company and enjoys outstanding management and corporate culture.
Consensus estimates call for the company to earn about $5.86 per share this year, up from $5.25 per share last year, and to go to about $6.51 per share next year. ECL has paid dividends to investors since 1936, and has increased its payments for thirty three consecutive years, which makes it a “Dividend Aristocrat.” During the past five years it has increased the dividends at an average rate of 9.94%, with a quarterly payment of 47 cents currently.
Technically (from the chart’s perspective) ECL looks attractive, trading 8.7% below its 52 weeks high, while it is forming a price consolidation pattern between $210 and $181 approximately, in which $181 is acting as a technical support level. The actively managed no-load mutual funds Vanguard Dividend Growth Inv. (VDIGX) and Edgewood Growth Institutional (EGFIX) are major shareholders of ECL, holding 1.4% and 1.0% of its shares respectively. The stock is also one of the 63 holdings of the mutual fund managed by Moneypaper Advisors, the MP 63 Fund (DRIPX). Ecolab’s main competitors are Sealed Air Corp. (SEE) and Sonoco Products Co. (SON)
ECL’s five-year Beta (a measure of the volatility, or systematic risk in comparison to the market as a whole as evidenced by the S&P 500® Index) is 0.80, so the stock is 20% less volatile than the Market.
ECL’s Dividend Reinvestment Plan charges no fees for cash investing, dividend reinvestment, safekeeping, automatic investment or termination of the plan.
With the stock being fundamental and technically attractive, this company is an appropriate holding for investors who wish to build a holding over the long term.
Vita Nelson, www.directinvesting.com, 914-925-0022, January 2, 2020
ICFI International, Inc. (ICFI) | Daily Alert January 27
Monday night, ICFI International, Inc. (ICFI) disclosed two noteworthy events: a material acquisition that bolsters its position in the large and fast growing TAM in federal IT services, and the potential of insourcing on some of its disaster relief work in Puerto Rico. Net net, we think the top line outlook for 2020 is higher than our previous estimates, but potentially more tilted toward inorganic growth.
We see the two events being somewhat EBITDA neutral, but a higher tax rate injects some headwind to adjusted EPS. We think some upside to our new estimates is quite possible given our projections reflect mostly business in hand today; and our view that in-sourcing in Puerto Rico may be less than we have modeled.
We remain convinced that the ICFI investment case overall is better now than it has been in several years.
ICF’s services portfolio is very broad but has always lacked critical mass in some markets for federal IT services. We think the ITG acquisition fills much of this white space, providing full lifecycle, cloud-based IT solutions, while leveraging strong partnerships with players such as ServiceNow and Appian. Agile development is also resonating with ITG customers, which we believe can be leveraged across the broader ICF portfolio.
ITG’s recent growth has been impressive at ~15%, outpacing the market. From here we believe cross selling helps as well, leveraging core ICF subject matter expertise into IT opportunities. ITG’s mid-teens EBITDA margin should also be accretive to the consolidated margin. Net net, we think the acquisition makes quite a bit of sense from a strategic perspective. Financially at a mid-teens EBITDA valuation, we don’t see this deal as cheap, but we also believe there is more strategic value in ITG for ICF than for much larger IT-focused federal services players.
In addition to inorganic growth, ITG will help the core ICF bid pipeline as well. While ICF has been growing its IT qualifications organically, we believe ITG significantly boosts this trajectory. Management noted that approximately 10% of core ICF’s bids outstanding would benefit from the addition of ITG qualifications into the bids.
Offsetting some of this good news, ICF also noted that it is lowering its revenue outlook from the FEMA-related disaster recovery work it is doing in Puerto Rico. Following recent elections there, the new governor is trying to increase the local government’s role in public infrastructure. While the eventual outcome here remains unclear, we have conservatively gone ahead and removed several points of revenue for this event for 2020. In our view, we believe that the high standards demanded by work for FEMA will eventually accrue to ICF even against a new local political backdrop in Puerto Rico. While this is a fluid situation and could change, this is a negative development from both a revenue and margin perspective. So far there is no impact on HUD-related ICF is working on in the Commonwealth.
With most all of ICF’s businesses doing better than they have in several years, we are encouraged by the outlook here and fine-tuning up our revenue estimates.
Joseph Vafi and Pallav Saini, Canaccord Genuity Research, www.canaccordgenuity.com, January 14, 2020
Cresco Labs Inc. (CRLBF) | Daily Alert February 10
A number of cannabis mergers have fallen through over the past year, not the least of which was the deal between Medmen Enterprises (MMNFF) and PharmaCann. That merger fell apart for reasons that are obvious (mostly falling valuations). After marijuana stocks fell, the merger didn’t make sense since the deal was paid for mostly in stock.
M&A activity in the industry has dropped off since then, mostly because no company wants to find themselves on the short end of the stick. That’s not a bad idea from an editorial perspective; you don’t win many readers by giving them NO news.
I think this all-stock deal will likely open the floodgates, mostly because it had almost completely closed. Two relatively small cannabis companies managed to close a merger, even as the market remains challenging. That means even bigger companies, with plenty of cash to burn, could close a merger as well.
Right now, all of our cannabis holdings are “buys,” mostly because they could become acquirers or targets themselves. We’re at the phase of industry development where M&A is actually going to start creating value: Taking out weaker hands that potentially have greater value, if played correctly.
Recommended Action: Buy Cresco Labs under $10.
Ian Wyatt and Ben Shepherd, Ian Wyatt’s Million Dollar Portfolio, www.wyattresearch.com, January 24, 2020
JetBlue Airways Corporation (JBLU) | Daily Alert February 11
JetBlue Airways Corporation (JBLU) shares are out-of-favor despite the airline posting an enviably long string of positive earnings surprises.
For one, the airline’s unit revenue growth has been lackluster. JetBlue’s CEO Hayes is however confident of delivering industry-leading EPS growth in 2020 from cost control efforts already underway.
If Hayes’ forecast comes true, JetBlue should earn $2.50-3.00 a share in 2020, well above analysts’ $2.38 estimate. Trading at a discount to peers, JetBlue shares appeal to contrarian investors. They trade at 8.5X-forward EPS versus prospects of 18% EPS growth in the next 12 months.
Sam Subramanian, PhD, AlphaProfit Sector Investors’ Newsletter, www.alphaprofit.com, 281-565-6963, January 2020
WW International, Inc. (WW) | Daily Alert February 12
WW International, Inc. (WW, TSINetwork Rating: Extra Risk) is on the move again after a bad start to 2019. The company rebranded itself as WW in the fall of 2018, when it expanded its weight-loss services to include “Wellness that works” programs. The move reflects the company’s goal of promoting healthy living, in general, rather than just weight loss.
However, it has failed to effectively communicate the rebranding. The stock dropped to as low as $16.71 in May 2019, but has rebounded 121% for investors since then. That’s on the strength of an effective new TV campaign, plus a continued focus on various social media channels. As well, major shareholder and media celebrity spokesperson Oprah Winfrey has been taking an active and effective promotional role.
Weight Watchers had 4.2 million active subscribers as of September 30, 2019. That’s up an impressive 7.7% from 3.9 million at the start of last year.
That subscriber growth should lead to improved sales and profits. The company now expects to make $2.04 a share in 2020—and the stock trades at a reasonable 20.6 times that forecast. We think today’s stock price marks an ideal entry point for investors looking to profit from the company’s turnaround. WW International is a Power Buy.
Patrick McKeough, Power Growth Investor, www.tsinetwork.ca, 888-292-0296, February 2020
*Monster Beverage Corporation (MNST) | Strategy: P/E/Growth Investor
Based on: Peter Lynch Monster Beverage Corporation (MNST) develops, markets, sells and distributes energy drink beverages, sodas and/or concentrates for energy drink beverages, primarily under various brand names, including Monster Energy, Monster Rehab, Monster Energy Extra Strength Nitrous Technology, Java Monster, Muscle Monster, Mega Monster Energy, Punch Monster, 5
Juice Monster, Ubermonster, BU, Mutant Super Soda, Nalu, NOS, Burn, Mother, Ultra, Play and Power Play, Gladiator, Relentless, Samurai, BPM and Full Throttle.
This methodology would consider MNST a “fast-grower”.
SALES AND P/E RATIO: PASS INVENTORY TO SALES: PASS EPS GROWTH RATE: PASS TOTAL DEBT/EQUITY RATIO: PASS
John Reese, Validea Hot List Newsletter, www.validea.com, 877-439-0506, January 2020
Growth & Income 826
Waste Management, Inc. (WM) | Daily Alert January 30
In one of our top seven sectors is Waste Management, Inc. (WM). Companies with a negative correlations to the ISM (Institute for Supply Management) report of weak manufacturing conditions (caused by a large extent by Trumps trade wars), include WM, with a negative correlation of a negative .91.
The business isn’t glamorous and is under-followed by Wall Street. It has been a great performer for our newsletter since our purchase in 1996 (up 356%), plus it sports a good dividend, based on our cost. It’s a great company.
Sean Christian, The Personal Capitalist, 9524 East 81st Street, Suite B #1715, Tulsa, OK 74133, January 22, 2020
Bristol-Myers Squibb Company (BMY) | Daily Alert February 3
Though I had hoped we would get more of a pullback as part of the round of profit-taking that was already long overdue in Bristol-Myers Squibb Company’s (BMY) stock as last month’s issue went to press, as you can see in the chart, after taking a very brief pause to catch its breath between the December issue and today, the stock is already making another push into new 52-week high territory.
And, as you know, I believe such price action can never be characterized as anything but a bullish clue about the current direction of the overall market). In response to this almost immediate resumption of the uptrend, I am raising the buy limits and adding a few more shares in both Portfolios this month. BMY is a strong buy under $58 and a buy under $68.
Nate Pile, Nate’s Notes, www.NotWallStreet.com, 707-433-7903, January 10, 2020
*2nd Opinion
Bristol-Myers Squibb Company (BMY) recently announced that it is boosting its quarterly dividend nearly 10% to a quarterly rate of $0.45 per share. What is especially noteworthy about the increase is that 1) it is the company’s largest dividend increase in more than a decade; and 2) the increase comes on the heels of the Celgene acquisition.
Bristol-Myers Squibb stock has performed well of late and recently moved to a new 52-week high. I still think there is plenty of upside in these shares.
Bristol-Myers trades at roughly 10 times that earnings estimate, an attractive valuation. Second, the company’s new-drug pipeline received an instant boost with the deal, and we should see fairly quickly some fruits from this deal in the way of new-drug approvals over the next 18 months.
Another reason to like these shares is the dividend yield.
The stock scores extremely well in our company’s Quadrix® stock-rating system, with an Overall score of 99 (out of a possible 100) and strong across-the-board scores in such important subcategories as Value 74, Performance 93, and Momentum 91. Despite the gains in the last few months, I think these shares can be bought at current prices for a double-digit total return in 2020.
Charles B. Carlson, CFA, DRIP Investor, www.dripinvestor.com, 800-233-5922, January 2020
Meredith Corporation (MDP) | Daily Alert February 5
Meredith Corporation (MDP) is the nation’s largest publisher of print and digital magazines, with powerhouse titles such as People, Travel + Leisure and Martha Stewart Living. Complementing these publications, the company owns a portfolio of 17 local television stations. Founded in 1902 by Edwin Meredith with his Successful Farming magazine, the company now has 42 million paid subscribers of its print and digital publications and 30 million viewers of its local television stations. In January 2018, Meredith acquired magazine publisher Time, Inc, for $2.8 billion in an all-cash deal.
While the S&P500 rose over 50% in the five years through mid-2019, Meredith shares remained unchanged. Since then, the market has increased another 10% while Meredith’s shares have dropped 37%, driven by its surprisingly weak guidance that Fiscal 2020 EBITDA will be about 20% below consensus expectations. Much of the problem is that the Time acquisition hasn’t delivered the anticipated advertising revenues as quickly as the company originally expected. Also, $50 million in new strategic investments, as well as other costs, will weigh on near-term profits.
The weak guidance further stoked investor worries that Meredith may be on the losing side of the battle for profitable media relevance, particularly as its print advertising revenues continue to decline. Meredith’s somewhat elevated post-Time debt level, upcoming negotiations with television networks and cable service providers, and changes in their magazine portfolio like the closing of iconic Family Circle, only add to investor concerns. The market appears to be turning the page on Meredith.
Despite these investor concerns, Meredith appears well-managed and well-positioned to remain a solidly profitable provider of relevant content to an attractive target market. The company reaches over 180 million Americans (more than Comcast or Disney) including 85 million millennial women, and is a top-10 digital destination with 150 million monthly unique viewers. It stays focused on the highly valuable American women audience, avoiding straying into other categories in the pursuit of growth. In eight of its twelve television markets, Meredith’s stations are ranked either #1 or #2.
To remain relevant, the company adapts its portfolio to capture growth driven by changes in its audience’s tastes. Their 2016 launch of The Magnolia Journal, based on the highly-watched television series featuring Joanna and Chip Gaines, has become one of the industry’s most successful and profitable launches. Portfolio upgrades include a new quarterly magazine based on the widely-followed “Property Brothers” series, as well as new television shows that leverage their People and Southern Living magazine brands. Importantly, Meredith continues to re-format or cull fading titles.
Based on its strong local television market position, we think Meredith’s upcoming distribution and network affiliate contract renewals will have a limited yet slightly positive effect on the company’s profitability.
Meredith’s revenues and profits indicate its ability to monetize its content. The company is successfully increasing its non-advertising revenues, which now comprise nearly half of total revenues. Advertising revenues are slowly declining, but part of the issue is the unexpectedly weak early results from its acquired Time assets. However, advertising performance in these titles is turning around while television advertising remains healthy. Also, the re-alignment and expansion of its sales force and other initiatives are helping Meredith increase its print advertising industry market share to 36.2%. The company’s profits remain quite healthy, and are likely to grow this year net of the effect of political advertising last year.
Helping to further boost profits, the company has already achieved $430 million in cost-savings from the Time acquisition, with another $135 million still ahead. An upcoming change-over to a new core technology platform should improve its operating efficiency as well as generate more consumer data and engagement.
Meredith produces generous free cash flow, helped by its low capital spending requirements. The company’s top two priorities for this cash flow are to repay roughly $800 million more in debt and fund its well-covered and recently increased dividend. Meredith has already repaid $825 million of Time acquisition debt, partly with proceeds from asset sales, leaving its $2.4 billion in total debt at a manageable 3.3x EBITDA. High-margin political ad revenues likely coming in calendar 2020 would fund an extra one-time $100 million+ paydown.
Meredith shares trade at a discounted 6.8x forward EBITDA multiple. Its strong market position, attention to tactical and strategic changes to maintain its relevancy, solid financials and attractive dividend yield make for a compelling value stock.
We recommend the PURCHASE of shares of Meredith Corporation (MDP) with a $52 price target.
George Putnam III, The Turnaround Letter, www.turnaroundletter.com, 617-573-9550, January 2020
Value 826
Spirit Airlines, Inc. (SAVE) | Daily Alert January 22
Despite solid U.S. economic performance, the airline industry offers some very low valuations right now. If economic conditions remain favorable for consumers and if fuel prices do not rise drastically, Spirit Airlines, Inc.’s ambitious growth strategy could make it a very rewarding investment.
Spirit is an ultra-low-cost carrier operating 600 daily flights to 75 destinations in 16 countries. The ultra-low-cost model has been popular in Europe for many years and seems to be gradually gaining favor in the U.S. as well. Spirit is leaning into the opportunity. It will end 2019 with about 145 planes in operation, double the size of its fleet at the end of 2015. Its growth plans
call for an additional 48 planes delivered over the next two years, approximately 15% growth per year.
The company’s competitive strategy is to cram its planes as full as possible and pass the savings on to passengers. It configures seating for maximum density and charges extra for carry-on bags, discouraging passengers from filling up the cabin with heavy luggage. It also upcharges for seat assignments and other benefits that many other carriers provide de rigueur.
At the end of the day, only half of revenue comes from base ticket fares, with the other half coming from upcharges and ancillary revenues. Even with the upcharges, the company claims that its all-in price remains about one-third lower than competitive carriers’ all-in prices. Low price can be a difficult strategy. Executed well, however, it is a very reliable one. Spirit does not provide the most pleasant experience in the sky, but it has its loyal customers.
One of the things that attracts us to Spirit is its young, standardized fleet of aircraft. Spirit flies the Airbus 320 family of planes, the same planes that fellow IAS company Allegiant Travel (ALGT) has standardized on as well. Owing to its fast growth, Spirit’s fleet is actually the youngest among major carriers. A young fleet depreciates faster but requires less maintenance. Spirit historically outsourced most of its maintenance but has started investing in its own labor and facilities. This will become more important over time as its growth naturally slows and its fleet ages.
The balance sheet is very solid for a growing, capital intensive business. Net debt (debt minus cash) is approximately $2.2 billion, safely less than the 3x EBITDA multiple that lenders and investors generally view as aggressively levered. We expect the company to draw down its $1 billion cash hoard as it accepts delivery of 48 new planes over the next two years, but with
help from operating cash flow, net debt should remain safely under 3x EBITDA as long as industry profitability does not erode dramatically.
This is never a guarantee in the airline industry. A normal economic downturn could imperil Spirit and its equally-indebted neighbors, although Spirit should do better than many. Its status as a low-cost operator should make it relatively resilient. Still, we can well imagine a scenario where management is cancelling deliveries and scrambling to finance the planes it does accept. The balance sheet looks robust enough to weather a storm, but that fact would be more comforting to lenders than stockholders.
This industry is no place to invest going into a recession, but an investor betting on continued, steady economic growth may find a lot to like here. The company’s growth story is simple—add more planes and more service routes. The pace of growth looks ambitious, but not wild. Even if growth is slower than hoped for, the low valuation could rise, and stockholders could make good money, nonetheless. We don’t see many pockets of deep value in the market at present, but this does look like one.
We model 10% compound EPS growth starting from a base of $3.80, which could generate EPS of $6.12 in five years. That figure, combined with a high P/E of 17.1, generates a high price of 105. For a low price, we apply a low P/E of 8.7 to 2014 GAAP EPS of $3.08—the company’s lowest normalized EPS performance in the last five years. This yields a low price of 27. On that basis, the upside/downside ratio is 5.7 to 1.
Doug Gerlach, www.InvestorAdvisoryService.com, 1-877-33-ICLUB, January 2020
Financials 826
Radian Group Inc. (RDN) | Daily Alert January 21
While Radian Group Inc. (RDN) may sound like a tech stock, the company is a leading provider of private mortgage insurance and risk-management solutions to lenders. The company also offers title services and real estate brokerage solutions.
At the end of September, primary insurance-in-force totaled $237 billion, up 9% from a year earlier. Radian is benefiting from robust mortgage originations, particularly from first-time buyers.
The company boasts an Overall score of 98, reflecting scores above 90 for Momentum and Financial Strength. The Value score is 88, placing Radian among the cheapest 12% of U.S.-traded stocks.
Radian offers excellent operating momentum, highlighted by accelerating revenue growth, healthy cash-flow trends, and 10 straight quarters of double-digit growth in per-share profits.
Operating cash flow increased 9% in the 12 months ended September, while free cash flow rose 9% to $664 million. For 2019, per-share earnings are expected to advance 16% to $3.11.
For 2020, the consensus is $3.21 per share, up from the $3.16 expected two months ago. The stock trades at eight times trailing earnings, below its five-year norm of 11, the industry median of 14, and the sector median of 13. We are starting coverage of Radian as Buy.
Richard J. Moroney, CFA, Upside, www.upsidestocks.com, 800-233-5922, January 6, 2020
M&T Bank Corporation (MTB) | Daily Alert February 7
M&T Bank Corporation (MTB) is a bank holding company headquartered in Buffalo, NY, that offers retail and commercial banking, trust and wealth management, and investment services through two operating subsidiaries, M&T Bank and Wilmington Trust, National Association, to clients primarily located in the Mid-Atlantic and Northeast.
The company’s Business Banking segment offers deposits, business loans and leases, and credit cards, and cash management, payroll, and letters of credit services to small businesses and professionals. Its Commercial Banking segment provides credit and banking services for middle-market and large commercial customers.
MTB’s Commercial Real Estate segment offers multifamily residential and commercial real estate credit, and deposit services. Its Discretionary Portfolio segment provides deposits; securities, residential real estate loans, and other assets; and short and long term borrowed funds, as well as foreign exchange services.
MTB’s Residential Mortgage Banking segment offers residential real estate loans for consumers and sells those loans in the secondary market; and purchases servicing rights to loans originated by other entities. Its Retail Banking segment offers demand, savings, and time accounts; consumer installment loans, automobile and recreational finance loans, home equity loans and lines of credit, and credit cards; demand, savings; and time accounts; mutual funds and annuities; and other services. The company also provides trust and wealth management; fiduciary and custodial; investment management; and insurance agency services.
As of Q4 2019 MTB had 750 domestic banking offices in New York State, Maryland, New Jersey, Pennsylvania, Delaware, Connecticut, Virginia, and the District of Columbia; a full-service commercial banking office in Ontario, Canada; and an office in George Town, Cayman Islands.
Kelley Wright, IQ Trends, https://iqtrends.com/, info@iqtrends.com, 866.927.5250, First-February 2020
Raymond James Financial, Inc. (RJF) | Daily Alert February 14
We are reiterating our BUY rating on Focus List selection Raymond James Financial Inc. (RJF), a provider of diversified financial services. The company reported solid fiscal 1Q20 EPS of $1.89, up from $1.69 a year earlier, driven by record revenues in the Private Client Group, Asset Management, and Raymond James Bank.
Looking ahead, we expect revenues to increase in the Private Client Group and Asset Management as net inflows continue to grow. We also look for an increase in net interest income
generated by Raymond James Bank. We expect the company to remain in expansion mode as it brings additional advisers to its platform and makes strategic acquisitions that fit within its
long-term plan.
RJF organizes its businesses into four segments: Private Client Group, Capital Markets, Asset Management, and Raymond James Bank. We look at recent trends and outlooks for these segments below. Private Client Group net revenues of $1.41 billion (70% of net revenue) rose 4% year-over-year in 4Q, aided by record assets under administration in fee-based accounts.
Capital Markets net revenue rose 6% to $268 million (13% of net revenue), driven by increased revenue in fixed-income brokerage and underwriting in the debt and equity markets. Asset Management net revenue rose 6% to $184 million (8% of net revenue), reflecting net inflows and market appreciation.
At Raymond James Bank, net revenue rose 6% to $216 million (9% of net revenue), driven mainly by increased mortgage banking loan growth. Net loans rose 7% to $21.3 billion. The net interest margin decreased seven basis points to 3.23%. The loan loss provision fell to 1.01% from 1.10% in the prior-year quarter, and the percentage of nonperforming assets fell to 0.16% from 0.21% a year earlier.
We are maintaining our FY20 EPS estimate of $7.83 and our FY21 estimate of $8.00.
RJF shares are trading at 11.4-times our FY20 EPS estimate, below their historical average range of 12-14. However, we believe a higher multiple is warranted based on the company’s growth prospects. We think that investors will continue to focus on the company’s growth in assets under management, strategic acquisitions, and plans to expand the number of advisers.
Jim Kelleher, CFA, Argus Weekly Staff Report, www.argusresearch.com, 212-425-7500, January 2020
*UMB Financial Corporation (UMBF)
UMB Financial Corporation has annual revenue of $1.1 billion and a market capitalization of $3.3 billion and offers banking, asset management, health spending solutions, and related financial services.
For the fourth quarter, total revenue increased 10% to $283 million, and beat analyst expectations by nearly $5 million. Adjusted earnings-per-share of $1.36 also beat analyst expectations, by $0.19 per share.
As a smaller financial institution, UMB has greater flexibility to enter less competitive areas to generate future growth that the major U.S. banks may ignore. The company also has a long track record of producing reliable growth, including its 27- year streak of dividend increases.8
We expect 7% annual EPS growth for UMB through 2025. Based on 2020 expected earnings-per-share of $5.31, UMB stock currently trades for a price-to-earnings ratio of 12.8. This is below our fair value estimate, which is a price-to-earnings ratio of 14.5. As a result, the stock appears to be undervalued. The combination of valuation changes, 7% annual EPS growth, and the dividend yield results in expected annual returns of 11.3% over the next five years.
Ben Reynolds, Nick McCullum, Bob Ciura, Josh Arnold, and Samuel Smith, Sure Dividend Newsletter, www.suredividend.com, support@suredividend.com, 800-531-0465, February 2020
Healthcare 826
InMode Ltd. (INMD) | Daily Alert January 23
52wk H. 58.78 52wk L. 13.06 Mkt Cap: $1.24B, EPS 1.16, P/E: 36.25
The medical aesthetics company. A hallmark in plastic surgery: expects Q4-’19 earnings of $1.76/shr vs. $1.55/shr a year ago. Price of INMD has rocketed 190% since its IPO in August ’19. Carries a forward P/E of 28. Technical picture since its IPO has been ascending above its 50-DMA: (17-20) to (20-22) to (24-27). Gapping up (30-36) to (40-43). Correction/ retraction completed after topping at (55-58). Reversal has challenged primary resistance (39-41).
Secondary resistance at (47-52) and upper-head resistance at (56-58).
BUYING RANGE: 37-47 NR TERM OBJ: 55 INTERMED OBJ: 69 STOP LOSS: 32
Joseph Parnes, Shortex Market Letter, www.shortex.com, 800-877-6555, January 16, 2020
ICON Public Limited Company (ICLR) | Daily Alert February 4
In the past month, five analysts have increased their 2020 forecasts for this contract research organization.
ICON Public Limited Company (ICLR) is being added to the Focus List. A contract-research organization (CRO), ICON offers testing and research services for drugmakers. The CRO market remains healthy, benefiting from drugmakers expanding their budgets for research and development. Drugmakers are also funneling more of their R&D spending toward CROs.
In January, ICON issued its 2020 outlook, with per-share profits projected to climb 10% to 14% to $7.55 to $7.85, straddling the consensus of $7.71 at the time of the announcement. ICON expects 2020 sales to climb 6% to 10%, versus the consensus growth target of 8%. ICON is also a Long-Term Buy.
Richard Moroney, CFA, Dow Theory Forecasts, www.dowtheory.com, 800-233-5922, January 20, 2020
Mylan N.V. (MYL) | Daily Alert February 6
On July 29, 2019, Pfizer Inc. (PFE) and Mylan N.V. (MYL) jointly announced that Pfizer’s Upjohn division would be combined with Mylan in a Reverse Morris Trust transaction. The transaction is expected to be tax-free for Pfizer shareholders, who will receive 57% of the shares of the new company, and taxable to Mylan shareholders, who will own 43% of the shares of the new company.
For Pfizer, spinning off its off-brand and generics business in Upjohn should allow the company to focus on its innovative core business, which is projected to grow faster than Upjohn, per analyst estimates. For Mylan, the key aspect of this deal was geographic revenue diversification. While Mylan has a strong foothold in the U.S. and Europe, Upjohn has a considerable presence in Asia and other emerging markets, allowing Mylan to reach an area of considerable growth without having to organically work to develop new markets on their own. This also diversifies Mylan revenues away from the U.S., which, considering the political climate surrounding drug pricing in America, should result in far lower volatility.
The new entity between Mylan and Upjohn will create substantial pure-play pharmaceutical company with revenue streams around the world. Mylan, as a stand-alone company, is a global generic and specialty pharmaceuticals company. For FY18, Mylan’s revenues included sales from drugs relating to Central Nervous System and Anesthesia, Infectious Diseases, Respiratory and Allergy, Gastroenterology, Diabetes and Metabolism, Dermatology, Oncology, Women’s Healthcare, Other, and Other Third party diseases.
Upjohn brings trusted, iconic brands, such as Lipitor (atorvastatin calcium), Celebrex (celecoxib) and Viagra (sildenafil), and proven commercialization capabilities, including leadership positions in China and other emerging markets.
Currently, the pipeline for the combined entity contains ~10 newly approved drugs, with dozens more in various stages of the pipeline process. Management expected to recognize ~$3bn in revenues from these new drugs by 2023.
The pro-forma entity is expected to have EBITDA margins in the ~40% range, and cost synergies that accelerate from $250mm in the first year to $1bn in year four of the merger. On a pro forma basis adjusting for shares that will be issued to Pfizer shareholders, Mylan looks interesting, trading at 6.6x free cash flow and 6.5x EBITDA.
Mylan also plans to pay a dividend of at least 25% of free cash flow, implying a minimum dividend of $1BN and dividend yield of 3.8%. We like the set up for Mylan. Shortly after the merger was announced, Mylan rallied but then fell as low as $17. If Mylan were to pull back to the mid to high teens, it would be an attractive buy. At that price, the implied yield on the stock would be close to 5%. Further, there would be significant additional free cash flow to de-lever and buy back stock.
This looks quite cheap.
Richard Howe, CFA, The Stock Spin-off Investing Newsletter, www.stockspinoffinvesting.com, 617-750-7454, January 31, 2020
Technology 826
Microsoft Corporation (MSFT) | Daily Alert February 18
While reviewing both the holdings in this portfolio and the performance of the market as a whole, the one striking difference between the two is the absence of four of the biggest darlings on Wall Street. Microsoft, Amazon, Alphabet, and Apple have had an extraordinary time of it over the past few years. So much so, these stocks have almost become the stock market.
My shock at realizing that I have failed to include any of these stocks in the portfolio was tempered by the fact that our stocks managed to perform just as well as the market as a whole in 2019, with much less risk. The question I found myself asking was simple: Can such a performance be matched in 2021 without at least some of these companies in our portfolio?
After studying each company closely, I have decided that the answer to that question is probably no. All of these companies have outperformed the market during the past two years. The S&P 500 Index is up some 17% during that past 24 months. During that same period, Alphabet is up 26%; Amazon is up 45%; Apple is 77%, and Microsoft is up 82%.
If you were crazy enough to put all your money into just these four stocks over the past two years, you would have made three times the money of those who played it safe and just bought the S&P 500.
However, let us not forget the lawyerly warning about investments, past performance is no guarantee of future results.
Of these four darlings of Wall Street, I am of the opinion that Microsoft Corporation (MSFT) is the best of the bunch. The company has been a star performer for much of the past four years, and I see little that will stop it. Although the stock price has tripled over the past three and a half years, the stock multiple sits at thirty. That may seem high, but not for a company playing such an important role in cloud computing.
This company is quite capable of producing annual sales growth rates of 15% or better. If you are concerned about going all-in after the run-up in price, I suggest you feed money into the stock slowly over the course of the year. This should help if we suddenly get that correction everyone on Wall Street is so worried about.
David C. Jennett, The Investment Letter, P.O. Box 6170, Holliston, MA 01746, 800-542-5018, January 16, 2020
*Aptiv PLC (APTV)
The marketplace for electric vehicles (EVs) is miniscule. Established automakers will need to prove they can compete with Tesla, while finding a way to make the economics work. That means multiple vehicles rising out of similar platforms.
But you shouldn’t chase this car maker, or that one. After all, the tech behind them will be the same. So, instead of risky bets on GM or Tesla, I have a different approach. The best way to play this trend is Aptiv PLC (APTV). The Irish firm builds greener, safer and more connected software solutions for the next generation of automobiles.
Vehicle makers intend to launch 45 new high-voltage platforms by 2022, spanning hundreds of vehicles and 13% of global vehicle production. Aptiv has booked $4.5 billion in new orders since 2016. However, high-voltage electrification system sales are expected to climb to $1 billion annually by 2022, a 40% compound growth rate.
During 2019, Aptiv won contracts for the Tesla Model Y and Model 3, launching in China. The company also won the contract to supply the low-voltage battery system for the Fiat 500 BEV.
Shares trade at 16.4x forward earnings and 1.5x sales, for a market capitalization of $22.7 billion. Given the potential size of the vehicle electrification market, these metrics look inexpensive. Aptiv Shares recently traded at $85.00, but I’m still looking for a new entry level. Investors should keep watch for weaknesses.
Jon Markman, Pivotal Point, issues@e.moneyandmarkets.com, 1-800-291-8545, January 31, 2020
*Inphi Corporation (IPHI)
Inphi Corporation (IPHI) has released its new Capella SerDes IP solution for data center environments, which promises better performance and lower power consumption in data centers and AI-powered devices. The company recently reported another fine quarter. While sales (up 19% from a year ago) and earnings (up 4%) didn’t wow, they both topped estimates. But more important were management’s comments that confirmed the demand environment for the company’s various high-speed wares should pick up meaningfully going forward. The fact that the accretive buyout of eSilicon closed in early January was also a plus. At this point, analysts see earnings now surging 40% this year and another 48% in 2021 as upgrade cycles and further telecom/data center buildouts accelerate. The stock was all over the place before (virus selloff) and after (up, down, then back up) the report, which isn’t ideal. We’re watching the action closely, but right now, shares remain in an overall uptrend (50-day line is near 76.5) so we’re fine staying on Buy.
Michael Cintolo, Cabot Growth Investor, www.cabotwealth.com, 978-745-5532, January 30 and February 6, 202010
*Lam Research Corporation (LRCX)
The shares of semiconductor processing equipment specialist Lam Research Corporation (LRCX) are outperforming in a big way thanks to the company’s earnings release.
This brings the shares’ one-year gain to almost 86%, and this recent outperformance comes despite recent rockiness in the semiconductor space. This could be why some options traders were showing caution ahead of the event. LRCX received a flurry of bullish analyst notes this morning. Of the handful of price-target hikes that have come through, the highest was $400 from Susquehanna. There’s still room for more positive analyst attention for the stock, however, since eight brokerage firms had “hold” or worse ratings in place today, so watch for upgrades on Lam Research going forward.
Bernie Schaeffer, Schaeffer’s Investment Research, http://www.SchaeffersResearch.com, 800-327-8833, January 30, 2020
StoneCo Ltd. (STNE) | Daily Alert February 19
StoneCo Ltd. (STNE) is the Square of Brazil. It’s a payment processor that gets a piece of each transaction and it focuses on the mostly unserved market of small to medium-sized business.
Wealth Advisory Earnings Grade: B+
StoneCo kept the rally alive in December. Management reported stellar numbers in November and sent shares spiking up. We’re now well above my new limit (which is just $10 shy of my original target price). So, I’m boosting that to make sure we’ve all got a chance to get in. Now that shares are above $40, I see them cruising over $50 in short order. So, let’s boost the limit to $45 and see if we can capture some more gains.
StoneCo Ltd. is now a “Buy” anywhere under $45. The 12-month target is staying at $75.
Brit Ryle and Jason Williams, The Wealth Advisory, www.angelpub.com, 877-303-4529, January 2020
Resources 826
B2Gold Corp. (BTG) | Daily Alert January 28
Mining stocks have been so strong that the fast money has fully embraced the space. That’s also what we want you to do today with our latest buy, Canadian-based gold mining firm B2Gold Corp. (BTG).
BTG is a gold-mining stock with great promise and it could even be a buyout candidate. In 2006, the company was founded by executives from Bema Gold. Since then, B2Gold has built a diversified portfolio of mines in Nicaragua, the Philippines, Mali, Colombia and Namibia with relatively low debt. And most impressively, it’s already making money—a lot of money. The company’s third-quarter earnings results were spectacular, with $311 million in revenue. Earnings came in at nine cents per share in the quarter, up an impressive 125% from the prior-year quarter. BTG also produced a record 258,200 ounces of gold, 7% above the company’s budget. Not only is the Fekola Mine in Mali expected to produce 450,000 ounces of gold this year and 600,000 ounces in 2020, BTG is expected to produce one million ounces of gold in 2020.
In November, the company also announced its first dividend, a modest one cent per share. In general, when a stock pays its first dividend, this is a good sign that the company is confident about the future. Research has indicated that the stocks which start paying a dividend tend to outperform non-dividend payers.
For us, the real key is the relative strength of the stock as this is a proxy for fast money. And in terms of that metric, BTG is riding high, with a gain of nearly 57% over the past 12 months. That performance puts it in the top 8% of all publicly-traded companies in terms of share price performance over the same period.
With the fast money embracing BTG, its strong fundamentals and a conducive Fed that has desired to keep interest rates steady and the exchange rate lower, now is the perfect opportunity to profit from this gold mining star. Let’s buy B2Gold at market with a protective stop set at $3.32. For those willing to take a bigger bet, we recommend the BTG Apr. $5.00 call options (BTG200417C00005000), which last traded for $0.15 and expire on April 17.
Mark Skousen, Forecasts & Strategies, www.markskousen.com, Eagle Financial, 300 New Jersey Ave. NW, Suite 500, Washington, D.C. 20001, January 21, 2020
*2nd Opinion
B2Gold Corp. (BTG) primarily holds 80% interest in the Fekola mine, an open pit gold mine located in Mali; 90% interest in the Otjikoto gold mine located north of Windhoek, Namibia; the Masbate gold project located in the south-east of Manila, the Philippines; and 100% interest in the El Limon mine, an underground gold mine located in northwestern Nicaragua. “Geopolitical uncertainty is already translating into greater gold demand,” says Goldman Sachs, as highlighted by Reuters, “adding that 2019 will likely be a record year for global central bank (CB) buying with a target of 750 tonnes combined purchases.”
Ian Cooper, The Cheap Investor, support@thecheapinvestor.com, January 202011
*Osisko Gold Royalties Ltd. (OR)
Following confusion and opposition after Osisko Gold Royalties Ltd.’s (OR) September acquisition of all of the Barkerville shares it did not already own—which saw the stock drop 24% in one week—plus several high-profile exits from the company, it has been making clear that it is not becoming a mining company, and that the core business remains royalties. The new messaging has been a little slow, and the stock has only very slowly begun to recover. The company has said that its contribution to Barkerville is mostly done, and that it does not intend any additional exploration expenditures. It will look for financing sources and seek to monetize its investment. In short, Osisko feels that the biggest mistake it made was not in buying Barkerville, which it said represents tremendous value, but in not clearly stating that it was not turning into a mining company. Barkerville is an extension off Osisko’s accelerator model which has been a financial success. Given the discount at which Osisko trades relative to other mid-sized and large royalty companies—only some of which is justified, given the higher-risk “hybrid” model—Osisko is a good buy at these levels.
Adrian Day, Adrian Day’s Global Analyst, www.adriandayglobalanalyst.com, 410-224-8885, February 2, 2020
Low-Priced Stocks 826
*Retractable Technologies, Inc. (RVP)
Retractable Technologies (RVP) manufactures safety medical products. RVP develops retractable needles and syringes, glass syringes and Luer caps. Its injection devices consist of VanishPoint® syringes,which are the gold standard for retractable needle syringes and virtually eliminate exposure to the contaminated needle, reducing the risk of needlestick injury. While U.S. sales have been flat for syringes, international sales have risen consistently. Blood collection and infusion devices sales have almost tripled in three years and do not require additional components such as sheaths, metal clips or activation buttons. Retractable Technologies’ trailing twelve-month net income of $1.1 million is the highest level since 2015.
Operating income in the third quarter of 2019 increased to $978,000 compared to a loss of $60,000 in the prior year period. The company has been gradually eliminating long-term debt. There are multiple catalysts resulting in relative strength for this growth stock. The syringe market is growing at a CAGR of 9%. Retractable Technologies has a competitive advantage and a strong financial foundation.The company’s newer product lines are gaining traction in a market with high barriers to entry, and international sales have helped to improve margins. With growth expected to continue and institutions and insiders accumulating shares, we’re optimistic about RVP’s outlook.
Faris Sleem, The Bowser Report, www.thebowserreport.com, 757-877-5979, January 2020
Preferred Stocks 826
Digital Realty Trust, Inc. (DLR-PL) | Daily Alert January 16
Digital Realty Trust, Inc.; 5.20% Fixed Rate, Cumulative Perpetual, Series L; Annual Cash Dividend $1.30; Current Indicated Yield 5.04%; Call Date 10/04/24; Yield to Call 4.45%; Pay Cycle 3e; Exchange NYSE; Ratings, Moody’s Baa3, S&P BB+; CUSIP 253868822;
Digital Realty Trust, Inc. (DLR) is a REIT that invests in carrier-neutral data centers, providing colocation and peering services. Colocation centers offer rental space to servers and other computing hardware, while providing customers with cooling, power, bandwidth, and physical security. Peering is the process by which internet networks can connect and exchange traffic between each other’s customers, without paying a third party.
At the end of 2018, DLR owned 214 data centers totaling almost 35 million rentable square feet. Locations are largely worldwide, with the biggest presence in North America. DLR’s 5.20% fixed rate, preferred issue is callable on 10/04/24, or anytime thereafter, at the company’s option. Dividends on this preferred investment are taxed as ordinary income, given DLR’s REIT status.
DLR reported Q319 Funds from Operations (FFO) of $364.9 million or $1.67 per share, topping estimates by a penny. The REIT also announced it agreed to purchase Interxion (INXN), a European provider of carrier and cloud-neutral colocation services. in an all cash transaction. Including the assumption of debt, the deal is valued at $8.4 billion. DLR’s ratings have been affirmed.
We recommend DLR-PL as a Buy for medium-risk tax-deferred portfolios, with a fair-value price of $26.70, which represents a current yield of 4.87% and a yield to call of 3.65%.
Martin Fridson, CFA, Income Securities Investor, www.isinewsletter.com, 800-472-2680, January 2020
Income 826
The Goodyear Tire & Rubber Company (GT) | Daily Alert February 13
The Goodyear Tire & Rubber Company (GT) is a leading supplier of light vehicle tires, selling in two distinct markets: replacement and vehicle manufacturers. GT shares ended 2019 down more than 20%, despite a 40% pop off the September lows. Concerns about tariffs impacting global auto sales, not to mention higher raw material costs and unfavorable currency translation, have continued to weigh.
We like management’s ongoing efforts to restructure factories in Europe, modernize infrastructure, reduce headcount and adjust pro- duction volume to higher-margin tires. Over the long run, GT should gain from structurally higher demand for tires in emerging markets, given the rise in new vehicle sales as more people reach the middle class. GT trades for just 7 times NTM estimated earnings, while top- and bottom-line growth should resume in 2020.
John Buckingham, The Prudent Speculator, www.theprudentspeculator.com, 877-817-4394, January 2020
*Brookfield Property REIT Inc. (BPR)
Brookfield Property REIT Inc. (BPR) is one of the publicly traded companies managed by Brookfield Asset Management (BAM). Brookfield has a global presence as a developer, owner, and manager of alternative assets. Brookfield is a Delaware based REIT with shares that are economically identical to BPY units. Dividends paid by BPR are identical in amount and timing to the BPY distributions. BPR shares are exchangeable one-for-one into BPY units.
Brookfield owns 88% of the BAM real estate assets. Those assets total $194 billion in value, spread across the globe. Office, retail, and multi-family are the largest asset classes in the real estate holdings. It is a growth-focused REIT. In 2019, the company sold $2 billion of assets. It invested $1 billion in new developments and $300 million in acquisitions.
Brookfield is an asset manager in which I want to be invested. So, do you.
We are investing in an attractive current yield plus solid dividend growth potential. I expect that Brookfield Property REIT will become a stellar performer in the Dividend Hunter recommendations list.
Important: Remember that we are buying shares of BPR, not shares of BPY.
Tim Plaehn, The Dividend Hunter, https://yn345.isrefer.com/go/cabmdpc/cab, February 2020
Short-Sale 826
Short Sell: Grubhub Inc. (GRUB) | Daily Alert January 23
52wk H. 87.98 52wk L. 32.11 Mkt Cap: $5.15B, EPS: 1.04, P/E: 1,311 Beta: 1.23
The food delivery service company is reducing its guidance due to competition, higher expenses on promotion to attract more customers. Trading below its death cross pattern since Aug ’19. Pressured by the plunge (56-40) set on Oct ’19 to new low of 32.11. Reversal has challenged primary resistance at (41-44). However, secondary resistance (59-62) and upper-head resistance (77-79) a paramount. Volatile.
SHORT RANGE: 52-62 COVER SHORT: 38 STOP LOSS: 73
Joseph Parnes, Shortex Market Letter, www.shortex.com, 800-877-6555, January 16, 2020
Funds & ETFs 826
Vanguard Growth Index Fund ETF Shares (VUG) | Daily Alert January 17
Vanguard Growth Index Fund ETF Shares (VUG) employs full replication of the CRSP U.S. Large Cap Growth Index. CRSP defines large cap stocks as those in the largest 85th percentile of the market. It further delineates those stocks based on numerous growth and value characteristics. It allocates half of assets to stocks with the strongest growth characteristics to the above index.
The index is market capitalization weighted, meaning the index, and the fund, emphasizes established growth companies. The fund holds 280 stocks, which is a wide diversification. However, the market capitalization weighing process results in a concentration in its top holdings: Recently, 41% of assets were invested in the top ten names. The fund tends to be 13
heavy in certain sectors, notably technology. But that is not out of line with the fund’s peers, which also tend to overweight technology and underweight slower-growth sectors such as energy and financial services. Vanguard Growth’s top holdings have been major contributors to overall returns. In 2019, Vanguard Growth ETF returned 37.3%, outpacing nearly 90% of the Morningstar large growth category.
Brian W. Kelly, Moneyletter, www.moneyletter.com, 800-890-9670, January 2020
Global X NASDAQ 100 | Daily Alert January 24
One of my loyal subscribers pointed out that the Global X NASDAQ 100 Covered Call ETF (QYLD) might be nearly as safe as a short- term bond fund while offering an 8% to 10% yield. I have never traded options, but I do know about ETFs, and this appears to be a solid one. QYLD has almost $1B in assets, it’s less volatile than the market, and has a reasonable 0.60% expense ratio. It is sponsored by Global X, a 10-year old business managing over 70 other ETFs. The QYLD ETF makes its money by owning the stocks in the NASDAQ 100 Index and then selling call options on the index. Without getting too far into the weeds, this strategy provides a way to earn income from an index that is known as a vehicle for growth while mitigating the down-side risk, all while reducing volatility and maintaining good diversity. This ETF will be viewed as a proxy for our cash and will not be on the 30-month ladder like our stock positions. If there is a flurry of splits, I won’t hesitate to sell off QYLD to allow us to get back to the “normal” 30 stock portfolio that we have been missing for a while now.
Neil Macneale, 2 for 1 Stock Split Newsletter, www.2-for-1.com, 408-210-6881, January 2020
CBOE Vest S&P 500 Dividend Aristocrats Target Income Index ETF (KNG)
It’s time to step things up a notch—to put you into a fund that’s generating income “fit for a king.” I’m talking about the CBOE Vest S&P 500 Dividend Aristocrats Target Income ETF (KNG, Rated “C-”).
KNG is a newer, $48 million ETF sponsored by CBOE Vest Financial LLC with a unique strategy. It owns shares of S&P 500 companies that have proven to not just pay, but raise, their dividends steadily and consistently for a quarter century. You heard that right: 25 years! Only around 50-60 S&P companies have been qualifying recently. In early January, the most heavily weighted stocks in the ETF hailed from a diversified mix of sectors. They included drug makers like Abbvie (ABBV, Rated “C”) and Johnson & Johnson (JNJ, Rated “B”), data provider S&P Global (SPGI, Rated “B-”) and toolmaker Stanley Black & Decker (SWK, Rated “C”).
But KNG doesn’t just collect the generous payouts from these appropriately named dividend aristocrats. The ETF also employs a “covered call writing” strategy, writing (or selling) call options on up to 20% of each stock holding. If you’re not familiar with how it works, here are some quick basics:
A call option gives its holder the right, but not the obligation, to buy an underlying stock at a specified price before a certain expiration date. Each options contract covers 100 shares of any given security, known as a round lot. When you write a call option, you receive an upfront payment—or premium—from the buyer. Effectively, you give up the right to some degree of stock price appreciation. But you get a payment up front for your trouble.
This strategy helps generate income. When you layer that income on top of the more-generous dividends that aristocrat companies pay out, you get a nice, juicy, market-beating yield. KNG’s recent yield was almost two-and-a-half-times the 1.7% yield offered by the SPDR S&P 500 ETF Trust (SPY, Rated “C+”). Plus, you can still benefit from capital appreciation in a rising market (though at a somewhat reduced rate). AND you have some downside protection in a falling market, thanks to the cushion provided by those options premiums.
Add it all up and you can see why this month, I recommend you buy a 5% position in KNG at a price of $47.25 or better.
Mike Larson, Safe Money Report, 1-877-934-7778, www.weissratings.com, January 2020
Direxion Daily MSCI Mexico Bull 3X Shares Direxion Daily MSCI Mexico Bull 3 (MEXX)
While the Mexican economy has not been particularly strong, its stock market is in a nice uptrend and the two trade deals, together with cost advantages, work in Mexico’s favor for several reasons.
First, China’s rise as the world’s largest manufacturer over the last few decades has been a major headwind for Mexico. We know that thousands of American firms moved manufacturing operations to China. This trend hit Mexico doubly hard since Mexican firms moved operations to China too and American firms chose China over Mexico as a manufacturing destination.
But now, with Mexico’s wages lower than China’s, Mexico has become the low-cost manufacturing base of choice—especially for North American markets. And while I realize we all want more U.S. manufacturing jobs, please keep in mind that Mexican exports to America already contain 40% U.S. content while Chinese exports to America have only 4% U.S. content. In other words, a washing machine assembled in Mexico and exported to America has about 40% of its components made in America.
In sharp contrast, for products assembled in China and then exported to America, only 4% of the content is made in America. Think an iPhone, for example. Almost all of its components are sourced in Asia. So, U.S. imports of Mexican products are 10 times better for American workers when compared with Chinese imports.
Improved investment and trade in Mexico could reduce some immigration pressures by creating better jobs in Mexico and America while also expanding U.S. exports to Mexico and South America. And with the new NAFTA deal passing Congress, a cloud of uncertainty has been lifted. Analysts are calling it “near shoring,” “in shoring” or “reverse globalization.”
The U.S. is already the biggest foreign direct investor in Mexico, accounting for 45% of all foreign investment, according to the State Department.
How will all this shake out and what will American Congressmen (and U.S. labor groups) think of U.S. multinationals shifting some manufacturing from China to Mexico?
American firms still export three times as much to Mexico as they do to China. And Mexico, in turn, sends 80% of its exports back across U.S. borders. In comparison, Mexico’s exports to its giant neighbor to the south, Brazil, accounted for only 1% of its total exports. Mexico has also launched more free-trade agreements that involve in excess of 40 countries—more than any other country and enough to cover more than 90% of the country’s foreign trade. Another plus is Mexico’s very favorable demographics, where almost half of the country’s population is what we would term working age, and 27% of Mexicans are under the age of 14. Most importantly, Mexican stocks are in a clear uptrend.
To gain direct and broad exposure to Mexico’s stock market, one could go with the Mexico iShares exchange-traded fund (ETF), which trades under the symbol (EWW).
But I recommend going with the bolder, more aggressive Direxion MSCI Mexico 3X Bull ETF (MEXX), which follows a basket of leading Mexican stocks but seeks to move three times (300%) the daily price change in the index—both up and down.
Because of that volatility, I suggest a 20% trailing stop-loss on this idea. BUY A HALF POSITION.
Carl Delfeld, Cabot Global Stocks Explorer, www.cabotwealth.com, 978-745-5532, January 23, 2020
*Fidelity Magellan Fund (FMAGX) and Fidelity Independence Fund (FDFFX)
Last month Sammy Simnegar became the sole manager of Fidelity Magellan Fund (FMAGX) (and its smaller clone Fidelity Independence Fund (FDFFX)). He is also the highly successful manager of Fidelity International Capital Appreciation Fund (FIVFX).
Outpacing the S&P 500 through almost all of 2019 (Magellan basically matched the index at year-end with a return of 31.2% versus 31.5%), a major course-correction in the fourth quarter weighed on its overall performance. On the other hand, Magellan is now better positioned to capitalize on the market’s fastest-growing and most promising stocks.
With portfolio turnover shooting up from 40% a year ago to 124%, today, Magellan and Independence are much more like Fidelity’s other large-cap growth funds, and less like the S&P 500 Index.
Based on Sammy’s track record and, most importantly, the changes he’s initiated at Magellan (and Independence), we’ve upgraded these newly refashioned large-cap growth funds to OK to Buy.
Jack Bowers, John M. Boyd and John Bonnanzio, Fidelity Monitor & Insight, www.fidelitymonitor.com, 800-397-3094, February 2020
Updates 826
Sell: A. O. Smith Corporation (AOS) | Daily Alert January 24, Updated from WSBI 790, February 15, 2017
What a disappointment! We owned A.O. Smith about eight years ago and it was an outstanding winner for 2 for 1. This time around it was definitely a loser. AOS was brought into the portfolio in 1/17 and the position was boosted twice along the way.
Our gain, including dividends will be less than 1% overall when we sell next week. The Vanguard 500 Index Fund will have advanced 53% over the same period.
Neil Macneale, 2 for 1 Stock Split Newsletter, www.2-for-1.com, 408-210-6881, January 2020
*Sell: Criteo S.A. (CRTO)
As we rebalance the Validea Hot List, Criteo S.A. (CRTO) leaves our portfolio.
John Reese, Validea Hot List Newsletter, www.validea.com, 877-439-0506, January 2020
*Retire: Schlumberger Limited (SLB) | Updated from WSBDS 320, May 8, 2019
Schlumberger Limited (SLB) moves from Buy to Retired today. After last week’s fourth quarter results were reported, analysts lowered their 2020 earnings estimates for the company. At this point, full year EPS growth is expected to be 10.9%. That’s actually not a bad number, but the P/E is now 23, so the stock cannot be considered to be undervalued. There are no big problems at Schlumberger. Revenue and profits are expected to continue growing, so if you want to keep the stock for the dividend income, you should feel comfortable doing so. Retired.
Crista Huff, Cabot Undervalued Stocks Advisor, www.cabotwealth.com, 978-745-5532 January 22, 2020
Investment Index 826
