Well, March in the markets certainly came in like a lion, didn’t it? And it looks like it may end the month the same way. Until we make progress in defeating the coronavirus, we expect continued volatility in the markets, and we recommend that you remain defensive.
That doesn’t mean Sell everything in your portfolio. Remember, you don’t have real losses until you sell your stocks. But it does mean if you are holding on to some stocks that weren’t doing well before the coronavirus outbreak, it might be a good idea to think about unloading them. But being defensive also means being judicious when buying. For the near future, I’m going to include this message in all my writings, as an alert that, certainly, you may buy these recommendations, but for most of us, they will provide entries into a ‘watch’ list that can be acted upon as the volatility disperses. Or you may find that you might want to nibble just a bit at some of them. That’s up to you, but please know that I’m here to help you with your investing decisions, so please don’t hesitate to reach out to me.
In the meantime, I—and our contributors—are very busy trying to find some great recommendations that will help your portfolio recover, once normalcy returns to the markets.
Market Views 827
Going Defensive
In light of today’s negative reaction to the Federal Reserve’s so-called “Emergency” rate cut to 0% on Sunday (in reality, a panic move), we are advising additional defensive adjustments to our Model Fund Portfolio, reducing allocations to Energy and Consumer Discretionary ETFs and increasing our allocation to Gold. This will reduce our Model Portfolio allocation to 55% invested, with a weighting emphasis on more defensive sectors.
James Stack, InvesTech Research, investech.com, 800-955-8500, March 16, 2020
Don’t Chase Rallies
The major trend is down. Oversold conditions are at record levels, though, and so a considerable rally could unfold. But I would expect a retest of the lows after that rally fades. The bulls are used to “V” bottoms for the last 7 or 8 years, but that may be changing finally. Wait for confirmed sell signals, and even then, don’t chase rallies.
Lawrence G. McMillan, The Option Strategist, optionstrategist.com, 973-328-1303, March 13, 2020
Stay the Course
The road ahead will be bumpy, but as we are always working with a long-term multi-year time horizon, we continue to stay the course with our broadly diversified portfolios of what we believe to be undervalued stocks, usually of dividend payers. We are not ready to go where top White House economic advisor Larry Kudlow went today in saying, “I think by the end of this year, we will be back to a strong economy,” but we will get through COVID-19.
John Buckingham, The Prudent Speculator, theprudentspeculator.com, 877-817-4394, March 16, 2020
Spotlight Stock 827
DuPont de Nemours, Inc. (DD) is one of the world’s largest and most highly-regarded specialty chemical companies. Its operations focus on four major business lines, including Electronics and Imaging (17% of revenues), Nutrition and Biosciences (28%), Transportation and Industrial (23%) and Safety and Construction (24%). A new “non-core” segment houses the remaining 8% of revenues.
Founded in 1802 by Éleuthère Irénée du Pont in Delaware to produce gunpowder, the company was forced by a 1907 anti-trust ruling to divest most of its near-monopoly, which led to its expansion into other chemicals. Over the years, DuPont developed iconic materials such as nylon, Teflon, Kevlar, Tyvek, and Dacron polyester. The company’s portfolio has undergone major changes recently, starting with the 2015 spin-off of its performance chemicals unit, named Chemours.
In August 2017, the company combined with Dow Chemical in a $130 billion merger of equals, creating DowDuPont, with plans to combine their over-lapping operations into three new companies.
DowDuPont spun off its materials sciences businesses as Dow Chemical in April 2019, followed that June by the spin-off of its agricultural business into a new company called Corteva. The remaining businesses became DuPont. This past December, the company announced an agreement to divest its Nutrition & Biosciences (N&B) division through a tax-efficient transaction with International Foods & Fragrances (IFF).
DuPont shares have fallen steadily since the 2017 merger. Recent fears over the coronavirus and a possible global economic slowdown, particularly in the automotive sector, along with disappointing fourth quarter results and an uninspiring 2020 outlook, have accelerated the losses, with the shares now trading down 41% since the June 2019 spin-off. Furthermore, investors are increasingly worried about the potential liabilities associated with toxic chemicals, primarily PFAS and PFOA. As part of its spin-off, Chemours agreed to indemnify DuPont from these liabilities, but Chemours is now demanding that DuPont either agree to share the cost of the liabilities or return the $4 billion dividend that Chemours paid to DuPont as part of the spin-off.
While DuPont’s near-term outlook may be uninspiring, its 9.2x EBITDA valuation assumes that its future is fairly grim. Yet, DuPont remains a high-quality company with market-leading brands and patented products that generate healthy 26% margins. Diversified across a wide range of industries, its innovations continue to position it well for highly-profitable relevance in emerging applications that include automotive, 5G, semiconductors, water technology and medical applications.
DuPont’s portfolio changes should help highlight some of its hidden value. The deal with IFF valued the N&B operations at a high 18x EBITDA multiple. The accompanying $7.3 billion cash payment to DuPont will help pay down its debt and possibly fund share repurchases. We expect more changes to its portfolio in coming years.
Earlier this month, the company replaced its CEO with Ed Breen, the highly capable executive who led the company’s vast transformation starting in 2015 and previously led the turnaround at Tyco. He will continue as executive chairman, and installed his trusted lieutenant Lori Koch as the new CFO. This important catalyst should accelerate the company’s performance improvement and possibly changes to its portfolio.
While the PFAS/PFOA liabilities appear daunting, they are likely to be contained at a level that DuPont can handle. We believe the new CEO will work toward a reasonable solution.
All-in, shares of DuPont look like a bargain, backed by a high-quality company that generates considerable free cash flow, has an improving balance sheet and led by a highly capable executive.
We recommend the PURCHASE of shares of DuPont with a $70 price target.
George Putnam III, The Turnaround Letter, turnaroundletter.com, 617-573-9550, March 2020
Feature 827
As contributor George Putnam III noted in the write-up of our Spotlight Stock, DuPont de Nemours is a company that is made up of several very valuable parts. Wall Street analysts often find it difficult to properly value a large, diverse company—especially when it has added divisions and spun-off separate organizations. But, suffice it to say, with DuPont—the largest U.S. chemical company—the sum of its parts look—to me—as if they are much greater than the 3
valuation that analysts currently bestow on it.
The shares of Dupont are trading for around 40% of their 52-week high, having lost 33% of their value since the coronavirus outbreak descended on us. Part of the decline is due to oil prices collapsing, when Russia and Saudi Arabia—OPEC members—couldn’t agree on production output and the Saudis flooded the market with oil. And since chemical companies use tons of oil in their daily products, the industry group has all suffered.
Yet, this—like the coronavirus—shall pass. According to Statista, U.S. chemical shipments are forecasted to rise from $569 billion this year to $668 billion by 2024, propelled by healthy demand from the construction and aerospace industries.
DuPont recently attracted the attention of Omega Advisor’s Leon Cooperman. In the fourth quarter, he bought around 426,000 shares of the company—more than doubling his existing shares. He now owns about 11% of DuPont’s outstanding shares. And why not? As a defensive company, DuPont sells its adhesives, fluids, reinforcing composites, foams and coatings, rubber and elastomers, and synthetic fibers into a huge range of industries, including electronics, transportation, biosciences, and construction throughout the economy.
Cooperman isn’t the only Wall Streeter on board. Sixteen analysts rate the company’s shares ‘Buy’. And price targets are anywhere from $64-$82 a share. That would be a pretty handsome return. And then, add in the 3.23% yield, and the gains keep getting better!
And with the shift in upper management (including a new CFO, too), analysts will feel more comfortable with a CEO that has proven himself during several spin-offs and acquisitions. As the market recovers, so should DuPont. You can certainly wait to add shares, until we see a market recovery in the works, but the stock looks like a screaming bargain at these levels.
Growth 827
Equifax Inc. (EFX) March 4 | Daily Alert
One of the Editor’s Portfolio companies that posted better-than-expected results is Equifax Inc. (EFX), a leading provider of credit-related data and services. Revenue in the fourth quarter rose 8% to $905.8 million, beating the consensus analysts’ estimate of $896.2 million. Adjusted earnings per share of $1.53 beat the estimate of $1.49.
The company’s Workforce Solutions unit led the way with 22% revenue growth. Verification services—the company is a leading provider of employment and income verification services—rose 33%. This business, which carries high profit margins, benefited from mortgage market inquiries and expansion of the company’s data records.
Equifax is confident that the operating momentum will continue in 2020. The company looks for constant-currency revenue growth of 4% to 7%. Looking at the individual operating segments, it expects very strong growth in verification services. Earnings will be impacted by costs associated with continued systems transitions to cloud-based platforms.
You may recall that Equifax experienced a massive data breach in September 2017—the U.S. Department of Justice recently announced charges against four Chinese military-backed hackers in connection with carrying out the cyberattack against Equifax—and has been spending aggressively to improve its systems security and data protection.
Equifax was the best-performing stock in the Editor’s Portfolio in 2019, rising 52%. The rebound in 2019 was especially impressive in light of the data breach and the ensuing fallout against the company. Stock price momentum has continued, with these shares up 14% year to date and trading around all-time highs. Several of the company’s business units are benefiting from
a strong mortgage and refinancing market. The firm is expecting the U.S. mortgage market to be about flat in 2020, but there could be some upside here if rates continue to trend lower.
The market clearly likes what it sees in the company’s income and employment verification business and the opportunities here. Turnarounds in some other businesses and a continued build-out of the firm’s international business—the company recently completed the acquisition of the remaining interest in its India business to take 100% control of that business—enhances long-term potential.
I have owned these shares since the 1990s and have been pleased with their long-term returns. It appears the worst is behind the company in terms of ramifications and costs from the data breach, which should help build investor support for the stock. While I don’t expect another 52% gain in 2020, the stock should beat the broad market over the next 12 months.
Please note that Equifax offers a direct-purchase plan whereby any investor may buy the first share and every share directly from the company. Minimum initial investment is $500.
Charles B. Carlson, CFA, DRIP Investor, www.dripinvestor.com, 800-233-5922, March 2020
Vera Bradley, Inc. (VRA) | Daily Alert March 2
Vera Bradley’s acquisition of a 75% interest in online jewelry brand Pura Vida has strengthened the former’s position as a lifestyle company and accelerated its earnings growth.
During its fiscal third quarter, Vera Bradley earned 20 cents a share, 10% above analysts’forecast and up 67% from the year-ago period. The consumer goods designer now expects to earn at least $0.49 a share in its fiscal fourth quarter, up from $0.25 a year ago.
Vera Bradley shares interest risk-tolerant growth-at-a-reasonable-price investors. They trade at 9.6X-forward EPS versus prospects for 55% EPS growth in 12 months. (Next earnings: Mar. 11)
Sam Subramanian, PhD, AlphaProfit Sector Investors’ Newsletter, alphaprofit.com, 281-565-6963, February 2020
ASGN Incorporated (ASGN) | Daily Alert February 25
Professional staffing company ASGN provides skilled workers to several attractive sectors, including technology, engineering, and life sciences. Serving nearly 15,000commercial and government clients, management estimates its addressable market approaches some $280 billion.
The company stands to profit from acquisitions and market-share gains that help diversify the revenue stream. Recently, ASGN acquired Blackstone Technology’s federal division for $85 million in a deal that strengthens the firm’s position in cloud applications and cybersecurity.
ASGN earns a 91 for Quadrix® Overall, 88 for Quality, and 78 for Earnings Estimates.
Consensus estimates call for per-share growth of 6% for full-year 2019 and 8% for the December quarter, which should be announced on Feb. 12. (Nancy’s Note: for 4Q, ASGN earned $1.28 per share, up 12% on revenues of $1.0 billion, up 10.3%.) For 2020, the consensus is $5.01, up 9%. Revenue is expected to advance 7%.
Shares trade at just 14 times estimated 2020 earnings, versus the industry median of 21. We are starting ASGN with a Buy rating.
Richard J. Moroney, CFA, Upside, upsidestocks.com, 800-233-5922, February 3, 2020
*Activision Blizzard, Inc. (ATVI)
Facebook (FB), Alphabet (GOOGL) and Netflix (NFLX) monetize their time naturally, and they have been rewarded handsomely. However, video game publishers are often overlooked. It’s time for that to change. And it’s time investors take note of Activision Blizzard.
SuperData, a game industry research firm, found that digital sales climbed 11% in 2018 to $110 billion. A year later, that number soared to $120.1 billion.
Activision, Take Two and Electronic Arts were never in the wrong business—they had a product mix problem. They went into 2018 with too much exposure to premium titles, and too few free-to-play games. At Activision, the largest publisher by sales, a restructuring was announced in January 2019. The company also cut ties to Bungie, the studio behind its Destiny franchise, an underperforming premium title. Since then Activision managers have repositioned the company for a new era dominated by F2P (free to play) titles.
GlobalData, another digital media research firm, expects the video game industry could reach $300 billion in annual revenues by 2025. It anticipates that new technologies, like 5G, the cloud and virtual reality, are converging with aggressive new offerings.
The firm is the market leader in eSports. Its Overwatch League is built in the mold of a traditional professional sports franchises. It has city-based teams, rich and famous owners and a regular season and playoff schedule.
More recently, Activision managers have increased emphasis on selling ads inside online and mobile games. During the fourth quarter of 2019, King, the company’s mobile games business that includes Candy Crush, grew advertising net booking to $150 million, an 80% increase year-over-year.
Activision shares trade at 21.5x forward earnings and 7.2x sales. This is definitely a stock that investors should keep on their radar.
Jon Markman, Pivotal Point, issues@e.moneyandmarkets.com, 1-800-291-8545, March 6, 2020
*Starbucks Corporation (SBUX)
Starbucks offers quality at a discounted price. Competitor-crushing brand power is a supporting pillar in the thesis. The market today values the Starbucks brand triple what it valued it only 10 years ago.
The company had 18,203 stores in its Americas segment at the close of 2019. It opened 550 new stores throughout 2019. Revenue in the Americas segment totaled $5 billion for the first quarter of fiscal year 2020 (ending December 2019), a 9% year-over-year increase.
The international store count increased 11% year over year to 13,592 outlets. Revenue for the segment grew 4% to $1.6 billion. Total annual revenue increased 7.2% last year. Earnings per share increased 9.2%.
New product offerings, like Beyond Meat breakfast sandwiches, will help keep the company on a long-term growth trajectory. New business alliances offer additional support.
China accounts for 10% of Starbucks’ annual revenue, 10% of its operating income, and 30% of its unit growth. Starbucks closed nearly half of its 4,300 Chinese stores last year in response to the coronavirus threat. But Starbucks already appears to be on the mend in China. Company officials announced last week that stores continue to open. Eighty-five percent of the closed stores have reopened their doors to consumers.
Second-quarter EPS will likely miss initial estimates by $0.15-to-$0.20. Fiscal-year 2020 EPS could drop to $2.90 from initial Wall Street estimates for $3.05. Once the latest health scourge has passed, growth will resume a normalized rate. Indeed, Wall Street is already forecasting $3.50 EPS for fiscal-year 2021 (which starts in October). That’s a 20% increase in expected EPS over fiscal-year 2020.
Let’s also consider the fundamentals. When we do, we find a company that generates copious quantities of cash, which it willingly returns to investors.
Starbucks is a buy at its discounted price. A return to normalcy would easily elevate Starbucks share to price $100 sooner than later. Buy Starbucks shares up to $86.
Ian Wyatt and Stephen Mauzy, Personal Wealth Advisor, wyattresearch.com, March 4, 2020
*The TJX Companies, Inc. (TJX)
The TJX Companies reported fiscal 2020 sales increased 7% to $41.7 billion with net income up 7% to $3.3 billion and EPS increasing 10% to $2.67. Same store sales increased 4%, marking TJX’s 24th consecutive year of comp store sales growth.
During fiscal 2020, TJX generated a fancy 55% return on shareholders’ equity. Given TJX’s continued strong cash flow, the board raised the dividend 13%, marking the 24th straight year of dividend increases. In addition, the directors approved a new $1.5 billion share repurchase authorization.
In fiscal 2021, TJX expects EPS in the range of $2.77 to $2.83, up 4% to 6% from fiscal 2020. This guidance is based on estimated comp store sales growth of 2% to 3%. Over the last 20 years, TJX has provided highly fashionable returns with the stock up more than 23-fold, rising from $2.54 per share to $59.80 per share. Buy.
Ingrid R. Hendershot, Hendershot Investments, hendershotinvestments.com, 703-361-6130, March 2020
*Avery Dennison Corporation (AVY)
Volatility right now is inevitable. So, what should you do? Consider gingerly tiptoe-ing back into equities using wide scales. Buy a little here, a little there and so on as prices come down.
Then once things calm down a bit, consider rotating into the sectors I’ve been highlighting for the last two years: Those that offer relative safety ... recession resistance ... lower volatility ... growing, secure dividend yields ... and solid Weiss Ratings.
To help you if and when you’re ready to start putting cash to work in the stock market, here is one of the names that was recently sitting in the top spot of your Heat Maps.
Avery Dennison (rated A+) produces and sells pressure-sensitive materials worldwide. Its Label and Graphic Materials segment offers pressure-sensitive label and packaging materials, including papers, plastic films, metal foils, and fabrics.
Mike Larson, Weiss Stock Ratings Heat Maps, issues@e.weissratings.com; phone: 1-877-934-7778, March 10, 2020
Technology 827
Netflix, Inc. (NFLX) | Daily Alert March 17
The stock market is down again today due to oil price competition and aggression between Russia and Saudi Arabia, which led to plummeting oil prices.
I can’t tell you how long that situation will last, nor how long the stock market will stay down. But I can tell you that the stock market has always recovered from pullbacks—and even crashes—and gone on to reach new all-time highs.6
If you have a lot of portfolio cash and you’re wondering what to buy today, I’d say buy a Movie Star Stock like Netflix. The success of these companies is not debatable, their share prices are rarely on sale, and the stock is trading at decent price support levels, as opposed to plummeting like oil stocks. Take advantage of today’s low price.
Generally speaking, take your time investing cash in the coming days and weeks. There is no hurry to scoop up bargains today, and please, definitely do not buy stocks that are reaching new lows as you look at their six-month price charts. Such stocks will not recover any time soon. Presuming that your goal is capital gains, you will want to stick with stocks that are showing more strength.
Crista Huff, Cabot Undervalued Stocks Advisor, cabotwealth.com, 9787455532, March 9, 2020
KVH Industries, Inc. (KVHI) | Daily Alert February 28
KVH Industries is the manufacturer of mobile satellite communications, guidance,and stabilization equipment and solutions for consumer, commercial, and military applications. It operates in two main segments: mobile connectivity and inertial navigation. As of today, the bulk of the company’s revenue comes from its maritime internet connectivity business.
The real focus of KVH Industries is the fiber-optic gyroscopes (FOGs), a kind of inertial measurement unit (IMU). FOGs are highly accurate electronic components that measure the orientation and movement of various pieces of hardware and machinery. Although FOGs make up a small part of KVH’s top line, soon this segment will overtake its maritime business.
In mid-January, Lockheed Martin selected KVH to develop next-generation multiaxis fiber-optic gyro (FOG) sensors for use in combat aircraft. Later in the month, the firm launched KVH Link, a new digital content streaming service for sailors and commercial fleets.
KVH is a “Buy” under $12. The risk level is “Medium.”
Jason Stutman, Technology & Opportunity, angelpub.com, 877-303-4529, February 2020
Alibaba Group Holding Limited (BABA) | Daily Alert February 21
Alibaba Group Holding Limited (BABA) is the Chinese equivalent of Amazon. There are several ancillary businesses attached to this massive e-commerce company, which operates under the Alibaba Group Holdings banner. They include Taobao, Tmall, eTao, and Juhuasuan. The company has 693 million active buyers.
The company will release fourth-quarter results on Thursday. (Nancy’s note: BABA earned $2.61 per ADS, surpassing estimates by 16%, up 49% from last year. Revenues were RMB161.5 billion (US$23.19 billion), up 38%, also higher than expected).
Third-quarter results were impressive, with revenue of $16.7 billion, an increase of 40% year-over-year. Annual active consumers on the company’s China retail marketplaces reached 693 million, an increase of 19 million from the 12-month period ended June 30, 2019.
Income from operations was $2.8 billion, an increase of 51% year-over-year. Adjusted EBITDA, a non-GAAP measurement, increased 39% year-over-year to $5.2 billion. Net income was $9.9 billion, which included a significant one-time gain recognized upon the receipt of the 33% equity interest in Ant Financial. Excluding this gain, non-GAAP net income was $4.6 billion, an increase of 40% year-over-year.
Diluted earnings per ADS (American Depository Shares) was $3.85 and non-GAAP diluted earnings per ADS was $1.83, an increase of 36% year-over-year.
This a long term holding for me and this recent pullback is an opportunity to add to your position.
Action now: Buy, with a target of $250.
Glenn Rogers in Gordon Pape’s Internet Wealth Builder, www.buildingwealth.ca, 1-888-287-8229, February 10, 2020
*L3Harris Technologies, Inc. (LHX)
L3Harris Technologies makes radio-communication products and systems. Its biggest customers are departments and agencies within the U.S. government, representing 77% of sales last year.
Per-share profits are expected to climb 16% and revenue 6% in 2020—and estimates have actually risen in the past week as the market has been shaken by coronavirus fears. L3Harris joins the Buy and Long-Term Buy lists.
Richard Moroney, CFA, Dow Theory Forecasts, dowtheory.com, 800-233-5922, March 9, 2020
*Science Applications International Corporation (SAIC)
This is not the time to rush into stocks, but it is time for a first nibble after a very long wait.
Our choice is Science Applications (SAIC), which sells productivity technology to many branches of the US government. These IT services should increase military and civilian productivity, which is, on balance, a good idea.
The stock is cheap at 71.25, with 3-5 year appreciation potential of 130-195. Add in a nice dividend yield, and the stock just about makes the 19% rule of Outsmarting Wall Street. The company has B++ financial strength, and a price growth persistence rank of “90”, which is excellent. Timeliness is an above average “2”, and annual earnings growth could easily hit 10% over the next 3-5 years. Buy.7
Continue to hold cash reserves of at least 60%.
Daniel A. Seiver, PAD System Report, padsystemreport.com, Dept. of Finance, S.D.S.U, San Diego, CA 92181, March 11, 2020
High Yield 827
Oneok, Inc. (OKE) | Daily Alert March 16
We’ve seen the first major signs of full-fledged PANIC selling.
The bad news is that we probably are still not at the bottom. Especially given the bombing-out of the energy sector (companies and ETFs changing in price as much as 50% lower today since Friday, for the love of Mike!) what was looking like overdone selling, etc. has turned today into mindless capitulation.
Again, that doesn’t mean it’s safe to buy energy in any significant way; especially since this price war launched in tag-team fashion by Russia (good on its part as I’ll be explaining) and Saudi Arabia (STUPID) will possibly go on a lot longer than the Coronavirus scare.
But as I said in adding Sunoco back (early, I know) I will add a “fave” at a time here and there at prices I think represent such compelling long-term value as to justify the remaining near-term downside risk, which will prove temporary.
For now, add back ONEOK, Inc. (OKE) as an “Accumulate.”
This is too good a company (one of many I could say that about, including both Sunoco and EPD, also getting hammered this morning) to be down here.
Chris Temple, The National Investor, www.nationalinvestor.com, 224-308-2587, March 9, 2020
Peoples United Financial, Inc. (PBCT) | Daily Alert March 9
People’s United Financial, Inc. (PBCT) is a regional bank and financial services company engaged in real estate and mortgage lending, equipment financing, consumer loans, life insurance, brokerage services, wealth management, and traditional banking services. The company has a network of 400+ branches, with total assets of $52 billion and a market capitalization of $6.9 billion.
In mid-January, People’s reported financial results for the fourth quarter of fiscal 2019. The company grew its operating earnings-per-share 3% over last year’s quarter, from $0.36 to a record $0.37, thanks to the acquisition of United Financial. For the full fiscal year, the company reported operating earnings of $552 million, or $1.39 per share, up 6.1% compared with fiscal 2018. Operating earnings-per-share have now increased for 10 consecutive fiscal years.
People’s United has a positive growth outlook in the coming years. Acquisitions will continue to help the company expand its geographic reach and customer base. Recent acquisitions include VAR Technology Finance, which focuses on serving the technological sector, BSB Bancorp, as well as the United Financial deal.
We expect $1.46 in earnings-per-share in 2020. Based on this, the stock trades for a price-to-earnings ratio (P/E) of 11.1. Our fair value estimate is a P/E of 13, which we believe is warranted due to the company’s growth potential and dividend history. Expansion of the valuation multiple could produce a slight bump of ~3.2% annually to shareholder returns through 2025. Combining valuation changes with the 5.0% expected annual earnings growth and the dividend yield, we expect total returns of 12.6% per year for People’s United Financial stock over the next five years.
Ben Reynolds, Nick McCullum, Bob Ciura, Josh Arnold, and Samuel Smith, Sure Retirement Newsletter, www.suredividend.com, ben@suredividend.com, February 9, 2020
*Corby Spirit and Wine Limited (CSW-B.TO)
Corby is best known as the maker of J.P. Wiser’s Canadian whisky, as well as leading brands Polar Ice vodka, Lamb’s rum, and Ungava gin. It is also the distributor for majority-owner Pernod Ricard’s international brands, such as Absolut vodka, Chivas Regal and Ballantine’s scotch whisky, Jameson’s Irish whiskey, Beefeater gin, and Malibu rum.
Corby’s own brands account for 80% of revenues, which grew 3%, to $149.9 million, in the year ended June 30, 2019.
Nevertheless, revenues have increased approximately 2% annually over the last three years and were up another 3% in the six months to Dec. 31, climbing to $82.1 million. Net earnings rose 7%, to $14.3 million ($0.50 per share).
Corby changed its distribution policy to increase the percentage of earnings paid out as dividends to 90% from 85%. It also paid a special dividend of $0.44 in December. This is the third time in the last five years that Corby has paid a special dividend in addition to its regular dividend hike.
Corby is a Buy for its solid profitability, improving sales growth from its major brands, rising dividends, and the possibility that Pernod Ricard may choose to buy out the minority shareholders.
Gavin Graham, in Gordon Pape’s Income Investor, buildingwealth.ca, 1-888-287-8229, February 28, 2020
Preferred Stocks 827
Citizens Financial Group, Inc. (CFG-PE) | Daily Alert March 10
For stock investors, the late-February correction provided an education in the role of information in financial markets. The downturn was worsened by doubts about the credibility of information emanating from China, the coronavirus’ site of origin. Misinformation from non-experts on the pathology of communicable diseases further rattled stock investors. It required considerable effort to cut through the noise and assess plausible arguments that the decline was overdone, advanced by genuine authorities on human health and financial markets.
What about income investors? On the face of it, their opportunities diminished. The headlines focused on plummeting interest rates, as capital fled to the safety of U.S. government bonds. Yields on both 10-year and 30-year Treasuries reached all-time lows. What the headlines did not communicate was a huge increase in risk premiums, that is, the extra yield investors receive for holding corporate obligations rather than default-risk-free government bonds.
For instance, between February 11 and February 28 the yield-to-worst differential between the median issue in the ICE BofA High Yield Fixed Rate Preferred Securities Index and the ICE BofA US Treasury Index more than doubled from +179 basis points to +404 basis points. (1 basis point = 1/100 percentage point.)
So even as yields on top-quality bonds plummeted, the median below-investment-grade (BIG) preferred’s yield-to-worst rose from 2.59% to 5.20%. Yield-to-worst takes into account the risk that the issuer will call your preferred, putting cash back into your hands that you will likely have to reinvest at a lower dividend rate. The huge jump in this yield measure during February reflected a substantial decline in call risk, thanks to the price drops. On February 11 just 8% of the issues in the high-yield preferred index were priced at par ($25 in most cases) or lower. On February 28 the proportion was 34%.
The newly created opportunity to put money to work at attractive rates is important to remember even while the sting of short-term losses remains fresh. Yes, the value of $1.00 invested in the high yield preferred index on December 31, 2012, with dividends reinvested, dropped from $1.87 to $1.78 in the last 17 days of February. But in percentage terms, that was slightly smaller than the drop from $1.60 to $1.52 during 2018. One year after that decline, the accumulated value had rebounded and risen to $1.82.
It’s an excellent bet that last month’s drop, too, will eventually represent just a minor dip on a long-term chart of BIG preferreds’ accumulated value. Withstanding ups and downs in income markets is the price of obtaining higher yields than CDs provide. And even investors who spend rather than reinvest their distributions benefit from putting more money to work at substantially higher rates than income investments offered a few weeks ago.
We are recommending Citizens Financial Group, Inc.; 5.00% Fixed Rate, Series E Non-Cumulative Perpetual; Par $25.00; Annual Cash Dividend $1.25; Current Indicted Yield 5.08%; Call Date 01/06/25 at $25.00; Yield to Call 5.36%; Pay Cycle 1b; Exchange NYSE; Ratings, Moody’s NR, S&P BB+; CUSIP 174610402.
CFG is one of the nation’s oldest and largest financial institutions. With approximately $163 billion in total assets at 06/30/19, the banking company ranks among the 25 largest U.S. banking institutions.
CFG operates throughout New England and in New York, New Jersey, Pennsylvania, Delaware, Ohio, Michigan, and South Carolina. The company offers a broad range of retail and commercial banking products and services to consumers, middle-market companies, and large corporations.
CFG’s 5.00% preferred issue may be redeemed beginning 01/06/25 and on any dividend payment date thereafter.
The banking company reported Q419 adjusted net income of $454.0 million or $0.99 per share, on the strength of higher mortgage banking fees. Results were ahead of analysts’ $0.96 estimates. Higher revenue growth benefited from strong mortgage banking income and higher credit card fees. CFG’s credit quality and capital position remain sound.
This preferred investment is suitable for low- to medium-risk taxable portfolios, recognizing CFG’s investment grade senior debt ratings. Buy up to $26.20 for a 4.77% current yield and
a 3.92% yield to call.
Martin Fridson, CFA, Income Securities Investor, www.isinewsletter.com, 800-472-2680, March 2020
RLJ Lodging Trust (RLJ-PA) | Daily Alert February 24
RLJ Lodging Trust (RLJ-PA) $1.95 Series A Cumulative Convertible Preferred Shares is often quoted as RLJ.PA, but on the iPhone it is RLJ’A, and Fidelity uses RLJPRA. In any case, this is the only RLJ preferred stock.
Normally, preferred stocks have a call provision whereby the company can buy them back at a certain price (par value) at a certain date (call date). However, this preferred does not have this provision which means this stock has unusual upside potential.
The only way the company could redeem this preferred stock is if RLJ common rose to $115.82 per share, an enormous rise in RLJ from its current price, which we are not forecasting any time in the foreseeable future. Instead, the upside potential comes from a drop in the yield on this preferred, which is highly likely.
This preferred stock pays $1.95 annually per share (which must be paid before the common stock dividend) providing a yield of more than 6%. If the yield drops to, say 5%, which would still be a good value, the price of this preferred would rise substantially because there is no call provision. At a 5% yield, the price of this stock would be $39 per share, a 34% increase. Meanwhile, the yield is excellent. It is also quite secure.
Gray Cardiff, Sound Advice, soundadvice-newsletter.com, 800-825-7007, February 3, 2020
REITs 827
National Retail Properties, Inc. (NNN) | Daily Alert March 5
National Retail Properties might not seem like the best shield against international mayhem. After all, it owns retail stores, and don’t retailers need Chinese supply chains to keep the registers ringing? And what about Amazon?
I can knock off both worries with this: That list is dominated by businesses that are either health- or entertainment-focused (restaurants, gyms and movie theaters) or sell things people need to buy daily, no matter what, such as 7-Eleven and Sunoco.
Three other things that stabilize NNN: long lease terms (from 10 to 20 years, with a weighted average of 11.2 years 9
remaining); nearly full occupancy (99% in the latest quarter); and steady dividend hikes. NNN’s payout has nicely paced its stock higher in the last decade: If you’d bought NNN a decade ago, that strong dividend growth would have you yielding 9.7% on your original buy today (because you calculate your yield on cost by dividing the current yearly payout by your purchase price). That’s nearly triple the REIT’s current yield.
Brett Owens, Contrarian Outlook, BNK Invest Inc., 500 North Broadway, Suite 265, Jericho, NY 11753 USA, 516-620-4294, info@bnkinvest.com, February 25, 2020
Kimco Realty Corporation (KIM) | Daily Alert February 20
Real estate investment trust Kimco Realty Corporation (KIM) has interests in 409 U.S. open-air shopping centers, comprising 72.4 million square feet of leasable space concentrated mostly in
major metropolitan markets and housing a diversified stable of tenants.
After a fantastic 2019 for KIM shares, 2020 is off to a lousy start, even as the company posted Q4 adjusted funds from operations (FFO) of $0.37, versus forecasts of $0.36, while occupancy rates ended 2019 at a record-high 96.4%, with anchor store occupancy at 98.9% and small shop occupancy of 89.3%. The period saw same store net operating income grow 2.7% year-over-year as new and renewing rents increased.
Management said it expects full-year 2020 FFO to be between $1.46 and $1.50 per share. We are positive on KIM’s continued transformation and rejuvenation as the company finished 2019
with a stronger balance sheet, a higher quality portfolio of assets and a pipeline of development and redevelopment that can produce attractive long-term growth.
While the retail environment isn’t without headwinds, we like management’s focus on better markets with higher barriers to entry.
John Buckingham, The Prudent Speculator, www.theprudentspeculator.com, 877-817-4394, February 3, 2020
*CyrusOne Inc. (CONE)
We know the CEO of CyrusOne suddenly resigned. But we see good value in its development pipeline that’s worth around an additional $20 per share. With around 476 acres of land in the U.S. and 23 in Europe, the Texas-based REIT is well-positioned to capitalize—and act quickly—on powered shell opportunities.
CONE is one of less than 10 investment-grade REITs with $1 billion in revenue and an international presence. Plus, it now has more than 4.5 MM CSF of development underway. That’s up 19% from Q4-18.
We consider this development pipeline to be a recognizable advantage, not to mention why the company’s been the subject of significant merger and acquisition (M&A) chatter. Also, CONE’s recent decision to right-size its workforce should enhance margins. And its very strong balance sheet provides it with significant capacity to support future growth initiatives.
While we don’t consider M&A a catalyst, we believe private equity investors could benefit substantially with this bolt-on acquisition. CONE shares are down 13.5% year to date and around 15% below our fair value target of $67.
Brad Thomas, Forbes Real Estate Investor, forbes.com/newsletters, brad@theintelligentreitinvestor.com, March 11, 2020
Healthcare 827
Emergent BioSolutions Inc (EBS) | Daily Alert March 13
Our rating on Focus List selection Emergent BioSolutions Inc. (EBS), a maker of vaccines and other products that address public health threats, is BUY. We believe that EBS is on track to post solid earnings growth over the next several years, driven by strong U.S. military demand for its anthrax and smallpox vaccine portfolios, as well as continued sales of its Narcan nasal spray for the treatment of opioid overdoses. We also expect it to benefit from its new product pipeline, including its antibody candidates for the treatment of serious influenza A and the Chikungunya virus spread by mosquitoes.
Although Emergent relies heavily on sales to the U.S. government, a fact that can often lead to uneven quarterly results due to contract timing, it is working to diversify its revenue by developing new products for both government and nongovernment customers, and by expanding internationally.
The company has three revenue drivers: Product Sales (roughly 86% of 4Q sales); Contract Developing and Manufacturing Services (7%); and Contracts and Grants (7%). In 4Q, Product Sales grew 43% to $310.8 million, driven by 60% growth in Narcan sales, to $66.9 million, a $78.5 million contribution from ACAM2000, and 75% growth in Other product sales, to $72.5 million. Conversely, sales of anthrax vaccines fell 31% to $92.9 million, as the USG began to transition its purchases toward the company’s next-generation anthrax vaccine, AV7909. Management expects an acceleration of AV7909 sales in 2020. Contract Developing and Manufacturing Services sales fell 5% to $25.5 million, reflecting contracted service work in 4Q18 that did not recur in 4Q19.
We think that EBS shares are attractively valued at current prices. From a technical standpoint, the stock achieved a golden cross in October 2019, as its 50-day moving average rose above its 200-day; the stock has advanced nearly 7% from this event, and, despite a recent decline over the past week, has remained above its 200-day average for the entire time. With its relative strength index at a modest 47, we expect that the stock would have significant room to run higher before running the risk of becoming overbought. On the fundamentals, EBS shares trade at 16.7-times our 2020 EPS estimate, below the average multiple of 25.1 for peer biotech companies. They are also trading at 15.1-times our 2021 estimate.
Based on the company’s heavy reliance on sales to the USG, and the uneven quarterly results, we believe that a modest valuation discount is warranted. However, we think the current discount is too great given our expectations for more than 20% annual earnings growth in 2020. Our revised target price of $67 implies a 2020 P/E of 19.0, still below the peer average, and a potential return of about 14% from current levels.
Jim Kelleher, CFA, Argus Weekly Staff Report, www.argusresearch.com, 212-425-7500, March 5, 2020
Medtronic plc (MDT) | Daily Alert March 11
Reasonably valued dividend-paying stocks with a long track record of raising the payout are the sweet spot in an uncertain market. Dividends have contributed to almost half of the stock market’s return since 1926 because of the compound growth they deliver when used to purchase additional shares of stock, like acorns that grow new oaks over time.
The wealth machine moves at an accelerated pace when a company consistently hikes its dividend year after year, through thick and thin–plagues, wars, bear markets, and recessions. Think of buying a $100 stock that pays $3 per year in dividends, a yield of 3% now, but if that dividend doubles over the next six years to $6, the yield on your original $100 cost doubles to 6%. Over the long-haul, stocks with a penchant for paying higher dividends can result in exceptional levels of retirement income, or a vehicle to keep on buying more stock, even if you stop putting money into your portfolio.
Medtronic pls (MDT) is a stalwart dividend-payer in good shape to survive near-term challenges and to reward shareholders longer term.
Fatalities from the COVID-19 virus now number in the thousands, but coronary artery disease and stroke are already major killers, together accounting for 15 million deaths per year worldwide.
Dublin, Ireland-based Medtronic earned $11.5 billion of its $31 billion in revenue over the past 12 months selling pacemakers and heart-related devices like defibrillators, replacement valves, and stents. The company also sells insulin pumps, tapping into a global market of half a billion diabetes patients around the world.
Revenue in 2020 is expected to grow 2.5% to $31.3 billion, earnings up 8% to $5.63 per share. The current quarterly dividend of $0.54 per share is up 163% from $0.205 per share in 2010.
John Dobosz, Forbes Dividend Investor, www.newsletters.forbes.com, 212-367-3388, March 5, 2020
BioMarin Pharmaceutical Inc. (BMRN) | Daily Alert March 3
Just at our Thursday deadline, BioMarin Pharmaceutical Inc. (BMRN) announced that the FDA has accepted for Priority Review the BLA for ValRox (valoctocogene roxaparvovec) for adults with hemophilia A. This constructive action by the FDA marks the first marketing application accepted for a gene therapy (GT) product for any type of hemophilia in the United States. The PDUFA date is August 21, 2020.
For the past 2+ years, we have known that the FDA has been proactive with gene therapy companies with an emphasis on hemophilia. Hence, today’s news may not be the biggest surprise. However, with specific issues of variability and durability relating to ValRox data to date, the BLA acceptance is absolutely good news. Moreover, the agency also stated that, as of now they do not expect to convene an outside Advisory panel before the PDUFA. This tells us a few things. First, the agency believes it has enough information to make decision on its own. And second, the agency has beefed up its own internal gene therapy (and likely gene editing) efforts since ~2018.
Of course, we won’t know the final answer until this summer. In the meantime, investors will continue to not only assess the likelihood of ValRox approval but also the potential market size and competitive landscape. We know BMRN has a major lead time over the other players in hem A GT—notably PFE/SGMO and Roche/ONCE. The nuances of differences in durability that Sangamo and partner Pfizer may show before the ValRox PDUFA date occurs.
BMRN has made enormous investments in gene therapy manufacturing and in our view, bodes incredibly well for ValRox and the company with regards to the FDA acceptance of its application. (SGMO should have its new facility online in 2021 with partner Pfizer’s guidance and cooperation.) Either way, the floodgates for hem A gene therapy are open once more. As a reminder, back in January the EMA also validated BMRN’s ValRox application and that, too, is scheduled for an accelerated review.
This is important positive news for BMRN (and also SGMO, in our view) and the revolutionary advances for patients via biotechnology. We believe BMRN is undervalued at current levels, and remains ripe for an acquisition. Today’s news should help that process along.
BMRN is a BUY under 100 with a TARGET PRICE of 130.
John McCamant, The Medical Technology Stock Letter, www.bioinvest.com, February 20, 2020
BioXcel Therapeutics, Inc. (BTAI) | Daily Alert February 27
BioXcel Therapeutics, Inc. (BTAI) has had a solid run with the stock up ~128% this year (S&P: +4.0%; XBI: +2.5%), even after accounting for last night’s offering. We had previously singled
out under-followed BTAI as having the potential to be the next central nervous system (CNS) stock that was primed for a big move.
With many more investor eyes on the stock now, we view the low-hanging-fruit component of our contention as having played out well. That said, we believe our BUY thesis on BTAI remains firmly on track as we see clear potential for further upside as we go into the mid-20 data readouts on BXCL501 (sublingual dexmedetomidine film), which is BTAI’s lead asset. Specifically, we like the risk-reward on the shares ahead of Phase 3 data for BXCL501 in agitation in schizophrenia/bipolar disorder (SERENITY; two trials), and the Phase 1b/2 data for agitation in dementia.
Our favorable view here is supported by the robust Phase 1b/2 data that BTAI presented in schizophrenia, where there was a clear dose dependence, and solid proof-of-concept data in dementia. We also like the potential for BXCL501 to be used in opioid withdrawal symptoms, which is an indication that we are adding to our model/valuation, among other changes. Our new price target of $68 implies ~100% upside from current levels, and we are reiterating our BUY.
At a high level, we like how management is positioning BTAI to be a leader in the treatment of agitation. On this, we note BTAI’s initiatives on 1) wearables (see here) and 2) a single-use injectable for severe agitation. We also like how BTAI is expanding dex’s potential from use in an acute agitation setting to chronic treatment. In this context, treatment of opioid withdrawal symptoms is important as it delves into sub-chronic dosing. Longer term, we expect to hear more about BTAI’s development of dex in combination with an as-yet-unidentified agent to target chronic agitation in dementia.
We now include a contribution from opioid withdrawal symptoms at a 40% probability of approval, with a launch in 2023E and unadjusted peak sales of $472mn in 2030E. We still model launches in agitation in schizophrenia/bipolar disorder in 2021E and in dementia in 2022E. We are modestly raising our probability of approval estimate in schizophrenia/bipolar disorder from 65% to 75% but keeping our 2030E unadjusted peak sales at $313mn. On agitation in dementia, we remain at 65% probability, but our 2030E unadjusted peak sales are $584mn vs. $513mn (as we start with a higher patient number that more accurately reflects market size). Our starting net price per film stays at $150. Given the potential for patent protection to the mid-2030s, we model a higher terminal contribution from 501. As BXCL701 (immuno-oncology) continues to evolve from a program/safety perspective, we are removing the prior modest contribution from the asset; some data are coming in 2020.
We include shares from the recent offering and continue to model more capital raising on the back of data. Finally, given the relatively de-risked neuro asset (vs. oncology), we are lowering our discount rate from 15% to 12%. Based on these changes, we are raising our PT from $27 to $68.
For some time now, our view on BXCL501 is that it remains a relatively de-risked asset in the agitation setting. We also received confirmation of this view when we recently had management out on the road and meeting investors in New York City. Based on the robust Phase 1b/2 data for BXCL501 in schizophrenia, we like the product’s chances going into the pivotal data readout in mid-20. Recall the SERENITY program contains two Phase 3 trials, i.e., one each in agitation in schizophrenia and bipolar disorder.
Sumant Kulkarni & Jia Min, Canaccord Genuity Research, www.canaccordgenuity.com, February 2020
Alcon, Inc. (ALC) | Daily Alert March 18
Alcon, Inc. (ALC, TSINetwork Rating: Extra Risk) offers investors two exciting ways to profit. Not only does it give you exposure to rapidly expanding, worldwide demand for its contact lenses and cataract surgery products, but its global operations and technological leadership enhance the possibility of it attracting a lucrative takeover bid. That could come from a rival or a global health-care giant.
Swiss pharmaceutical giant Novartis spun off Alcon just last year. And as we’ve said many times before, spinoffs are the closest thing you can find to a sure thing, regardless of market ups and downs.
We believe trends now underway—including Alcon’s strong position in its key markets—have set its sales, profit and share price on a strong growth path. We recommend this stock as a Power Buy.
Alcon is the world’s biggest eye-care company. Specifically, it’s the leader in ocular surgical supplies and No. 2 in contact lenses.
While Alcon is based in Switzerland, it is headed by an American, reports its results in U.S. dollars, and gets 40% of its sales in that market. It also generates 25% of its overall revenues from emerging markets, one of the highest percentages among its rivals in the industry.
Independent since last year, the company produces ophthalmic surgical devices under various brands; investors should note that this is a rapidly expanding and lucrative market driven by several growth factors:
• Aging baby boomers and the resulting demand in developed markets for cataract and vitreoretinal procedures. (The latter refers to any operation to treat eye problems involving the retina, macula, and vitreous fluid. These include retinal detachment, macular hole, epiretinal membrane and complications related to diabetic retinopathy.)
• Increased access to eyecare in emerging markets where the cataract surgery rate is currently about a quarter of the U.S. rate. Key markets are China, Brazil, and Russia—where greater affluence is leading to increased demand for cataract surgery.
Alcon also makes contact lenses and ocular health products, which includes dry-eye and red-eye treatments, and contact-lens care. Key growth drivers of interest to investors include: a consumer shift to disposable lenses from reusable lenses; a significant population of undiagnosed dry-eye sufferers; increasing use of vision-care products in emerging markets such as Asia, which has only 3% contact-lens penetration compared to 15% for the U.S.; and rising consumer access through expanding distribution, including online sales and other direct-to-consumer channels.
In the quarter ended September 30, 2019, Alcon’s revenue rose 4.5%, to $1.84 billion from $1.76 billion.
Excluding one-time items, per-share earnings in the quarter fell 8.0%, to $0.46 from $0.50, on higher costs. However, following a comprehensive review, Alcon has identified significant efficiency improvements that should boost its profits and pay off for you. Alcon also spends a high 10% of its sales on research, which makes it appear less profitable than it really is.
This Power Buy currently trades at a high 31.5 times its forecast 2020 earnings of $2.01 a share. That p/e reflects keen investor interest in its upward growth path as it expands into new markets and services.
Tapping into key energizers, like an aging population, greater wealth globally, and technological changes that make it hard for new entrants to crack its markets, all bode well for Alcon’s share price and its investors.
What’s more, the company is now without a controlling shareholder for the first time and it could become an attractive takeover target for other health-care companies looking to enter or expand in the eye-care market.
Patrick McKeough, Power Growth Investor, www.tsinetwork.ca, 888-292-0296, March 2020
*NovoCure Limited (NVCR)
NovoCure shares are significantly off their high of 93 about a month ago, closing yesterday at 67. This is, of course, very disappointing and also in sharp contrast to the financials released last week showing a 300% earnings surprise on a 42% jump in net revenue. Gross margins were 75% and the balance sheet is strong with $313 million in cash.
Based in Israel, NovoCure sells a medical device that uses low-voltage electric fields to successfully treat the most aggressive forms of cancer. The technology has succeeded in every clinical trial. The Food and Drug Administration (FDA) has approved it and Medicare now covers it.
The core product is called Optune—its Tumor Treating Fields delivery system—and it was launched in 2011 for glioblastoma, the most common primary brain cancer and one of the most difficult cancer types to treat. Optune is sold in the U.S., Germany, Austria, Switzerland, Sweden, Israel and Japan.
Optune also uses low-intensity electrical fields to treat mesothelioma, a tumor of the tissue that lines the heart, lungs, stomach and other organs. However, studies are underway with other brain cancers as well as pancreatic, ovarian, liver and lung cancers, with key results due over the next few months.
If you own NovoCure, I would hold it. If you don’t own it, I would be a buyer. BUY A HALF
Carl Delfeld, Cabot Global Stocks Explorer, cabotwealth.com, 978-745-5532, March 12, 2020
Financials 827
Brookfield Asset Management Inc. (BAM) | Daily Alert March 6
In his State of the Union Address, President Trump emphasized the need to rebuild our infrastructure, a topic that drew applause from both sides of the aisle. That’s why we are investing in Brookfield Asset Management Inc. (BAM).
The company announced strong investor demand for its Brookfield Infrastructure Fund IV, with total equity commitments of $20 billion, exceeding the original fundraising target by 18%.
Sam Pollock, head of Brookfield’s Infrastructure Group, said, “The strong level of support we have received from investors reflects the growing global demand for infrastructure investments and their attractive characteristics. We have already deployed a meaningful amount of the fund into a number of high-quality investments and are pleased with the opportunities we continue to see across our target markets and sectors.”
BAM last month posted an outstanding 2019 report. CEO Bruce Flatt stated, “2019 was a successful year on many fronts. Fundraising was excellent with more than $30 billion raised during the year and now over $50 billion raised for this round of flagship funds. We invested over $30 billion into new opportunities during the year but continue to build liquidity, with approximately $65 billion of capital to deploy into investments globally.”
BAM also announced a three-for-two stock split in the form of a special dividend payable on April 1 to improve liquidity. It will not dilute shareholder equity.
Mark Skousen, Forecasts & Strategies, www.markskousen.com, Eagle Financial, 300 New Jersey Ave. NW, Suite 500, Washington, D.C. 20001, March 25, 2020
Equitable Holdings, Inc. (EQH) | Daily Alert February 26
Today’s business headlines announced a big financial merger, with global investment manager Franklin Resources (Ben) buying Legg Mason (LM), a retail investment firm. I was thrilled by the news. I bought LM for several family members in recent months, but I wasn’t surprised, because there are far more investment and insurance companies on my buy list right now than any other industry.
Since I screen stocks, first and foremost, for strong earnings growth, it makes sense to me that a bigger company would want to own a smaller, very profitable company.
You’re in luck! There are many additional small- and mid-cap financial firms that warrant attention right now, including Equitable Holdings, Inc. (EQH), a leading U.S. provider of financial advice, asset management and protection solutions. The company has $701 billion in assets under management through two principal franchises: Equitable Life Insurance Co. and a majority stake in AllianceBernstein Holdings L.P. (AB), an investment management firm.
French insurer AXA S.A. (AXAHY) had held a 39.1% stake in AXA Equitable Holdings (EQH) until last month. At that time, AXA S.A. sold 144 million shares of EQH in a secondary stock offering in order to raise cash to fund last year’s $15 billion purchase of XL Group (XL). (XL Group was featured in Cabot Undervalued Stocks Advisor when they received the buyout offer from AXA in March 2018.) AXA S.A.’s ownership in EQH is now down to about 10%. Equitable subsequently changed their name from AXA Equitable Holdings to Equitable Holdings.
This year, Equitable announced an agreement to sell U.S. Financial Life Insurance Company and MONY Life Insurance Company of the Americas, Ltd. to Heritage Life Insurance Company. The transaction is expected to close in early 2020.
“This transaction simplifies our balance sheet and is aligned with our strategy to improve the return on capital of our Protection Solutions segment,” said Anders Malmstrom, Chief Financial Officer of AXA Equitable Holdings.
Last week, AllianceBernstein reported a huge fourth-quarter revenue and profit beat. Net income was $0.85 per unit vs. the analysts’ consensus estimate of $0.70, and revenue was $817 million vs. the $769.8 million estimate. The good news propelled both AllianceBernstein’s and Equitable’s stocks higher. After a great 2019, the AB shares are up another 16% so far this year. AllianceBernstein’s bullish results are great news for Equitable, because as a majority shareholder, Equitable’s value is also enhanced. Wall Street is expecting AllianceBernstein’s profits to rise another 17% in 2020.
Next up: Equitable’s fourth-quarter results, due out on the afternoon of February 26. Per the third-quarter report, the company is successfully increasing both insurance premiums and net inflows in all business divisions, which include Individual Retirement, Group Retirement, Investment Management & Research and Protection Solutions. The market’s expecting fourth-quarter earnings per share (EPS) of $1.17, within a range of $1.10-$1.25, and $3.4 billion revenue, within a range of $3.2-$3.5 billion. Full-year 2019 profits are expected to finish the year up 20%.
With so many of its insurance and investment peers outperforming expectations this earnings season, and guiding analysts’ 2020 forecasts upward, I naturally expect Equitable to follow suit. Amazingly, Equitable’s 2020 price/earnings ratio (P/E) is only 5.5. For comparison, Legg Mason’s 2020 P/E was 10.9 before the buyout offer was announced, and 13.4 at the $50 buyout price. Equitable has additional insurance and investment peers with much higher valuations: Ameriprise Financial (AMP) with a 9.7 P/E and Voya Financial (VOYA) with a 12.9 P/E. So, there’s room for Equitable to rack up serious capital gains without even coming close to their peers’ valuations.
Share repurchases and dividend payouts are a priority for Equitable. The current dividend yield is 2.2%; it was most recently increased in May 2019.
The company’s IPO was issued in May 2018. EQH rose to a new all-time high this month, and the price chart remains bullish. Barring a downturn in the broader stock market, I expect continued capital gains from EQH this year.
Timothy Lutts, Cabot Stock of the Week, cabotwealth.com, 978-745-5532, February 18, 2020
*Ally Financial Inc. (ALLY)
We emphasize gradually buy so you can buy more quality into further panic and volatility. Ally Financial is on our starting list of companies to accumulate, depending on your risk tolerance and time horizon. The U.S. banking system is so much stronger than the last time valuations in the financial sector plunged 12 1⁄2 years ago.
ALLY is a leader in electronic banking, which reduces costs and improves margins. A growing yield annually will outpace fixed income during this lower interest rate environment.
Alan B. Lancz, The Lancz Letter, lanczglobal.com, 419-536-5200, March 2020
*Hercules Capital, Inc. (HTGC)
Hercules Capital gave the very positive surprise of an eight cent supplemental dividend on top of the regular $0.32 per share payout. For fourth quarter results, net investment income was up 31.1% compared to a year earlier. This BDC gives us exposure to the tech and IPO markets.
Tim Plaehn, The Dividend Hunter, yn345.isrefer.com/go/cabmdpc/cab, February 2020
*Bank of America Corporation (BAC)
We should be looking at your stocks that have gotten slammed in this rout. Bank of America is hovering around $20. It’s worth way more. The markets turn and BAC is back up to $30 or higher. I’m buying BAC under $22.50. One thing I’m not doing is selling stocks that have already taken the hit. I’m confident in the long-term future of every company in my personal portfolio and our model portfolio. And right now, the losses are on paper, but they’re not real. Once I sell, they’re real and I can never reverse them.
But if I’m patient, if I’m bold, if I stick it out I’m going to be positioned to win big and maybe retire earlier than I’d hoped. And isn’t that why we’re all here anyway?
Historically, this is when people make the most money.
Jason Williams, The Wealth Advisory, angelpub.com, March 9, 2020
Funds & ETFs 827
iShares Morningstar Large-Cap ETF (JKD) | Daily Alert March 12
Morningstar created a family of 16 indexes in 2004, targeting coverage of 97% of the US equity markets. The indexes were designed to provide investors with accurate benchmarks for performance measurement, in addition to providing building blocks for portfolio construction.
Morningstar uses multiple “inputs” or characteristics to assess a stock’s style. The indexes also reflect the “overall economic importance of a company—the larger and more liquid the security, the more weight it deserves in the index,” according to Morningstar.
The index structure begins with a broad market index: the Morningstar US Market Index. The first level of index breakdown divides this universe into three composite style indexes (i.e., total market value, core, and growth) and three capitalization indexes (i.e., large-, mid-, and small cap). There is no stock overlap within the style or capitalization indexes. Beyond that, the process breaks stocks into nine style indexes (large value, core, growth, and mid-cap and small-cap of the three). Again, there is no overlap in stock representation or sampling techniques used in the construction of the nine style indexes.
The index that the iShares Morningstar Large-Cap ETF (JKD) tracks is the Morningstar Large Core Index—comprised of large cap equities that have exhibited “average growth and
value characteristics.” The Morningstar large-cap indexes start with the “largest stocks that comprise 70% of market capitalization of the investable universe.” The value-oriented index within that targets stocks that have a stronger value orientation and which are thought to be undervalued by the market relative to comparable companies. The growth-oriented large-cap index selects stocks with the strongest growth orientation, and which are expected to grow earnings above average relative to the market. And finally, the core index (which this fund tracks) has exhibited average growth and value characteristics.
Clearly, the dominance of Apple in the portfolio has a major impact on returns, even though there are 78 total holdings in the fund. For the trailing year through Friday, February 28, Apple has advanced 59.7% (even after the week’s dramatic declines in reaction to coronavirus concerns). Other strong performers within the top ten holdings include The Home Depot, Coca-Cola, and Pepsico (up 20.7%, 21.5%, and 16.7%, respectively).
iShares Morningstar Large-Cap’s performance has placed it in well within the top third of the Morningstar large blend category in seven calendar years since 2010. To date in 2020, it is in the middle of the pack (again, caveat, after the last week in February rout) with a negative -8.3% return.
Brian W. Kelly, Moneyletter, www.moneyletter.com, 800-890-9670, March 2020
Updates 827
*Sell: Patriot One Technologies Inc. (PTOTF) | Updated from WSBI 812, December 19, 2018
The news flow over the next four to eight weeks will be very, very negative. In my 401(k) retirement account, I moved to 100% cash last week. This was a simple decision – since changes in the account do not cause any capital gains. I’m going to immediately start getting more defensive in the portfolio. That’s why I’m preparing to sell. Sell ¼ of every position in the Million Dollar Portfolio.
Plus, I plan to exit several positions that pose greater risk in the current environment, including this one.
Small-cap defense stock Patriot One Technologies will continue to see downward pressure. We’re going to exit our entire position.
Ian Wyatt, Ian Wyatt’s Million Dollar Portfolio, wyattresearch.com, March 9, 2020
*Sell: Harding Loevner International Equity Portfolio Investor Class (HLMNX) | Updated from WSBI 796, August 16, 2017
Harding Loevner International Equity is focused on international stocks. I believe that U.S. stocks will remain stronger relative to international—and therefore will exit this position.
Ian Wyatt, Ian Wyatt’s Million Dollar Portfolio, wyattresearch.com, March 9, 2020
*Sell: 1/3 Dexcom, Inc. (DXCM) | Updated from WSBI 824, December 18, 2019
Dexcom (had been doing yeoman’s work trying to resist the market’s decline, but this week it’s finally succumbed to the selling pressure. Don’t get us wrong—shares aren’t a disaster compared to most (great relative strength today!), and the fact that the stock gave ground grudgingly, backs up the view that the stock is owned by plenty of big fish that are hesitant to let it go, partly because its business combines growth and defensiveness (diabetics will continue to switch to CGMs over time).
That said, we had a big position and a good profit, which, combined with the market’s implosion, prompted us
to take partial profits, selling one-third of our shares and holding the rest. We still believe DXCM will see higher prices during the next sustained market uptrend. SOLD ONE-THIRD, HOLD THE REST.
Michael Cintolo, Cabot Growth Investor, cabotwealth.com, 978-745-5532, March 12, 2020
*Sell ½: ProShares Ultra S&P 500 Fund (SSO) | Updated from WSBI 816, April 10, 2019
We’ve patted ourselves on the back a bit regarding moves (and stock picks) that have kept the portfolio’s in one piece while the market has crashed. But to be fair, our handling of SSO has been poor. We did sell one-third of our position in late January, but never did sell any more on the way down, as the odds favored this being a “normal” correction within an ongoing bull market. Clearly, that hasn’t been the case.
We still want to play the odds, and even though this market has been breaking rules; the historic selling we’ve seen does favor a meaningful low to be in place soon. However, we also can’t ignore the loss we now have on this position, not to mention the weakness. Long story short, we’re going to sell half our remaining position tonight, but also hold the other half and see how things play out from here. SELL HALF, HOLD THE REST.
Michael Cintolo, Cabot Growth Investor, cabotwealth.com, 978-745-5532, March 12, 202014
*Sell: Equitable Holdings, Inc. (EQH) | Updated from February 16, 2020
Equitable Holdings originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Special Situation Portfolio and now in her Growth & Income Portfolio, reported fourth quarter results last week, and they were good, actually beating analysts’ estimates. However, the stock gapped down in response, as the market fell apart and investors anticipated tougher sledding for all investment companies going forward. In her latest update, Crista wrote, “This stock is a very attractive bargain, but if the price falls below support, hold off on additional near-term purchases.” Well, the price has definitely fallen through support. SELL.
Timothy Lutts, Cabot Stock of the Week, cabot.net, 978-745-5532, March 2, 2020
*Sell: Radian Group Inc. (RDN) | Updated from WSBI 826, February 20, 2020
We are discontinuing coverage of Radian. The stock no longer ranks among our favorite picks, as a mixed near-term growth outlook and weak stock-price action temper our enthusiasm. Its Performance score is down to 29.
Richard J. Moroney, CFA, Upside, upsidestocks.com, 800-233-5922, February 25, 2020
*Sell Comcast Corporation (CMCSA) | Updated from WSBI 791, March 15, 2017
When I recommended Comcast (CMCSA) in Feb, 2017, I said it would be a “safe, stable anchor for the 2 for 1 portfolio.” That was more or less true, but the anchor got stuck from time to time and wound up holding the portfolio back. CMCSA will have an overall return of about 7.1% annualized returned, when we sell next week. The Vanguard 500 Index Fund will have an annualized gain of ±14.0% over the same period.
Neil Macneale, 2 for 1 Stock Split Newsletter, 2-for-1.com, 408-210-6881, February 2020
Investment Index 827
