Markets rebounded this past month, albeit with plenty of volatility. But the net result was a 1,500+ gain in the Dow Jones Industrial Markets.
Unemployment, of course, is still pressuring the economy, with some 29.5 million Americans without jobs. However, the housing market perked up, with starts and building permits rising. Retail sales—reflecting the reopening of the economy—were also up.
It’s worrying that coronavirus is rising in about 20 states, but, hopefully, if people begin once again following social distancing, the new cases won’t push us off the economic reopening strategy.
Advisors and consumers are back on the bullish track, as you’ll see in our Barometer, as well as Market Views.
Despite the market’s rise, there are still plenty of undervalued stocks in the marketplace. And we begin this issue with our Spotlight Stock, a technology company that is gaining market share in the highly competitive field of cybersecurity—in this case, specializing in ID authentication for employees and customers. My feature article explores the industry in more depth, as well as additional reasons for adding our Spotlight Stock to your portfolio.
Market Views 830
The Dow recuperated from this morning’s 700-point decline, slowly rising to end with a 150-point win, despite renewed fears surrounding a spike in COVID-19 cases. The S&P 500 and the Nasdaq also clawed their way to modest daily wins on a Federal Reserve announcement that it would buy individual corporate bonds. A similar announcement helped dig markets out of their March trough as well. Today’s update extends on this program, indicating the central bank’s continued support of credit markets.
Bernie Schaeffer, Schaeffer’s Investment Research, SchaeffersResearch.com, 800-327-8833, June 15, 2020
Long Term is Bullish
Stocks crashed last week, led by smaller caps. The Federal Reserve kept interest rates unchanged, and surprised nobody by saying the pandemic has slowed the economy. It says the short term is extraordinarily uncertain, but its long-term forecast is unchanged. After a big rise, stocks needed to correct.
The same factors that created the rise from March are still in place. Yardeni’s formula: TINA + MMT = MAMU. It means: “there is no alternative” (to stocks) plus modern monetary theory (with QE4EVER) equals the mother of all melt-ups.
The coronavirus trajectory is a mystery. Some areas got lucky, others did not. Such uncertainty will persist, which should keep financial stimulus coming.
Jason Kelly, The Kelly Letter, jasonkelly.com/kellyletter, June 14, 2020
Bullish, but Safety First
Breadth isn’t the only bullish signal emerging from the technical indicators. A lack of downside leadership has also propelled the bullish “Selling Vacuum” component [*1] of our Negative Leadership Composite well past the +20 threshold. This alone has been a historically positive sign, but signals are even more reliable when breadth confirms simultaneously, as it is currently. The technical situation has steadily improved and is indicating that equities will likely move higher for the foreseeable future. That being said, the many persistent risks in this environment compel us to maintain our defensive stance in line with our “safety-first” strategy.
James Stack, InvesTech Research, www.investech.com, 800-955-8500, June 5, 2020
Spotlight Stock 830
The world of big business is obsessed with identity. And in this age of telecommuting, knowing exactly who is logged into the network and from what location is essential for businesses to track productivity and manage employees. That kind of vital demand is already being provided by some great businesses.
One of them is Okta Inc. (Rated “D+”). The company provides multi-factor authentication to enterprises, partners, and customers. The San Francisco-based company has become a digital passport provider to over 7,000 organizations.
And the work from home trend’s acceleration that only increases the value of the business.
Like many newcomers in Silicon Valley, Okta was born in the cloud era. Todd McKinnon and Frederic Kerrest, two former Salesforce.com, Inc. (CRM, Rated “C-”) engineers, recognized that managing employee and customer identity across disparate software platforms had become needlessly complicated. Lost passwords and application lockouts were dampening the productivity benefits of the cloud.
Okta software gives employees a single login. In the background, they are magically logged into their Microsoft Office, Salesforce, Adobe, or any other enterprise accounts. It’s seamless and there are no passwords to remember. When they leave the company, their access is automatically revoked.
This kind of security is vital.
Most data breaches are the result of weak or stolen login credentials. Okta identity management negates credentials. It also provides managers with a live dashboard showing who is logged in, and from what location. That peace of mind is more important than ever with so many employees working outside of the office.
Okta is the clear leader in enterprise identity management. And it’s recently been recognized as such.
Last year, the company was named an Access Management leader in the Gartner Magic Quadrant. Forrester Research made a similar declaration in June 2019.
The best news is the lack of any real competition. While Microsoft does have a similar single login, its solution is not vendor neutral, nor does it integrate with as many software platforms. The Okta Identity Cloud works with thousands of enterprise apps.
The business is on a roll. Its stock has risen 66% this year, and 1,032% since the IPO in 2017. Sales have also surged, from $85.9 million in 2016 to $586 million through fiscal 2020.
Today, the corporate client list is a who’s who of up-and-coming enterprise software companies: Twilio Inc. (TWLO, Rated “D”), Workday, Inc. (WDAY, Rated “D”), Zoom Video Communications, Inc. (ZM, Rated “C-”), Splunk Inc. (SPLK, Rated “D+”), Box Inc. (BOX, Rated “D”), ServiceNow, Inc. (NOW, Rated “C+”) and Zscaler (ZS, Rated “D”) all depend on Okta for identity management.
And Okta is also signing bigger companies like Adobe, Inc. (ADBE, Rated “B”), Salesforce.com, Jet Blue Corp. (JBL, Rated “D+”), and Major League Baseball.
Managers have found a way to monetize enterprise identity. They also built a business that is largely immune from competitors because the architecture is vendor neutral.
The company still does not have earnings, but managers expect to turn profitable in 2022. Currently, shares are trading at 39.9 times sales.
Jon Markman, Pivotal Point, issues@e.moneyandmarkets.com, 1-800-291-8545, May 31, 2020
Feature 830
Online security is a big problem. Consider this:
There is an attack every 39 seconds on average on the web
Hackers steal 75 records every second
Hackers create 300,000 new pieces of malware daily
On average, 30,000 new websites are hacked every day
Those are some pretty sobering statistics. Consequently, it’s no surprise that the global cybersecurity industry market is 3
predicted to grow at a CAGR of 10.1%, and reach $400 billion by 2026.
According to research firm Grand view, the global digital transformation market size was valued at $284.38 billion last year, and is forecasted to grow at a CAGR of 22.5% from 2020 to 2027.
The total addressable market in identity solutions space—where our Spotlight Stock operates, is sliced into two factions: Workforce Identity (around $30 billion) and customer identity ($25 billion). And Okta is an integral part of that space, making identity-management software used to log in to various systems. It has grown its customer base to more than 6,500 companies, of which some 1,600 customers have an annual contract value of $100,000. And half of those were new customers.
The company says it has four primary growth drivers: 1) Innovation in platform and network; 2) Landing & expanding in large enterprise; 3) Growing Partner Channel; and 4) Making investments in international expansion.
You can see that the company is on the right track, revenue-wise, with sales expected to more than double from first quarter 2019 to first quarter 2021.
Okta’s first quarter revenue beat analysts’ estimates by 6.3%. It soared by 46%, to $182.9 million, as a result of a 48.3% jump in subscription revenues. And Okta is flush with cash, generating $30 million, a record level of free cash flow, during the quarter.
And the future looks rosy for Okta. Management is estimating full-year fiscal 2021 revenue to be between $770 million, representing 31% to 33% year-over-year growth.
Okta was already on a tear, and then COVID-19 boosted its potential by the rapid increase in remote workers, most of whom have very minimal security in place in their homes. And with hackers growing faster than solutions, we can look for exponential demand for cloud-based and AI security improvements, which puts Okta in the right spot, at the right time.
Growth 830
Sprouts Farmers Market, Inc. (SFM) | Daily Alert June 5
It’s time for another new buy recommendation, and this one is all about high-quality food. No, not high-quality restaurant food. We still can’t really go to restaurants like we used to. Rather, we are talking high-quality, organic meats and foodstuffs of the sort sold at high-end boutique grocers.
Specifically, we are talking about the high-quality products sold at Sprouts Farmers Market, Inc.
Full disclosure, this is a store that Jim shops at frequently because it sells all of the pills, potions and organic foods that help fuel his workouts. But you don’t have to be a fitness freak to love SFM’s stock. In fact, all you have to do is be in love with the combination of the major earnings growth and strong buying in the shares.
On the earnings front, SFM has recently reported that sales across the chain rose at a brisk pace of 16% to $1.6 billion and that same-store sales spiked 10.6%. Adjusted earnings per share also surged 72% year over year. And Wall Street loves that organic growth (pun intended) as SFM shares are up some 29% year to date.
Pandemic or no pandemic, we suspect customers will continue to shop at Sprouts, and that means more upside in sales, earnings and in the share price, as the fast money continues a flight to high quality.
So, let’s buy Sprouts at market, with a protective stop set at $20.00.
For those willing to take a bigger bet, buy the SFM Sept. $30 call options (SFM200918C00030000) at market, which last traded for $0.80 and expire on Sept. 18.
Mark Skousen & Jim Woods, FMA Trader Alert, markskousen.com, Eagle Financial, 300 New Jersey Ave. NW, Suite 500, Washington, D.C. 20001, May 18, 2020
*Glu Mobile Inc. (GLUU)
Glu Mobile Inc. develops, publishes, and markets a portfolio of free-to-play mobile games for the users of smartphones and tablet devices. It publishes titles primarily in four genres, including lifestyle, casual, mid-core, and sports and outdoors.
The company’s portfolio of compelling games based on its own intellectual property, such as Cooking Dash, Covet Fashion, Deer Hunter, Design Home, Diner DASH Adventures, and QuizUp, as well as games based on or significantly incorporating third party licensed brands, including Kim Kardashian: Hollywood, MLB Tap Sports Baseball, and Restaurant Dash with Gordon Ramsay, as well as Disney Sorcerer’s Arena. It markets, sells, and distributes its games primarily through direct-to-consumer digital storefronts, such as the Apple App Store, Google Play Store, and others.
GLUU has begun to rebound. A big reason for that was the World Health Organization (WHO), which encouraged gaming during “stay at home” orders. However, that’s not the only catalyst for GLUU stock. Demand for mobile gaming has been incredibly explosive. More than 2.7 billion global gamers are expected to spend nearly $160 billion on games just this year, according to market researcher Newzoo. Better, mobile gaming could generate up to $77.2 billion this year—13.9% growth year over year. With solid mobile gaming growth ahead, I wouldn’t be shocked to see GLUU stock double, if not triple over the next year.
Ian Cooper, The Cheap Investor, support@thecheapinvestor.com, June 2020
*Trulieve Cannabis Corp. (TCNNF)
Trulieve, recommended by yours truly in Cabot Marijuana Investor has been building a nice base between 12 and 14 over the past month, so buying here is okay if you don’t own it yet. Trulieve is the established market leader in Florida, which is an all-medical market at this point, and just last week the company made further progress toward its debut in Massachusetts (where both medical and adult-use are legal), receiving approval from the Massachusetts Cannabis Control Commission to cultivate, manufacture and operate a retailestablishment in the state. BUY.
Timothy Lutts, Cabot Stock of the Week, cabot.net, 978-745-5532, June 8, 2020
*Valens GroWorks Corp. (VLNS.TO)
Valens Groworks (Speculative) keeps signing extraction agreements to process marijuana from third-party producers to make its cannabis resins and oils. Valens’ customers include Canopy Growth, Tilray and Organigram Hexo Corp. Investors also benefit from its medical cannabis extract sales online through Shoppers Drug Mart.
In the quarter ended February 29, 2020, revenue was $32.0 million, up from $2.2 million a year earlier. The company made a profit of $2.5 million, or $0.02 a share. That’s compared to a loss of $6.4 million, or $0.07. Valens’ balance sheet is also very sound, with cash of $44.3 million and no debt.
Longer term, if its niche proves successful, Valens could attract competition from larger firms. Meanwhile, regardless of which cannabis growers emerge as winners in the Canadian landscape, it, and its investors, are there to profit.
Valens GroWorks has a 3-Leaf Cannabis Quality Rating (CQR) and is a speculative buy for aggressive investors who want exposure to the marijuana industry.
Patrick McKeough, Power Growth Investor, tsinetwork.ca, 888-292-0296, June 2020
* 2U, Inc. (TWOU)
2U Inc. is a Maryland-based technology company that enables colleges and universities to bring their degree programs online. 2U recently acquired Trilogy Education, which it has folded into its offerings. Trilogy defines itself a “workforce accelerator”, partnering with universities to create and manage skills-based training programs and boot camps, mainly targeting the tech industry.
2U also provides solutions for content development, student acquisition, and application monitoring. The firm generates revenue through subscription fees to software offerings on a 10- to 15-year basis. The company has a total of 73 university partners.
Not too surprisingly, 2U is coming off very solid first-quarter results amid the coronavirus pandemic. Revenue grew an impressive 44% year over a year to $175.5 million. This growth was driven by organic growth in the company’s graduate segment and through the addition of Trilogy, which was acquired in May 2019.
As a result of the coronavirus pandemic tailwinds, 2U’s stock has already received numerous upgrades over the last month from institutional players including Berenberg, Baird, and Barrington Research.
We rate 2U Inc. a “Buy” under $35. The risk level is “Medium-High.” Investors will want to put a stop loss on this. We’re placing ours at 20%.
Jason Stutman, Technology & Opportunity, angelpub.com, 877-303-4529, May 2020
Growth and Income 830
Reliance Steel & Aluminum Co. (RS) | Daily Alert May 21
Reliance Steel & Aluminum was founded in 1939 and is the largest metals service center company in North America. RS provides materials management and metals processing services, and it distributes a full line of more than 100,000 metal products, including carbon, alloy, stainless and specialty steel, aluminum, brass, and copper products to more than 125,000 customers in a broad range of industries.
Due to RS’s focus on small orders, decentralized operating structure and the diversity of the markets RS serves, the company’s largest customer represented only 1.0% of net sales in 2019. In 2019, RS’s average order size was $2,090; approximately 51% of the company’s orders included value-added processing and around 40% of the orders were delivered within 24 hours from receipt of the order.
Historically, RS has expanded through both acquisitions and internal growth. Since its initial public offering in September 1994, RS has successfully purchased 67 businesses. The company’s internal growth activities during the last few years, which are supported by its capital expenditures, have been at historically high levels for RS and have included opening new facilities, adding to the company’s processing capabilities and relocating existing operations to larger, more efficient facilities.
Investments in processing equipment have increased the range of value-added services that the company provides and increased its efficiency, which has likely contributed to its recent gross profit margin improvements. RS thinks these investments also differentiate the company from its competitors and has helped RS increase its market share.
RS expects to continue to grow its business through acquisitions and internal growth initiatives, particularly those that will diversify its products, customer base and geographic locations and increase its sales of specialty products and high margin, value-added processing.
Kelley Wright, IQ Trends, iqtrends.com/, info@iqtrends.com, 866.927.5250, Mid-May 2020
Calavo Growers, Inc. (CVGW) | Daily Alert June 1
Calavo Growers operates in the farm products industry. It was founded in 1924. Today, it markets and distributes avocados and other foods. The Fresh Products segment sizes, packs, and ripens avocados for delivery to its customers. The Calavo Foods segment procures and processes avocados into guacamole, and distributes it to customers. Lastly, its Renaissance Food Group produces and distributes a variety of healthy fresh packaged food products, such as tomatoes and papayas, through retail channels.
Calavo Growers earns a place on this list because of its growth story. Avocados are a “super food”, and are growing in popularity due to their high nutrition. As such, they have great appeal to health-conscious consumers. This is an emerging trend in the United States; consumers are becoming much more aware of what they are eating. Healthier foods like avocados are seeing strong demand as a result. According to Calavo, consumption of avocados in the United States has risen at an 8% annual rate over the past 10 years.
This undeniable trend is evident in Calavo’s huge growth over the past decade. In fact, from 2009 to 2019, Calavo’s sales grew nearly 250%. Adjusted diluted earnings-per-share tripled over the same time.
In the most recent quarter, Calavo reported a 15% increase in fresh avocado unit volume over the same period last year. Revenue increased 5.8% to a record $273 million. Adjusted earnings-per-share came to $0.07 per share for the quarter. For the full year, Calavo management expects double-digit growth in adjusted earnings-per-share.
Household penetration of avocados is still below other common fruits, which means Calavo has a long runway of future growth up ahead. Calavo is an industry leader, with durable competitive advantages. It has more than 15 production and distribution facilities throughout the United States, giving the company the opportunity for continued growth in the years ahead.
Calavo pays an annual dividend. The 2019 dividend payout of $1.10 per share was a 10% increase from 2018. If Calavo continues to generate high levels of growth, it is conceivable shareholders could be in line for another strong dividend hike later in 2020.
Ben Reynolds and Bob Ciura, Sure Dividend Newsletter, suredividend.com, support@suredividend.com, 800-531-0465, May 22, 2020
Booz Allen Hamilton Holding Corporation (BAH) | Daily Alert May 29
The consultant Booz Allen Hamilton has increased its dividend every year since initiating the payout in 2012. Over the last three years, the dividend has risen at an annualized rate of 17%, yet still accounts for just 40% of earnings, leaving plenty of flexibility for additional hikes. The yield based on an indicated dividend five years ahead is 3.7%. To compute the future dividend, we assumed continued growth at the same rate seen over the last three years.
Booz Allen has grown per-share profits 22% annually over the last three years, and analysts expect growth of 13% this year, 10% next year, and 13% again in 2022. The stock’s consensus profit targets have held up better than most because of the company’s reliance on the U.S. government for 96% of its revenue.
Booz Allen Hamilton is a Buy and a Long-Term Buy.
Richard Moroney, CFA, Dow Theory Forecasts, dowtheory.com, 800-233-5922, May 11, 2020
Sysco Corporation (SYY) | Daily Alert May 26
I plan to play the restaurant resurrection similarly to how we played the airline resurrection. I plan to play it not with a front-end provider, but with a back-end supplier (like Boeing with airlines).
I recommend playing the restaurant resurrection with the leading food-service provider SYSCO Corp.
SYSCO is the distributor king. Annual revenue, driven by the restaurant business, exceeds $60 billion. The company distributes a wide array of food products: frozen foods, fully prepared entrees, fruits, vegetables, canned and dry foods, fresh meats, dairy, beverage products, and imported specialties. It also distributes paper products, tableware, cookware, restaurant and kitchen equipment and supplies, and cleaning supplies.
Size, as so often the case, confers advantages. The $300-billion U.S. food-service market is low-growth but highly fragmented. Thanks to its heft and financial resources, SYSCO moves the needle buying competitors on attractive terms. It typically completes several acquisitions each year.
Acquisitions have kept revenue growing at a 5% average annual rate over the past 10 years. Earnings per share (EPS) have grown at a 7% average annual rate over the same period. EPS growth has outpaced revenue growth on incremental efficiency gains. The annual operating margin has expanded by 50 basis points over the past five years. SYSCO aggressively repurchases shares. Earnings growth has been concentrated on fewer shares.
Growth, as you might expect, will take a holiday in fiscal-year 2020 (which ends June 30). Because of the government-mandated comatosing of the economy due to the COVID-19 virus, revenue will likely drop 8% for the year (to $54.4 billion). EPS will ease 9% (to $2.92).
It hasn’t all been downhill since March. SYSCO’s healthcare food business (8% of revenue) is up more than double digits over the past couple of months. Within its government and education segment (9% of revenue), the education side of the business has softened due to school closures but, the government business is more stable.
Management anticipated the rough patch when the lock-downs were announced. Liquidity has been bolstered by an incremental $4 billion bond offering. Management intends to use the bond proceeds to repay commercial paper outstanding and for general corporate purposes (dividend support being one).
Management indicated that even under the most draconian downturn, the company has the financial resources to weather this storm.
Most companies reflexively cut costs when business contracts. SYSCO is no different, though it has taken the process a step forward. It also has exploited the downturn to right size its expense structure. Cost cutting includes temporary furloughs as well as permanent reductions in force. Permanent route efficiency gains have also been achieved.
SYSCO is uniquely positioned among food-service providers to build market share in a post-COVID-19 world. The sales team is already working to tap new accounts while expanding existing ones. SYSCO’s scale and liquidity should yield a relatively rapid rebuild of operations and inventory.
SYSCO is the dominant player in an essential industry. It sports the strongest balance sheet in the business. It can boast of a long record of generating value for shareholders through continual share buybacks.
SYSCO has generated additional value is generated through the dividend. SYSCO has 49 years of annual dividend growth to its name. The dividend has grown at a 9% average annual rate for the past 10 year.
SYSCO shares were trading near $85 when we entered 2020. They trade near $55 today. They trade at a 35% discount to blue-sky expectations at the start of the year. The sky is clouded today. The short-term outlook is uncertain. The sell-off in SYSCO shares since the country-wide lock-down began in March has lifted the starting dividend yield to a high by historical norms.
Long-term, we know the restaurant industry will be resurrected (even if all participants won’t be). SYSCO’s fortunes will be resurrected, as well. Indeed, management this week mentioned that business is already improving.
The more the outlook improves, the higher the share price will rise. I expect SYSCO to post incremental improvement through the second half of the year as the economy continues to open to more businesses.
I have a $69 per share 12-month price target. My price target assumes SYSCO’s outlook will improve sufficiently heading into fiscal-year 2022 (July 2021) to warrant the historical average 18.9 multiple to forward earnings. I expect EPS to post at $3.10 for fiscal-year 2021 and $3.65 for fiscal-year 2022. The multiple applied to expectations for next gives us our price target and our opportunity today.
Suggested Action: Buy SYSCO Corp. shares up to $59.
Ian Wyatt and Stephen Mauzy, Personal Wealth Advisor, www.wyattresearch.com, May 6, 2020
MKS Instruments, Inc. (MKSI) | Daily Alert June 8
MKS Instruments is a 60-year-old global provider of instruments, subsystems and process control solutions that measure, monitor, deliver, analyze, power and control critical parameters of advanced manufacturing processes to improve process performance and productivity for their customers. The company’s primary served markets include the semiconductor, industrial technologies, life and health sciences, research, and defense.
MKS offers the largest breadth of products and services in its market, with 2200 patents and a sales presence in 100 countries. Investors can tune in to webcasts as the CFO and CEO speak at industry conferences on May 26, May 27, and June 8.
MKSI is an undervalued, small-cap growth stock, a good choice for growth investors and traders. Analysts’ consensus estimates point toward EPS growth of 12% and 38% in 2020 and 2021. If MKSI rises past the top of its trading range near 108, there’s additional price resistance at 120. Strong Buy.
Crista Huff, Cabot Undervalued Stocks Advisor, cabotwealth.com, 978-745-5532, May 27, 2020
*Elbit Systems Ltd. (ESLT)
Elbit Systems is a small, but important player in the Global Defense business, mostly in airborne, land, and naval systems; homeland security; commercial aviation products. Military and Helicopter systems; Drones; Electro-optical & night vision systems. ESLT also has a growing business in Cyber-Security, something that goes hand in hand with this business.
Elbit did cut the dividend, but I don’t think it’s a significant event as it was done more out of caution than need, and was less than 2% at the time of the cut. This is a growth stock, not a ‘dividend’ stock.
The stock made a high of $165 before the Virus/deluge, fell to as low as the $110 area and now has rallied to the $150 area with the market rally and I think it will be fine, in fact I believe it will thrive.
The virus just makes the globe more politically unstable, and ESLT is making good inroads into business outside of Israel and the USA and the backlog stands at a record— almost $11 Billion. This business is going from “soldier-intensive” to “tech-intensive” and ESLT is known in the business as a very able provider of the highest quality in their tech products with new innovations all the time. I am moving my buy suggestions up to $160. I think this will make for a very good long-term holding.
Bob Howard, Positive Patterns, P.O. Box 310, Turners, MO 65765, 417-887-4486, June 9, 2020
*Southwest Airlines Co. (LUV)
Special Situation
52wk H. 58.83 52wk L. 22.47
Mkt Cap: $22.68B, EPS: 4.45, P/E: 8.64
Beta: 1.41
The major airline pressured by the pandemic plunging from (50-54) to the low of 9.78. A survivor with a strong balance sheet. Despite lower fees by 20%-25% expects lower revenue of 30% and a return to profitability by 2022. Technical picture has improved dramatically. Reversal has managed to break through the bottom leg of its death cross mode.
(25-28) to (28-30) to (32-35) Volatile.
BUYING RANGE: 30-39
NR TERM OBJ: 487
INTERMED OBJ: 57
STOP LOSS: 28
Joseph Parnes, Shortex Market Letter, shortex.com, 800-877-6555, June 4, 2020
Financials 830
Fauquier Bankshares, Inc. (FBSS) | Daily Alert May 28
Today we added a little more Fauquier Bankshares, Inc. at $12.75: cheap, smart old bankers, nice yield, plus good markets and good asset quality. Trades plenty some days. Over 110,000 shares left on its buyback; should be bought soon. The company owns most of its locations as well—maybe some hidden value there also. Insiders buying some this month. NWIN added a few shares under $30. Many insiders have also been buying.
Fauquier Bankshares’ regulatory capital ratios continue to be deemed “Well Capitalized,” the highest category assigned by the Federal Deposit Insurance Corporation (FDIC). At September 30, 2008, the company’s leverage ratio was 9.38%, compared with 9.35% one year earlier, and its total risk-based capital ratio was 13.13% compared with 12.71% at the same respective dates.
“With our level of capital strength, we can continue to extend credit and execute our growth strategies, including the building of new branch locations,” said Randy Ferrell, Fauquier President and CEO. While we are seeing some increase in our non-performing loans, it has been commensurate with the current economic conditions and continues to compare favorably with our bank peers. Our conservative principles have kept us away from the sub-prime mortgage and other high-risk lending activities that are making headlines recently.”
Fauquier reported the following performance strength indicators for the quarter ended September 30, 2008:
— Net interest income before the loan loss provision for the third quarter of 2008 increased by 5.2% compared with the same quarter in 2007.
— Net interest margin of 4.10% was slightly higher in the third quarter versus the same period in 2007.
— Total deposits grew $17.4 million or 4.5% from June 30, 2008.
— Charge-offs, net of recoveries, for the third quarter of 2008 was $66,000 compared with $114,000 for the same quarter in 2007.
Ferrell said, “The primary mission of The Fauquier Bank is to provide our community with the financial products and services that they need during both good times and difficult times. We continue to make loans available to our community as we have done during our 106-year history, and our management and Board are confident that we can continue to do so without requiring government support.”
Wow that’s some great numbers in hard times.
Douglas Hughes, Hughes Investment Management, banknewsletter.com, 888-814-7575, May 21, 2020
PJT Partners Inc. (PJT) | Daily Alert June 12
PJT Partners Inc. is an advisory-focused investment bank. The company offers an array of strategic advisory, restructuring, and special situations and private fund advisory and placement services to corporations, financial sponsors, institutional investors, and governments. It provides, through Park Hill Group, private fund advisory and placement services for alternative investment managers, including private equity funds, real estate funds and hedge funds. Its advisory business offers a range of financial advisory and transaction execution capability, including mergers and acquisitions, joint ventures, minority investments, asset swaps, divestitures, takeover defenses, corporate finance advisory, private placements, and distressed sales. Its Restructuring and Special Situations Group’s services include advising companies, creditors and financial sponsors on recapitalizations, reorganizations, exchange offers, debt repurchases, capital raises, and distressed mergers and acquisitions.
P/E/Growth: Peter Lynch Strategy
P/E/GROWTH RATIO: PASS
The investor should examine the P/E (29.18) relative to the growth rate (48.28%), based on the average of the 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for PJT (0.60) makes it favorable.
EPS GROWTH RATE: PASS
This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for PJT is 48.3%, based on the average of the 4 and 5 year historical eps growth rates, which is considered ‘OK’. However, it may be difficult to sustain such a high growth rate.
EQUITY/ASSETS RATIO: PASS
This methodology uses the Equity/Assets Ratio as a way to determine a financial intermediary’s health, as it is a better measure than the Debt/Equity Ratio. PJT’s Equity/Assets ratio (9.00%) is healthy and above the minimum 5% this methodology looks for, thus passing the criterion.
RETURN ON ASSETS: PASS
This methodology uses Return on Assets as a way to measure a financial intermediary’s profitability. PJT’s ROA (11.53%) is above the minimum 1% that this methodology looks for, thus passing the criterion.
John Reese, Validea Hot List Newsletter, validea.com, 877-439-0506, May 29, 2020
Healthcare 830
*Bayer Aktiengesellschaft (BAYRY)
German life sciences company Bayer posted strong first-quarter results. Operating income rose 10% to $4.8 billion, 5% above analysts’ forecast. Bayer is working to sell its Animal Health & Consumer Health units to focus on Pharmaceuticals & Crop Science.
Bayer is taking a tough stand in settling weed killer cancer claims resulting from its purchase of Monsanto in 2018. Uncertainty from this litigation elevates the risk of Bayer ADRs. They have a high yield and trade at 8.0X-forward EPS versus prospects for 10% EPS growth in the next 12 months. (Next earnings: August 4)
Sam Subramanian, PhD, AlphaProfit Sector Investors’ Newsletter, alphaprofit.com, 281-565-6963
*Gentherm Incorporated (THRM)
Gentherm Inc. is applying its technologies in new areas, such as its medical business, where 1Q sales rose a strong 48.3%, highlighting its ability to maneuver quickly in a rapidly changing environment.
Hospitals in the U.S. and Europe are using Gentherm’s Blanketrol solutions to help with the temperature management of COVID-19 patients. The company has also received FDA emergency use authorization for its Hemotherm Model 400CE Dual Reservoir Cooler-Heater, a blood oxygenator/heat exchanger that is used to cool or warm blood during long-term respiratory/cardiopulmonary support.
Although management withdrew its 2020 guidance due to the pandemic, we believe that Gentherm is well positioned in key markets, which should drive revenue growth and margin expansion as the U.S. economy reopens. Our target price of $50, implies a potential total return of 14% from current levels.
Jim Kelleher, CFA, Argus Weekly Staff Report, argusresearch.com, 212-425-7500, June 10, 2020
Technology 830
II-VI Incorporated (IIVI) | Daily Alert May 27
IIVI reported a solid beat and raise in its first full quarter of Finisar, driven by record bookings and backlog of $840M and $893M, respectively.
Specifically, revenue of $627M was above consensus of $576M and our $584M estimate. Gross margin in the quarter reached a high-water mark of 39.2, driven by a relentless focus on cost reduction and integration. This led to adjusted EPS of $0.47, above consensus of $0.14 and our $0.11 estimate.
We are raising our estimates to reflect the early success integrating Finisar (largest investor concern) and broad end market demand across most segments, as well as the ramp and qualification at the Sherman facility.
IIVI has a long history of successful M&A integration. Specifically, the Street bet against IIVI with the Oclaro deal in 2013 and lost, in our opinion. While Finisar is of much greater size and
scale, it would seem IIVI’s cost discipline is paying off.
On the demand side, IIVI is largely exposed to the Asian supply chain without getting tangled in trade through Asian partners. As such, we anticipate IIVI will be able to benefit from the spate of recent data points that suggest a rebounding post-COVID market in this geography. This supports the FQ4 outlook for revenue of $650M-$700M and non-GAAP EPS in the range of $0.50-$0.70, compared to consensus of $648M and $0.53.
IIVI’s cash and cash equivalents as of March 31 were at $388M. In connection with the latest acquisitions, the company entered into senior credit facilities totaling of $2.43B. As of March 31, the total debt was $2.28B. The covenants require the company to maintain net leverage ratio of no greater than 5x; as of FQ3, the net leverage ratio was at 3.8x.
We are reiterating our BUY rating and adjusting our price target to $52, which is based on applying a 22x multiple to our FY21 EPS estimate of $2.38.
Jed Dorsheimer, Canaccord Genuity Research, canaccordgenuity.com, May 12, 2020
Cloudflare, Inc. (NET) | Daily Alert June 2
Cloudflare (NET) shares began the week strong, hitting 30 before coming back with the market to 27 and change. Looks like there may be some resistance at 30.
Recently, NET reported strong first-quarter numbers.
Sales in the U.S. region climbed 44% year over year and represent 40% of total revenue and 62% year-over-year surge in its international business. Total revenue was $91.3 million, increasing 48% year over year and its gross margin was 77%. The company’s loss from operations due to higher development spending was $36.1 million, compared to $17.1 million in the first quarter of 2019.
The company’s net loss per share was $0.11 as it reported a cash and equivalent position of $588 million. In addition, during the first quarter, the company added 250,000 new customers representing a year-over-year jump of 40%.
This aggressive cybersecurity recommendation went public last year. The company is growing fast and appears to be gaining market share and some analysts expect its revenue to double by 2022.
If you have not yet invested in NET, I suggest you do so and consider pairing it with the below more conservative cybersecurity play, an ETF called BUG. BUY A HALF.
Carl Delfeld, Cabot Global Stocks Explorer, cabotwealth.com, 978-745-5532, May 21, 2020
Baidu, Inc. (BIDU) | Daily Alert June 4
Artificial intelligence is bound to change the future of the world. By fiscal year 2025, the artificial intelligence market size is expected to be $390.9 billion. However, this number does not tell the whole story. By FY2030, the projected growth of global GDP as a result of artificial intelligence is expected to be $15.7 trillion. This projection bodes well for AI stocks.
Clearly, this is a game changing technology for the world. The impact of AI will be felt across industries. As an example, AI-powered autonomous vehicles have the potential to reduce road accidents. Similarly, AI can prevent 86% of cyber-attacks.
Further, as research article from Harvard Business Review suggests, AI-driven companies can outstrip traditional firms in the long-term. This makes the adoption of AI a necessity across industries.
Considering the potential for growth, there are several companies in the race to grab market share.
My focus is on a few AI stocks that can make significant inroads in AI in the coming years. These companies are likely to be long-term value creators as business from AI grows. Furthermore, these companies will shape a better and safer world through their AI-driven innovation.
The Senate passed a bill that could delist Chinese companies from the U.S. stock exchange. This created some jitters for Chinese-listed stocks. However, I believe that Baidu is among the quality AI stocks from China and can pass the stringent compliance.
Specific to AI, Baidu has been increasing investments in the segment, which promises to be a potential value creator for the company. Talking about the focus on AI, Baidu has filed 5,712 AI-related patents as of October 2019.
In the autonomous vehicle segment, the company has already deployed more than 100 vehicles in 17 cities in China. Baidu has also been using AI to help health organizations cope with the novel coronavirus pandemic.
From a financial perspective, Baidu reported cash and equivalents of $20.7 billion as of March 2020. This gives the company ample financial flexibility to pursue investments and innovation related to AI. I believe that the company is well positioned to accelerate top-line growth in the coming years. This makes BIDU stock attractive, coupled with the fact that the stock currently trades at a P/E ratio of just 15.3.
Brett Owens, Contrarian Outlook, BNK Invest Inc., 500 North Broadway, Suite 265, Jericho, NY 11753 USA, 516-620-4294, info@bnkinvest.com, May 22, 2020
Cohu, Inc. (COHU) | Daily Alert June 9
Cohu is a global leader in test and handling equipment, thermal subsystems, interface solutions, vision inspection and MEMS test solutions supplying the semiconductor industry and its test subcontractors, and a leader in printed circuit board test.
In the first quarter, COHU reported supply chain impacts in some regions due to the coronavirus pandemic, yet the company’s broader 5G-related business continued to see strong bookings as manufacturing ramps up in advance of big infrastructure upgrades. Cohu expects to see growth from the build out of global 5G networks, while consumer and automotive spending may drop in the near-term due to the pandemic.
While the P/E ratio is unusually high (83 times 2020 earnings estimates) the semiconductor space is notoriously cyclical, and earnings are expected to rebound strongly in 2021 and 2022. Management has for the time being discontinued the dividend to prioritize debt repayment, but we think capital gain potential is high.
John Buckingham, The Prudent Speculator, www.theprudentspeculator.com, 877-817-4394, June 2020
Applied Materials, Inc. (AMAT) | Daily Alert June 17
The semiconductor sector has a number of attractive players. One of my favorites is Applied Materials. The company is a leading provider of semiconductor manufacturing equipment. With technology invading virtually every part of our life, the demand for semiconductors to drive that technology will increase.
Applied Materials is coming off a decent first quarter. And while the coronavirus will impact results in the near term, the company should still post decent growth in 2020—something that will likely be a rare occurrence for many companies.
The stock is down 21% from its 52-week high and offers a buying opportunity for investors wanting to add to their technology holdings.
Applied Materials calls itself “the leader in materials engineering solutions used to produce virtually every new chip and advanced display in the world.” While that seems like a bold statement, the company backs it up with numbers that are fairly impressive. The firm will likely do more than $16.5 billion in revenue this year, up from $14.6 billion in 2019. Per-share profits should grow sharply to $3.78. The fi rm started the year out in fairly strong fashion. First-quarter revenues rose 12% to nearly $4 billion. Per share profits of $0.89 were up 27% and matched analysts’ estimates. Semiconductor Systems revenue rose more than 17% in the quarter. Applied Global Services saw revenue gains of 3%, while Display and Adjacent Markets posted a revenue increase of nearly 5%. During the quarter, the company returned $392 million to shareholders, including $199 million in share repurchases and $193 million in dividends.
In the near term, Covid-19 will have some impact on results. Stay-at-home policies in some states could impact supplier operations, and the economic downturn may affect investment decisions in certain -industries. Still, Applied Materials pointed out that despite a fluid situation, demand for the company’s semiconductor equipment and services “remains robust.”
Applied Materials trades at less than 15 times 2020 earnings estimates. That seems like a reasonable multiple to pay for a company at the heart of the cutting edge of semiconductor technology. That is also a very reasonable P-E ratio relative to other technology stocks.
The company’s dividend has more than doubled since 2017 and was recently raised nearly 5% to a quarterly rate of $0.22 per share. While that may not seem especially high, keep in mind that the dividend yield exceeds the interest rate on a 30-year Treasury note. Applied Materials has traded in the $60s in each of the last four years and should return to that level before year-end.
Please note Applied Materials is part of Computershare’s online-only DirectStock program. Minimum initial investment is $25, though the minimum is reduced to $10 if an individual sets up automatic investments via monthly debit of a bank account. For more information on the plan, visit Computershare at www.computershare.com. And of course, the stock is available for purchase via any brokerage firm.
Charles B. Carlson, CFA, DRIP Investor, dripinvestor.com, 800-233-5922, June 2020
Low-Priced Stocks 830
*Liberated Syndication Inc. (LSYN)
Liberated Syndication (Libsyn) is a profitable podcast and website hosting company, growing at a double digit clip. As the business does not require much capex, it generates significant free cash flow. An activist recently won a proxy fight with management and has undertaken a strategic review for the company. The conclusion is expected to be announced soon.
Libsyn has two businesses: podcast hosting and website hosting. Both businesses are excellent as the vast majority of revenue is recurring and capital requirements are low. Podcast hosting is its primary business (accounts for 59% of revenue) and is the key growth driver. It grew 15% in 2019, but I expect it to grow 20% in 2020. The website hosting business represents 41% of business. It grew 4% in 2019, and I expect a similar level of growth in 2020.
In 2020, I’m expecting revenue to grow by 10%, consistent with 2019. I’m expecting modest margin expansion as the company continues to leverage its fixed cost base. As a result, I’m expecting EBITDA to grow by 15% and EPS to grow by 28% to $0.20 (shares outstanding will decline due to cancelled equity grants).
Libsyn is not dirt cheap, but trades at a very reasonable valuation given its secular growth, recurring revenue, and strategic alternatives. Currently, the company trades at an EV/2019 sales multiple of 3.1x, and EV/2019 EBITDA multiple of 8.6x, 10
and a price/2019 EPS multiple of 18.7x.
My 12 month price target is $6.00 as I believe LSYN deserves to ultimately trade at 30x my 2020 EPS estimate of $0.20.
Make sure to use limits when buying LSYN as the stock is very illiquid. My rating for LSYN is Buy Under 3.35.
Richard Howe, CFA, The Stock Spin-off Investing Newsletter, stockspinoffinvesting.com, 617-750-7454, June 10, 2020
*TOMI Environmental Solutions, Inc. (TOMZ)
TOMI Environmental is a global provider of disinfection and decontamination essentials through its premier Binary Ionization Technology® (BIT™) platform, under which it manufactures, licenses, services and sells its SteraMist® brand of products.
These products have experienced significant growth recently as a result of the COVID-19 pandemic. Quarterly revenues jumped 463% year-over-year and management is expecting an exceptional second quarter.
Quarterly net income increased to $2.6 million from a net loss of $934,532 in the prior year period. SteraMist® revenues were the biggest factor in the shift, with product based revenues jumping 545%.
One small yet noteworthy factor in TOMZ’s above-average cash flow is the TOMI Service Network (TSN)—a network of outside professionals exclusively licensed and trained to use the SteraMist® products. TSN drives a continuous revenue stream through recurring purchases of the BIT™ solution. Recurring revenue is very beneficial for cash flow and almost guarantees healthy financials if management keeps the shareholders’ interests in mind.
In FY19, TOMZ added three new items to its growing product pipeline. Management also mentioned that by expanding its research and development partnership with a safety cabinet manufacturer, it has now produced a custom-built decontamination solution. The solution is now being field tested at a federal government site for a youth with xenobiotics research project.
We hope to see TOMZ’s product pipeline continue to expand and generate ongoing successful new launches in the future to sustain growth.
The main catalyst for TOMI Environmental is not necessarily the COVID-19 pandemic, but rather the overall change in infectious disease protocols.
Just six weeks into the second quarter, revenues have already surpassed the total from the first quarter.
While TOMZ’s share price has appreciated substantially, there is still a clear opportunity for sustainable growth.
Faris Sleem, The Bowser Report, thebowserreport.com, 757-877-5979, June 2020
High Yield 830
Telus Corporation (TSX: T.TO, NYSE: TU) | Daily Alert June 15
Telus claims to be Canada’s fastest-growing telecommunications company, with $14.7 billion in revenue in 2019 and 15.2 million subscriber connections. The company provides a wide range of communications products and services, including wireless, data, Internet protocol (IP), voice, television, entertainment and video, and is Canada’s largest healthcare IT provider.
Telus split its shares 2 for 1 in March, just before the market swooned. The stock has been struggling to claw back those losses since.
Telus reported first-quarter results that were largely in line with analysts’ estimates and did not indicate any serious fall-out from the recessionary impact of the coronavirus. Operating revenue was $3.9 billion, up 5.4% from $3.5 billion last year. Adjusted net income was $400 million ($0.32 per share) compared to $453 million $0.38 per share) in the same period last year. The company said that high depreciation and amortization costs due to recent acquisitions contributed to the profit drop. An increase in the number of outstanding shares reduced the EPS results.
Telus reported free cash flow of $545 million, up by $392 million over the same period a year ago. This resulted primarily from decreased income tax payments, lower device subsidy leasing amounts, lower restructuring and other costs disbursements, and higher EBITDA.
The company said it had 70,000 net wireless additions during the quarter, of which 21,000 were high-quality mobile phones. There were also 36,000 net wireline additions.
“Our robust and consistent performance over the longer-term, coupled with our strong financial position, positions us well to navigate the uncertainty caused by the global COVID-19 pandemic, as well as for anticipated post-pandemic economic challenges and market opportunities,” said CEO Darren Entwistle.
CFO Doug French said the company is in a sound financial position. “We have a strong balance sheet, further supported by our successful $1.5 billion equity offering in February, with available liquidity of over $3 billion and no debt maturities until 2021. This puts us in an enviable position to navigate this period of uncertainty, and to continue to grow the business and prosper in the post-COVID-19 environment,” he said.
The company withdrew its previous 2020 guidance and said it would issue revised guidance at the time of the second-quarter results, expected at the end of July.
The stock pays a quarterly dividend of $0.29125 ($1.165 a year).
This is another company that appears to be well-positioned to deal with the COVID recession and the dividend is very attractive.
Action now: Buy.
Gordon Pape, Internet Wealth Builder, buildingwealth.ca, 1-888-287-8229, June 1, 2020
Altria Group, Inc. (MO) | Daily Alert June 16
Altria Group is the largest U.S. domestic cigarette maker and one of the largest in the world. The company is the domestic part of the old Philip Morris that spun off the international division in the form of Philip Morris International (PM) in 2008. Altria now operates primarily in the United States.
In addition to cigarettes, Altria also sells E-cigarettes, marijuana, beer, wine, and smokeless products. Altria also owns a 10.2% stake in the world’s largest brewer Anheuser-Busch InBev (BUD). It may seem like a diversified company, but it really isn’t. About 85% of net revenues are generated from cigarettes and the overwhelming majority of that is from its flagship Marlboro brand, which commands a stratospheric 40%-plus cigarette market share in the U.S.
That’s a problem. In case you haven’t heard, cigarettes are bad for you. The volume of cigarette smoking is declining by about 4% to 6% per year. Of course, it has been declining at a 4% pace for decades. And over that time Altria has been able to more than compensate for the declines by raising prices and via share buybacks. The company still grew annual earnings at a solid rate and had been one of the best performing large stocks in the index.
But things are changing.
The rate of annual volume declines is increasing because more people are opting for E-cigarettes, especially young smokers. To answer that problem, Altria purchased a 35% stake in dominant E-cigarette brand JUUL in late 2018 for $12.8 billion. It has since been the acquisition from Hell. JUUL has been under relentless assault by regulators primarily for marketing to young people. There is now even a question if E-cigarettes will be allowed to be sold at all.
Altria has already written down $8.6 billion of the investment. The market hasn’t liked this, and the stock is down about 50% from the 2017 high and near a five-year low.
But here’s the thing. If E-cigarettes get sued out of business Altria will sell more cigarettes. If E-cigarettes survive, Altria owns the dominant company in the space. It’s will ring the register either way. Plus, Altria has other growth opportunities.
In late 2018, Altria purchased a 45% stake in Canadian Cannabis company Cronos (CRON) for $1.8 billion. Legal cannabis is a huge growth industry still in its infancy. But the growth is undeniable. The trend toward legalization is clear and could accelerate as states opt for additional tax revenue to compensate for the budget shortfalls from this recession.
Altria, with its unparalleled regulatory expertise, deep pockets and marketing should be able to cash in on some of that growth going forward. As well, the company has a joint venture with Philip Morris International to sell heated tobacco product IQOS throughout the U.S. It is the only such product with FDA approval and could potentially capture much of what has been lost by E-cigarettes.
In the meantime, the company continues to grow earnings per share. Management is forecasting high single digit annual growth for the next several years. Earnings grew over 18% in the first quarter as people are smoking more during the pandemic.
Is that massive dividend yield safe? I think it is rock solid. The company has a rather high 80% payout ratio, but that is the historical average. And the company has raised the payout every year for the last 50 years.
Historically, this has been one of the best and most reliable dividend paying companies on the market because the company generates an obscene amount of free cash flow, money left over after expenses. To give you an idea, in 2019 Altria generated $7.6 billion in free cash flow and paid $6.1 billion in dividends.
This is one of those companies that is actually doing better during this recession as people tend to smoke more. It can offset volume declines with price hikes and share buybacks. But it also has some promising growth prospects for the longer term. Meanwhile, that big fat dividend should be safe, and the stock is priced near a five-year low.
Tom Hutchinson, Cabot Dividend Investor,cabotwealth.com, 978-745-5532, June 10, 2020
*ViacomCBS Inc. (VIAC)
New York-based ViacomCBS (VIAC) is a mass media company that creates and distributes content to audiences around the world. Founded by Sumner Redstone in 1986, the company operates its business in segments that include news and entertainment, cable networks, publishing, and local media. Its entertainment assets include the CBS Television Network, CBS Television Studios, and CBS Interactive, while cable networks encompass Showtime, CBS Sports Network, and Smithsonian Networks.
ViacomCBS also operates in consumer book publishing with imprints like Simon & Schuster and Scribner. Revenue this year is expected to dip 5.2% to $26.4 billion, and earnings are forecast to decline 25.1%. Despite the tough year, pessimism is already reflected in the discounts to historical valuations: VIAC trades 51.6% below its five-year average price-to-sales ratio, and 53.1% below its average price-earnings ratio. Dividends have grown 17% a year over the past decade,
John Dobosz, Forbes Dividend Investor, newsletters.forbes.com, 212-367-3388, June 6, 2020
REITs, Preferred & Income Stocks 830
Hersha Hospitality Trust (HT-PD) | Daily Alert May 22
Hersha’s Preferred D (HT-PD) has tripled from its low-point, far out-pacing the common stock, and there is still tremendous upside potential. We recommend using limit orders to purchase this preferred stock because the float is relatively small.
The CARES Act provides aid for this industry under the small business provisions. The act defines each individual hotel as its own small business because hotel owners with several properties, if taken together, would not qualify as a small business.
In April, Hersha was able to restructure covenants regarding its debt which greatly enhances the company’s future. It was able to amend its bank credit facility by obtaining waivers on all financial covenants through March 31, 2021. These covenants required the company to sequester funds if certain financial ratios were not met.
Additionally, the company accessed an additional $100 million on its line of credit. To enhance liquidity, the company has also suspended all dividend payments for the balance of 2020. These events were critical to the company’s near-term survival prospects.
This preferred stock is cumulative, which means that all unpaid preferred dividends must be restored before dividends on the common stock can be resumed. The resumption and payment of unpaid dividends of $1.64 per share (annually) on the preferred D would provide close to a 15% annual yield based on today’s stock price. Of course, just the prospect of a resumption of the dividend would propel a steep recovery in the price of the preferred D stock.
The preferred dividend in 2019 amounted to 26% of the company’s FFO, which means that it will be much easier to restore the preferred stock dividends.
Gray Cardiff, Sound Advice, soundadvice-newsletter.com, 800-825-7007, April 30, 2020
*Gladstone Land Corporation (LAND)
Gladstone owns farmland and related properties in 10 states that it leases to corporate and independent farmers on a triple-net lease basis (tenants pay all expenses). Although a 2013 IPO, Gladstone is still growing revenues around 10% annually. Gladstone pays monthly dividends equating to a 3.7% yield.
Harry Domash, Dividend Detective, www.dividenddetective.com, 866-632-1593, June 5, 2020
*W. P. Carey Inc. (WPC)
W. P. Carey. It’s a unique net lease REIT that offers powerful scale advantage by investing in mission-critical office and industrial properties. Holding 1,215 properties, WPC is one of the largest owners of net-lease assets. It’s also among the top 20 REITs in the MSCI U.S. REIT Index. The company’s portfolio is well diversified through its 352 tenants, the top 10 of which represent 21.7% of its annual base rent (ABR).
It’s obvious that COVID-19 has disrupted certain property sectors. Yet WPC’s business model is rooted in:
Corporate headquarters
Key distribution facilities
Manufacturing plants
Critical research and development facilities
Data centers
Top-performing retail stores (with limited exposure in the U.S.)
This is how it’s managed to maintain strong occupancy levels of, at last check, 98.8%. The same was true during the credit crisis and following economic downturn, in which that figure never dropped below 96.6%, which it touched on in 2010.
We maintain a Buy rating on this moat-worthy REIT that’s now trading at $64.18. It has a P/FFO multiple of 14.1x and a dividend yield of 6.5%.
Analysts estimate that FFO per share will decline by -2% in 2020 and by -1% in 2021 before advancing 4% in 2022.
Brad Thomas, Forbes Real Estate Investor, forbes.com/newsletters, brad@theintelligentreitinvestor.com, June 5, 2020
Morgan Stanley (MS-PL) | Daily Alert June 11
Morgan Stanley; 4.875% Fixed Rate, Non-Cumulative Perpetual; Par $25.00; Annual Cash Dividend $1.21875: Current Indicated Yield 5.00%; Call Date 01/15/25 at $25.00; Yield to Call 5.47%; Pay Cycle 1m; Exchange NYSE; Ratings, Moody’s Ba1, S&P BB+; CUSIP 61762V804
Morgan Stanley (MS) is a fully integrated investment banking company, offering Investment and Wealth Management Services, Investment Banking & Capital Markets Operations, Lending, and Sales & Trading at both the Institutional and Retail level. The firm has one of the largest retail brokerage operations in the U.S. market.
Earnings and profitability over the last five-year period have been solid. This preferred stock issue is fixed rate and callable at par plus declared dividends on 01/25/25 or any dividend payment date thereafter.
MS reported solid 1Q 2020 earnings although net income of $1.7 billion or $1.01 per share fell short of analysts’ $1.15 estimates. Top line revenue was also a bit shy of analysts’ expectations. Management said the COVID-19 pandemic negatively affected each of the company’s major businesses. Nonetheless, MS achieved solid results in the face of economic turmoil.
Although financial results may remain under pressure over the remainder of 2020, we expect upward momentum in 2021. This preferred investment is suitable for low- to medium-risk taxable portfolios. Dividends are qualified and taxed at the 15%-20% rate.
We point out that MS’s senior debt is rated A3 by Moody’s and BBB+ by S&P. Buy up to $25.50 for a 4.78% current yield and 4.40% yield to call.
Martin Fridson, CFA, Income Securities Investor, isinewsletter.com, 800-472-2680, June 2020
*American States Water Company (AWR)
I’m going to bring back a stock that was a winner for 2 for 1 about five years ago, with a 24.6% overall annualized return when we sold it in 2016. American States Water is a regulated utility providing water to portions of California. It is also under long term contract to supply water and maintain the water infrastructure for ten military bases across the country. This is another business that is not going to go away no matter what the state of the economy. AWR is relatively profitable for a utility while having the advantages of a secure and predictable cash flow and return on investment. The dividend is a modest 1.6% but it is secure and growing at about a 6% annual rate.
Neil Macneale, 2 for 1 Stock Split Newsletter, 2-for-1.com, 408-210-6881, May 2020
Funds & ETFs 830
Fidelity International Capital Appreciation Fund (FIVFX) | Daily Alert June 3
Covid-19, and even more recently, political and economic uncertainty, have led to a sudden alteration to the international investment landscape. While we’ve changed only a handful of fund ratings this month, there can be elevated and difficult-to-quantify risks to venturing abroad with your money.
With that in mind, our models have only limited direct exposure to overseas stocks (most of it is the result of U.S. stock funds holding foreign domiciled companies).
In a perfect world we could steer investors to International Small Cap Opportunities (FSCOX). But as it’s closed to new investors, and as we’ve just downgraded its close cousin International Small Cap (FISMX) to OK to Sell from Hold, International Capital Appreciation remains our top choice. (It’s the only foreign stock fund we hold in our model portfolios.)
Jack Bowers, John M. Boyd and John Bonnanzio, Fidelity Monitor & Insight, fidelitymonitor.com, 800-397-3094, June 2020
First Trust Dow Jones Select MicroCap Index Fund (FDM) | Daily Alert June 10
Especially with microcaps, avoiding likely losers is crucial. That is the premise behind our top pick among microcap funds, the First Trust Dow Jones Select Microcap exchange-traded fund.
The fund screens for actively traded microcap stocks, then eliminates those with the worst earnings growth, profit margins, price/sales and price/earnings ratios, and six-month returns. The fund, which has outperformed the Russell Microcap Index over the last five and 10 years, ranks among the top 2% of small-value funds based on 10-year returns.
The fund, with an 0.60% expense ratio, mirrors an index designed by Horizon Investment Services, a sister company of Horizon Publishing. Horizon Investment Services is compensated
for creating the index.
Richard J. Moroney, CFA, Upside, upsidestocks.com, 800-233-5922, June 1, 2020
*SPDR Gold Shares (GLD)
Though the chart pattern could absolutely “break down” and tumble back to somewhere near the $135 range in a hurry, history also suggests that if it instead breaks out to the upside, it ought to make a sizable run for us. And, because “gold is gold,” I am comfortable adding a few more shares to both Portfolios as part of the “buy small lots on a regular basis” approach we have been taking with the precious metal for several years now (and, in fact, it is the only thing I am buying in the Aggressive Portfolio this month!). That being said, while “weakness will be bad,” you are encouraged to look at any strength that develops as a reason to buy, not sell. GLD is considered a buy under $172.
Nate Pile, Nate’s Notes, NotWallStreet.com, 707-433-7903, June 2020
Updates 830
SELL Fidelity International Small Cap Fund (FISMX) | Daily Alert June 3
Updated from WSBI 793, May 17, 2017
We’ve downgraded International Small Cap to Sell. Our decision comes down to its modest allocation to growth stocks generally, and its small technology exposure (just 8%), in particular.
Jack Bowers, John M. Boyd and John Bonnanzio, Fidelity Monitor & Insight, fidelitymonitor.com, 800-397-3094, June 2020
SELL LGI Homes, Inc. (LGIH) | Daily Alert June 8
LGI Homes is the tenth largest residential home builder in America. The company is currently building homes, primarily for first-time home buyers, in 19 U.S. states from coast to coast and the District of Columbia.
LGI Homes joined our portfolios in early December. We caught three run-ups since then, with a buy recommendation at early points in the run-ups, then moving to Hold recommendations at the peaks. Along the way, the earnings outlook slowed enough that the company does not present enough potential earnings growth to remain in the Growth Portfolio.
Therefore, I’m selling LGIH today. The stock peaked at 95 in February, and it’s possible that it will retrace that price soon, but I encourage you to sell by that point. Homebuilders don’t generally thrive during economic recessions, so caution is warranted. Sell.
Crista Huff, Cabot Undervalued Stocks Advisor, cabotwealth.com, 978-745-5532, May 27, 2020
SELL Atkore International Group Inc. (ATKR) | Daily Alert June 10
Updated from Wall Street’s Best Investments 811, November 14, 2018
Atkore International is being dropped from coverage because of its deteriorating profit outlook, reflecting a mixed construction environment. The company posted uneven March-quarter results partly because of unfavorable prices for steel and resin. Atkore has seen profit estimates for 2020 and 2021 tumble, dropping its Earnings Estimate score to 23.
Richard J. Moroney, CFA, Upside, upsidestocks.com, 800-233-5922, June 1, 2020
Sell: Community Healthcare Trust Incorporated (CHCT) | Daily Alert June 16
Updated from Wall Street’s Best Dividend Investor 309 June 12, 2018
Community Health Trust, fast-growing small healthcare REIT, is benefitting from the recent upward thrust in the market. It’s up over 13% just this month. While the underlying business is in defensive health care properties, the stock is a lot more cyclical because it is a small, lesser known REIT. This is a stock that in the near term will mimic, and indeed exaggerate, the whims of the market. Since I believe the market to be precarious at this point, I will sell the remaining one third position while the getting is good—with a 31% return in two years on the remaining position. Nice profits have already been realized on two thirds of the position during the boom times. But I see the remaining third as a prudent place to pull back right now. SELL.
Tom Hutchinson, Cabot Dividend Investor, cabotwealth.com, 978-745-5532, June 10, 2020
*SELL Preferred Apartment Communities, Inc. (APTS)
Updated from WSBI 825, January 16, 2020 Preferred Apartment Communities has some vulnerability, if some colleges continue with on-line classes this fall; could hit rentals income in student housing. I’m thinking ever more (and so, clearly, are others) that such aggressive and active diversification—sensible in a healthy economy—may leave APTS overextended and vulnerable.
Chris Temple, The National Investor, nationalinvestor.com, 224-308-2587, June 9, 2020
Investment Index 830
